Hurricane Energy Restructuring Plan: Court Declines to Sanction Plan Cramming Down Shareholders

On 28 June 2021, the English High Court handed down a judgment declining to sanction a restructuring plan proposed by Hurricane Energy PLC, which sought to cram down the dissenting class of shareholders and hand over the control of the company to its bondholders with a debt-for-equity swap diluting the shareholders down to 5% of their existing shareholding. This is the first time that the English court has declined to sanction a restructuring plan (since their introduction almost a year ago in June 2020), and only the fourth time that the cross-class cram down mechanism has been used.

The court held that there was a realistic possibility of the shareholders being better off in the relevant alternative (which did not involve imminent insolvency) and therefore, the “no worse off” test for cross-class cram down was not satisfied; and in any case, it would not have exercised its discretion to sanction the plan. The key takeaways from the judgment are that: (i) the court’s sanction of a restructuring plan is not a rubber-stamping exercise and it will take particular care where a plan involves immediate and irrevocable deprivation of dissenting class’ rights; (ii) the court will consider the possible range of outcomes where the relevant alternative is not imminent insolvency; (iii) in the absence of a burning platform, timing for proposing a restructuring plan is key to avoid premature disenfranchisement of creditor classes; and (iv) shareholder rights are fundamentally different to that of debt holders and in the absence of a formal insolvency process, they retain the right to appoint or remove directors.

It follows the judgment relating to the Virgin Active restructuring plans earlier this year which, for the first time, successfully crammed down dissenting landlord classes following a contested five-day sanction hearing, to achieve a balance sheet and operational restructuring. The Hurricane Energy plan can be distinguished from the Virgin Active plans due to the lack of imminent liquidation. Both cases carefully considered the position of shareholders and show that, given the ability of a plan to impose a cross-class cram down, valuations are of critical importance and valuation disputes are likely to constitute a regular and important component of any restructuring plan challenge.

In this OnPoint, we consider the key takeaways from both cases and look at the key issues arising in the High Court’s refusal to sanction the Hurricane Energy plan.