Mr Justice Zacaroli has handed down his judgment in Hurricane Energy plc  EWHC 1759 (Ch).
The Court declined to approve the cross-class cram down of Hurricane’s shareholders as part of the Part 26A restructuring plan because the available evidence did not demonstrate that the shareholders were “no worse off” as a result of the restructuring plan. On that basis the restructuring plan failed.
Additionally, if it has been necessary to decide whether to exercise the court’s discretion as to whether to sanction the plan, the court would have declined to exercise that discretion.
The fact that shareholders might change the board of the company if the restructuring plan is not approved, and that those new directors would be hostile to the restructuring plan, was not a ground for urgency. Absent a formal insolvency proceeding, it was the right of the shareholders to change the directors should they wish to do so; those directors would of course be subject to directors’ duties, including any overriding duty to creditors created by actual or likely insolvency.
A Part 26A restructuring plan is a procedure under the Companies Act 2006 introduced by the Corporate Insolvency and Governance Act 2020. As a condition to entry for a restructuring plan, a company must be in financial difficulties and the plan be designed to mitigate or reduce those financial difficulties. The company’s creditors and, where relevant, members vote as classes dependent on their rights in relation to the company proposing the plan. The court has the power to sanction a restructuring plan even where classes of creditor voting against provided that (a) at least one class with an economic interest votes in favour and (b) the other classes are “no worse off” as a result of the restructuring plan than they would be in the “relevant alternative”.
Hurricane Energy plc (“Hurricane”) is an AIM-listed company with a number of subsidiaries holding licences in the UKCS in relation to a number of fields (Lancaster, Lincoln, Warwick and Halifax). The terms of the licences expire on or before December 2024.
Hurricane’s principal creditors are unsecured bondholders with debt of US$230m (the “Bondholders” and the “Bonds”). While Hurricane has been paying the Bondholders current (as to interest) it predicted that it would not be able to repay the principal on maturity on 24 June 2022. Hurricane is holding US$168.5m in cash, of which at least US$100m is unrestricted.
Hurricane proposed a restructuring plan. The purpose of the restructuring plan was to extend the maturity date for the Bonds, reduce the principal amount, increase the coupon and provide security to support the Bonds. Additionally, Hurricane would issue the Bondholders with shares which would provide them with 95 per cent. of the equity in Hurricane.
Hurricane proposed that only the Bondholders would vote on the restructuring plan, on the basis that it was not necessary for the shareholders to vote, as their rights were unaffected. A number of shareholders objected to the restructuring plan. At the convening hearing (the first court hearing), the court determined that the shareholders should be entitled to vote on the restructuring plan.
At the plan meetings, 100 per cent. of the Bondholders voted in favour and 92.34 per cent. of shareholders voted against. Consequently Hurricane asked the court to exercise its powers of cross-class cram down in order to sanction the plan.
Refusal to exercise cross-class cram down
The court had to consider: (a) what would be most likely to happen in relation to Hurricane were the plan not sanctioned; (b) what would be the consequence of that for shareholders; and (c) what would be the outcome if the plan is sanctioned.
The court considered a controlled wind-down of Hurricane to be the “relevant alternative”. In this scenario, Hurricane would continue to operate and receive revenues from its subsidiaries. How much money was generated in this scenario was dependent on the production levels from one of its wells (P6) and the future price of oil.
Hurricane’s argument was that future revenues to May 2022 (ahead of the Bond maturity date) would be insufficient to repay the Bonds in full and consequently, in the “relevant alternative” the shareholders would receive nothing. The shareholders argued that this was too blinkered a view and that actual well performance, production post May 2022, future oil price, the potential for refinancing or a bond buyback could all make a difference to the eventual outcome. Zacaroli J was also unconvinced that the FPSO needed for the fields would be unavailable unless the restructuring plan were approved. Additionally, shareholders pointed to the fact that there was no “insolvency crisis” and irrevocably removing shareholders’ rights at this stage was premature.
It was accepted that the restructuring plan return to shareholders was very small: a small potential surplus of which they would receive 5 per cent. Consequently, Zacaroli J considered whether shareholders would be better off with that nominal return or with the uncertain but potentially better outcome if the restructuring plan were not approved. His conclusion was that the shareholders retaining 100 per cent. of the equity in Hurricane and continuing to trade, with a realistic prospect of repaying the Bonds in full was a better position that receiving 5 per cent. of the equity with no prospect of anything but a minimal return.
On that basis, one of the conditions for a cross-class cram down was not met and consequently the restructuring plan could not be approved. In any event, the court would not exercise its discretion to sanction the restructuring plan.
Position of the board and urgency
Hurricane had presented the restructuring plan as being urgent for a number of reasons but principally that the shareholders were taking steps to hold a shareholders’ meeting to remove the current board. It was anticipated that the board would be removed on 5 July 2021 and that the replacement board would withdraw the restructuring plan. The new board would be likely to pursue a different “risky” strategy that, the bondholders argued, would result in a lower repayment of the Bonds.
The court’s view was that the imminent removal of the board was not a reason for urgency. The shareholders were within their rights to remove and replace the board and the new directors would be subject to directors’ duties in the usual way. There were no other grounds to consider that it was essential that the Bonds be restructured now.
Hurricane is an interesting case as it shows the risks in seeking a restructuring too far ahead of the date on which an “insolvency crisis” could arise. Fundamentally the court was not convinced that, in a volatile market such as oil and gas, changes in production and pricing might not improve the shareholders’ position. Absent the threat of an immediate insolvency, it was reasonable for the shareholders to take a view on future prospects and wish to hold their position. It is also a useful reminder of the shareholders’ rights to have a board of their choice, even if those board members will owe duties to creditors due to the company’s financial position.
It is unclear as to whether Hurricane will appeal the decision.