The Court of Appeal has reversed the sanction of the Petrofac group’s restructuring plans and allowed the appeal of two dissenting unsecured creditors.Re Petrofac Limited and Petrofac International (UAE) LLC [2025] EWCA Civ 821 (CA). There is much to digest in the judgment that will inform market practice in the preparation of restructuring plans, and in particular the terms of any related new money and the allotment of participation rights between creditors. The judgment is more wide-ranging than the carefully nuanced appeal decisions in AdlerRe AGPS Bondco Plc [2024] EWCA Civ 24 (CA). and Thames WaterKington Sarl v. Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475 (CA). and to that extent will prompt greater introspection for prospective plan companies.
This Client Alert explains the background to the case and analyses the potential effects of the judgment.
The court at first instanceRe Petrofac Limited and Petrofac International (UAE) LLC [2025] EWHC 1250 (Ch). sanctioned the plans despite active opposition from two joint venture partners of Petrofac, each of whom had significant claims against Petrofac for its share of liabilities arising from an under-performing joint venture project which were owed to the commissioning party. Under the restructuring plans, Petrofac sought to compromise those claims (the joint exposure of the consortium to the commissioning party was expected to be in excess of US$1.5 billion and other related unsecured claims of the JV partners against it (about US$120 million) in exchange for a share of a limited fund (US$1 million) and certain warrants in the restructured equity of Petrofac.
The group’s senior secured creditors would compromise their debt claims (about US$900 million) in exchange for approximately 17.5% of the post-restructuring equity (listed on the London Stock Exchange). Other affected secured and unsecured claims (including certain contingent claims) were grouped into different classes and under the plans would receive varying amounts of cash and warrants.
The appeal turned on the terms of the new money required to restore the group’s liquidity position. The new money comprised a US$350 million investment, split between debt and equity components. The senior secured creditors would provide the lion’s share of the new investment and participation rights were offered pro rata to their pre-restructuring exposures; the balance was provided by a third-party funder that subsequently bought into the existing debt at a discount. The investment would be backstopped by certain of the senior secured creditors in exchange for a backstop fee comprising additional new money notes and equity. A separate new US$80 million guarantee facility would allow the group to provide cash-backed guarantees to third parties for future projects it was awarded.
The JV partners’ appeal was based on two grounds. First, that the judge had been wrong to conclude that the JV partners would be “worse off” in the relevant alternative of a group-wide liquidation than they would be under the plans. Second, that the benefits preserved or generated by the plans were not being fairly shared between the plan creditors, and that in consequence the court had been wrong to exercise its discretion to sanction the plans. The JV partners failed on the first but succeeded on the second ground.
The “no worse off” testSection 901G(3), Companies Act 2006. requires as a condition to the court’s exercising its power to cram down dissenting creditor classes that those creditors be no worse off than they would be in the event of the relevant alternative, which is the most likely outcome to the plan should it not be sanctioned. The agreed relevant alternative on appeal was a group-wide liquidation. The JV partners argued that in that liquidation they would in fact be better off because Petrofac would go out of business and exit the market as a competitor and that those indirect economic benefits ought to have been considered by the court in determining whether the no worse off test had been satisfied. If they were included, the test would not have been satisfied and the court would have had no jurisdiction to sanction the plans.
The judge at first instance had dismissed the argument because he considered the indirect benefits that the JV partners would receive as a result of Petrofac’s going out of business to be too remote.Petrofac, first instance at 67-71. The Court of Appeal agreed with the outcome if not with the reasoning: instead of a remoteness test, the correct analysis was for the no worse off test to distinguish the JV partners’ rights as a creditor of the plan company from its broader interests. Relying on a long line of scheme of arrangement case law,Re Hawk Insurance Co Ltd [2001] 2 BCLC 480. the economic benefits that would accrue to the JV partners in the event of Petrofac’s liquidation were interests rather than rights integral to the debtor/creditor relationship. As such, they should not be considered in determining whether the no-worse-off test was satisfied. This is a welcome correction to the court’s original reasoning.
The second ground of appeal succeeded because the court found that the plans proposed an unfair allocation of the benefits of the restructuring. This centred around the new money. The new money participants would be rewarded with a little over two-thirds of the post-restructuring equity of the group; based on the lower end of the valuation report, the equity would have been worth about US$1 billion. The Court of Appeal drew a distinction between new money provided at a market rate as a “cost of the restructuring” and new money provided in excess of the prevailing market rate, which it categorised as a “benefit of the restructuring”. Anything falling in the latter category would — as a benefit — need to be allocated fairly between competing creditor classes. Critically, it was for the plan companies to justify the fairness of the allocation.
The Court of Appeal had no doubt that the consideration for the new money was a benefit of the restructuring and was content to make this finding of fact without affirmative evidence that the new money could have been provided at a more favourable rate in the market. The plan companies had failed to satisfy the burden of proof on them: the “evidence of market testing was wholly inadequate”. Whilst the first-instance judge had found “nothing disproportionate” in a return to the new money of 211%,Petrofac, first instance at 89. the Court of Appeal was unpersuaded that the new money carried sufficient risk to justify the returns it would generate (being a blended debt and equity return of 267%).
1. Assessing the entitlement of out-of-the-money dissenting creditors remains the critical issue. The Court of Appeal drew on the non-exhaustive categorisation of restructuring plan cases set out in the Thames Water appeal judgment. They were:
2. While each category of plan has its differing underlying purpose, the Court of Appeal stressed that a Thames Water-style plan is not the only category of plan that might give an entitlement to out-of-the-money creditors. Petrofac confirms that plans encompassing a comprehensive balance sheet restructuring in which secured creditors form the only in-the-money classes are not necessarily more dilutive of the entitlement of out-of-the-money unsecured creditors. This sits a little uneasily alongside existing company voluntary arrangement (CVA) case law, which has not found the equivalent treatment of similarly positioned unsecured creditors (such as landlords with leases from which the debtor company wishes to exit) to be unfairly prejudicial.
3. If there was any doubt following Thames Water that the underlying principles of Virgin Active had been jettisoned, Petrofac removes it. In Virgin Active, the opposing unsecured landlords had argued unsuccessfully that they too should have been entitled to participate in the new money, but the court found that because they were out-of-the-money “their objections to what the secured creditors have agreed with the plan companies in this respect carry no weight”. Following Petrofac, that is emphatically no longer the case. In Virgin Active, the court was provided with no evidence that the new money might be obtained on better terms, and this was sufficient for the plan companies to satisfy the burden of proof.Virgin Active at 297. Petrofac reverses that presumption such that it is the plan company that must now provide detailed market-based evidence to prove the negative. This will add to the costs and timeline in structuring and presenting plans involving new money (for example, in the procurement of expert fairness opinions to justify allocations).
4. In the absence of such evidence, it would seem that the court will draw adverse inferences: the court could “only speculate as to what part of the return on the new money should be regarded as a benefit of the restructuring, the fair allocation of which falls to be considered”. It is important to note that the Court of Appeal did not expressly find that the allocation of the benefits of the restructuring (the new money) between creditors was unfair. However, it was seemingly sufficient in order to overturn the sanction that it might be unfair.
5. The allocation of the restructuring benefits might remain unfair despite the JV partners being given the opportunity to participate in the new money proportionately to their claims. The offer of the same “excessive return” to all creditors might not cure its inherent unfairness: “the fact that [creditors] do not wish to [participate in the new money] may well not be a reason for depriving them of a share in the benefits of the restructuring to which they would otherwise be entitled”. In a case in which almost all of the benefits of the post-restructured enterprise value were bound up in the new money, it is a legitimate question to ask how the benefits might otherwise have been allocated to non-participating creditors.
6. It is no longer an adequate answer to a fairness challenge that the senior secured creditors in any given case would not have supported any other alternative plan, thereby rendering that alternative plan undeliverable. It would appear that the evidence of supportive creditor classes (and in particular those receiving a work fee) will be subject to heightened judicial scepticism. The flames of any related “burning platform” argument to justify speed and lack of creditor engagement may now be left by the court to extinguish themselves in the relevant alternative.
It remains to be seen whether, in light of the predominantly factual findings of the judgment, Petrofac will appeal the decision to the Supreme Court. Nevertheless, the market will closely follow how several first-instance sanction decisions expected to be handed down in the coming weeks will interpret and apply the decision. It would not be surprising were first-instance judges to be more tentative in their exercise of the court’s discretion to cram down dissenting creditors. What will and what will not now pass muster as “fair” remains unclear. That uncertainty may encourage plan companies to pursue earlier settlements or explore other implementation methods (such as administration pre-packs), in each case so as to avoid recourse to a plan. What is clear is that, if a plan is pursued, the evidential “fairness” burden on any plan company has been significantly increased.