In a much-anticipated judgment (Saipem SPA & Ors v Petrofac Limited & Anor [2025] EWCA Civ 821), the English Court of Appeal overturned the High Court’s sanction of Petrofac’s restructuring plans (the Plans).
Petrofac was only the third case of a restructuring plan coming before the Court of Appeal (following Adler (2024) and Thames Water (2025)).
Key takeaways
In a rush? Here are the four key takeaways from the Petrofac Court of Appeal judgment to get you up to speed:
- No worse off test: only rights compromised or released by the plan are relevant to the “no worse off” analysis. Broader commercial interests or market effects fall outside the scope of the test.
- New money: if the returns to new money providers are materially above what could be obtained in the market, the excess amount is to be treated as a benefit of the restructuring.
- Restructuring surplus: plan companies will need to provide cogent evidence, either by way of expert evidence or by evidence of market-testing, to explain why the allocation of value preserved or realised by the restructuring is fair, particularly where new money providers are to receive a substantial share of the restructuring surplus.
- Work fee: the courts will carefully scrutinise such fees to ensure they do not result in disproportionate enrichment of certain creditors at the expense of others, particularly out-of-the-money creditors.
Background
The Petrofac Group, a major international energy services provider, faced ongoing financial distress following regulatory investigations, adverse market conditions, and unsuccessful prior refinancing efforts. By late 2024, the Group proposed comprehensive restructuring plans to address liabilities across five categories of creditors, including senior secured debt, shareholder claims, director claims, insurance restitutionary claims, and substantial liabilities arising from its Clean Fuels Project joint venture.
The Plans contemplated a significant deleveraging of the Group’s balance sheet, the compromise of various creditor claims, and the injection of US$350 million in new money, primarily from an ad hoc group of existing secured creditors and new investors. The allocation of equity and other entitlements under the Plans varied by creditor class, with the providers of new money set to receive a substantial majority of the post-restructuring equity.
As part of the Plans, work fees would be paid to certain senior creditors of the ad hoc group who had supported the restructuring process. These were to be paid in equity, rather than cash, which meant that post-restructuring the value of the equity allocated as work fees would increase from approximately US$7 million to be worth between US$24 million and US$30 million.
The appeal addressed two principal issues: (i) the application of the “no worse off” test for dissenting creditors, and (ii) the fair allocation of benefits generated by the restructuring (often referred to as the ‘restructuring surplus’).
Grounds for Appeal
The “no worse off” test should take into account indirect economic benefits that would accrue to creditors in the relevant alternative.
The Court of Appeal dismissed the appeal on the first ground. The Court clarified that the “no worse off” test is concerned with a comparison of the financial value of the rights of a creditor against the plan company between (a) the relevant alternative and (b) under the plan. The Court held that only rights compromised or released by the plan are relevant to the “no worse off” analysis, and that broader commercial interests or market effects (such as the competitive advantage a creditor might gain from the debtor’s liquidation) fall outside the scope of the test.
The benefits of the restructuring were not fairly allocated between the plan creditors given the substantial value conferred on new money providers.
The Court allowed the appeal on the second ground, holding that the High Court judge’s approach to the allocation of benefits was flawed. The Court emphasised that, in exercising the cross-class cram down power, it is necessary to scrutinise how the value preserved or generated by the restructuring is allocated among creditor groups, including those who are out of the money, in the relevant alternative.
The Court found that the Plans allocated over two-thirds of the value generated by the restructuring to the providers of new money, resulting in a return of over 200% on their investment. This allocation was agreed before the final valuation of the restructured Group was available and was not revisited after the valuation report projected a significantly higher equity value post-restructuring. The plan companies failed to provide evidence that the terms for the new money were equivalent to what could have been obtained in the market for the plan companies post-restructuring, or to justify the allocation as a fair cost of the restructuring. The absence of market-testing or expert evidence on this point was critical.
The Court rejected the argument that the opportunity for all creditors to participate in the new money on the same terms necessarily cured the unfairness, noting that there may be various reasons why creditors are unable or unwilling to participate.
What does this mean for the future of restructuring plans?
Going forwards, plan companies will need to provide cogent expert evidence and/or evidence of market-testing justifying the allocation of value (including as to work fees), particularly where new money providers are to receive a substantial share of the restructuring surplus.
Plan companies will also need to evidence a genuine attempt to negotiate a reasonable compromise with all affected stakeholders. Out of the money creditors should be treated “fairly” in reaching such compromise, though this standard will continue to evolve.
