The Court of Appeal’s judgment in Petrofac provides a timely reminder that the primary purpose of the cross-class cram down power under Part 26A restructuring plans is to override the exercise of an unjustified veto by holdout creditors. It is not a tool to enable supporting creditors to appropriate to themselves an unfair share of the benefits of the restructuring.
Treatment of out of the Money Creditors Pre-Petrofac
Until recently, the trend had been going in the opposite direction. On the basis that out of the money creditors are no longer economic owners of the business and therefore not entitled to share in the benefits of the plan,1 many restructuring plans have to date essentially focused on removing unwanted liabilities from the balance sheet, with little regard being given to the value created by their discharge.
For a Court to sanction a restructuring plan, the dissenting creditors must be no worse off than in the relevant alternative. Plan companies typically claim that the relevant alternative is insolvent liquidation in which, by definition, the out of the money creditors recover nothing. In such circumstances, the Court in Virgin Active (one of the earliest plans) stated that little regard needs to be given to the interests of out of the money creditors given that their views carry “little or no weight”.2 This incentivises plan companies to formulate a relevant alternative which is the worst possible outcome for creditors. In assessing the relevant alternative, the Courts have determined that the directors of the plan company are best placed to identify what would happen if the plan is not sanctioned. In many instances, the directors in turn rely on statements made by the supporting creditors as to what they would do if the plan is not approved (e.g. accelerate their debts leading to insolvency). While dissenting creditors in such cases often argue that the proposed relevant alternative is not the most likely counterfactual, given that it is typically the most value-destructive outcome for all stakeholders, the Courts will require sufficient reason for doubting the plan company’s evidence.3 In practice, the dissenting creditors have faced an uphill struggle to convince the Courts that another relevant alternative is the more likely outcome.
On top of that, the absence of a rule equivalent to the absolute priority rule (found in US bankruptcies) means that dissenting creditors cannot rely on the ordinary priority of distribution which would apply in the relevant alternative to capture value ahead of junior ranking classes. As economic owners of the business, in the money creditors can gift value to other stakeholders (such as shareholders), thereby bypassing the ordinary priority of distribution.4
These principles have resulted in plan companies and their supporting creditors having significant control over the allocation of post-restructuring value in the company. There is some justification for that approach given that the restructuring plan was designed as a debtor-friendly tool to rescue struggling businesses, save jobs and preserve value. However, the net effect is that out of the money creditor claims have typically been discharged with no upside mechanism. It is true that a restructuring plan must be a “compromise or arrangement” and cannot simply amount to a confiscation. This, however, is a “low jurisdictional threshold”, typically satisfied by a de minimis payment.5 This contrasts with the approach taken in CVAs in which creditors subject to the arrangement are often granted some option (however small) to participate in the recovery of the business (such as turnover leases for landlords which increase rental payments if the business improves).
A Change of Direction?
Based on a recognition that the release of rights by the out of the money creditors creates value in the restructured business by allowing the company’s balance sheet to be cleaned up, the pendulum has recently started to swing in the opposite direction. In Thames Water, the Court of Appeal sought to move away from Virgin Active as a “hard edged rule” stating that, the fact that a creditor would be out of the money in the relevant alternative is not in itself a reason to exclude that creditor from the consideration of whether the restructuring surplus (i.e. the value preserved or generated by the restructuring plan) is fairly allocated amongst all creditor classes.6 While the position of creditors in the relevant alternative is the obvious reference point for the Court in exercising its discretion to impose a plan upon dissenting classes, such discretion involves the Court scrutinising the fairness of the plan, by inquiring how the restructuring surplus, over and above the relevant alternative, is to be allocated between the different creditor groups.7
In Petrofac, the Court of Appeal further developed that principle, stating that an assessment of the fair distribution of the restructuring surplus requires an analysis of whether any class of creditor is getting “too good a deal (too much unfair value)” (citing Snowden LJ in Adler CA).8 In overturning the Petrofac restructuring plan, the Court of Appeal held that the plan company had failed to justify the 211% post-restructuring return to the principal new money providers. Where the return exceeds the company’s expected cost of capital in the open market post-plan, such return must be regarded as a benefit of the restructuring, the allocation of which needs to be specifically justified.
Such allocation also needs to be kept under review. The allocations of the restructuring surplus in Petrofac were fixed prematurely, having seemingly been “set in stone” in December 2024 on a notional post-restructuring equity value and not adjusted in light of (much higher) updated valuations.9
An offer to dissenting creditors to participate in the new money on the same terms as the supporting creditors, may be a commercial solution to prevent objections, but it does not necessarily result in a fair outcome sufficient for the Court to sanction the plan or remove the need to properly consider and justify the allocation of the restructuring surplus.10 Creditors may have good reason not to participate in the new money and hence their failure to do so may not justify depriving them of a share in the benefits of the restructuring to which they would otherwise be entitled.
The Court of Appeal also made clear that the burden of establishing that a plan is fair, so as to justify the exercise of the Court’s discretion to sanction a plan notwithstanding the presence of dissenting classes, rests squarely on the plan company.11
The Court of Appeal’s decision in Petrofac requires plan companies fundamentally to re-consider the approach to the allocation of value in restructuring plans that had prevailed until recently. Plan companies will need to think carefully about allocating post-plan value and how to justify that allocation. Such justification will need to be rooted in solid evidence and market testing and be able to withstand the scrutiny of the Court. Any seemingly extravagant returns to stakeholders which are not properly explained may well result in the Court refusing to exercise its discretion to sanction the plan.
A Postscript on the No Worse Off Test
A further (but unsuccessful) ground of appeal in Petrofac was that the High Court was wrong to consider only direct economic benefits when determining whether the dissenting classes would have been worse off in the relevant alternative (i.e. the insolvent liquidation of the Petrofac group). The dissenting creditors argued that the Court should have had regard not only to the direct monetary returns that they would make on their claims against Petrofac, but also to any indirect economic benefits which would accrue to them if Petrofac went into liquidation. In that event, the dissenting creditors would be freed of a competitor and would stand to make substantial profits from future business which would otherwise have gone to Petrofac. As a result, Petrofac’s plan, so the dissenting creditors argued, underestimated the positive financial impact of the proposed relevant alternative on the dissenting creditors. The High Court, however, discounted this indirect benefit as being too “remote”.12 The Court of Appeal agreed with the High Court’s decision but disagreed with its reasoning, stating that there was no such test of remoteness and it was “no accident” that previous authorities invariably used the term “rights” because “the focus on rights rather than interests is fundamental.”13 The Court is required to determine the financial value which a creditor’s existing rights would likely have in the relevant alternative, and to compare it with the financial value of the new or modified rights which the plan offers in return for the compromise of those existing rights. Where a plan compromises or releases other rights of the creditor, it extends to those other rights too. However, the loss of a competitive advantage upon sanction that would otherwise accrue in the relevant alternative was deemed beyond the scope of that test.
Key Takeaways
Petrofac is only the third Court of Appeal judgment on restructuring plans. The decision once again highlights the fact restructuring plans are still a nascent restructuring tool, whose outer bounds and inner workings will continue to be developed by the Courts for some time to come. That being said, the decision has given restructuring professionals plenty to think about. Some of the key points to takeaway are:
- Out of the money creditors may well have a seat at the table. The fact that out of the money creditors have no economic interest in the distressed business prior to implementation of the restructuring plan does not of itself mean that they are not entitled to a share of the value created by the plan.
- Plan companies need to remain flexible and continuously review their assessment of the post-plan outcome and the fair treatment of the different creditor classes. The benefits of the restructuring must be assessed on the basis of the plan company having achieved sanction and the restructuring having been implemented.
- The burden of proof falls on the plan company to show that returns on new money are either equivalent to that which could be obtained in the market or to justify the allocation of those benefits. This will likely require rigorous market testing and/or the submission of expert evidence. We may see more challenges to plans by out of the money creditors in due course as a result.
- The chances of the Court sanctioning the plan increase if the plan company can show that there has been a genuine attempt to formulate and negotiate a reasonable compromise between all stakeholders and that the dissenting creditors are unreasonably holding out for a better deal.
1Re Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475, §124
2Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch), §311
3Re ED&F Man [2022] EWHC 687 (Ch), §39
4Re AGPS Bondco Plc [2024] EWCA Civ 24, §252
5Re CB&I [2024] EWHC 398 (Ch), §86
6Re Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475, §156
7Re Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475, §159-160
8Saipem SpA v Petrofac Ltd [2025] EWCA Civ 82, §108
9Saipem SpA v Petrofac Ltd [2025] EWCA Civ 82, §185
10Saipem SpA v Petrofac Ltd [2025] EWCA Civ 82, §188
11Saipem SpA v Petrofac Ltd [2025] EWCA Civ 82, §183
12Re Petrofac Ltd [2025] EWHC 1250 (Ch), §70
