Restructuring plans post-Petrofac: How to demonstrate that the benefits of a restructuring have been allocated fairly

On 1 July, the Court of Appeal overturned the High Court’s decision¹ to sanction the restructuring plans proposed by two Petrofac group companies as they did not consider that the benefits of the restructuring had been fairly allocated. 

Following this, the next restructuring plans that the Court was asked to sanction were those of Chandlers Building Supplies Holdings Limited and fellow members of the Independent Builders Merchants Group (IBMG), advised by Macfarlanes. On 9 July, these companies successfully satisfied the Court that their plans were fair, supported by novel use of independent evidence regarding the distribution of the benefits generated by the plans. This is how they did it.         

The Petrofac restructuring plans

What did Petrofac’s restructuring plans involve?

The inter-related restructuring plans proposed by Petrofac International (UAE) LLC (PIUL) and Petrofac Limited (PL) sought to release $900m of secured debt and an estimated $3bn of unsecured claims. The unsecured claims being released included those of Samsung and Saipem, which had arisen as a result of an unsuccessful joint venture with Petrofac entity PSS BV. 

In return for the release of their debt, the secured creditors would receive shares equating to around 17.5% of the post-restructuring equity.   

In return for releasing its claims against PIUL, Samsung would receive a distribution of cash or shares equal to 110% of the return it would have received in an insolvent liquidation. However, as their claims against PL were completely "out of the money", in return for releasing those claims Samsung and Saipem would only be given a right to share in a settlement fund of £1m and to receive warrants entitling them to shares in PL if its post-restructuring equity market capitalisation exceeded certain thresholds.

Under the restructuring plans, Petrofac would receive $350m of new money, comprising a mixture of new secured debt and equity. The existing secured creditors would provide $187.5m of this new money. They had the opportunity to receive further equity in two ways: 

• those senior secured creditors who agreed to underwrite the provision of the new money would receive "backstop fees" to be paid part in listed shares that could be realised almost immediately and part in notes; and
• members of an ad hoc group of senior secured creditors which had been involved in the negotiation of the restructuring plans would also receive "work fees" to be paid in listed shares that could be realised almost immediately.

In total, more than two-thirds of the post-restructuring equity would be allocated to the new money providers. These returns were originally agreed against a notional post-restructuring group equity value of $350m. Subsequently, however, a report was produced indicating that the post-restructuring equity value would be much higher - between $1.5bn and $1.85bn. This meant that the new money providers would enjoy a return of over 200% on their money. 

What did the Courts decide?

Samsung and Saipem argued (among other things) that the benefits of the restructuring had not been fairly allocated and that therefore, even if the other conditions for cross-class cram down of their unsecured claims were met, the Court should not exercise its discretion to sanction the restructuring plans.  

The decision of the High Court 

The judge noted that, following the Court of Appeal's decision in Thames Water², the fact that Samsung and Saipem were almost or wholly out of the money in the relevant alternative did not mean that their interests should be disregarded when looking at whether the benefits of the restructuring had been fairly allocated. However, the judge decided that the benefits had been fairly allocated. The judge was influenced by the following:

• investors who had had no previous involvement were prepared to contribute towards the new money alongside the existing secured creditors - given the level of risk they were being expected to take in injecting cash into a company that would otherwise fail, they would expect a substantial return; and
• not all of the existing secured creditors were prepared to contribute - if the returns really were disproportionately high, the judge would have expected a greater take up.

The decision of the Court of Appeal 

The Court of Appeal held that the judge had been wrong to focus on the pre-restructuring risks. The correct question was the cost at which new money could be raised by the PL, PIUL and their subsidiaries (the “Group”) after the restructuring and conditional upon sanction. This would remove the existing liabilities from the plan companies’ balance sheets and thus avoid the risk of liquidation.

In this regard, the equity valuation of the restructured Group was important. It is for a plan company to satisfy the Court that its restructuring plan is fair. PL and PIUL should have provided cogent evidence - either by way of expert evidence or by market-testing - to explain why allocating most of the value preserved or realised by the restructuring to the new money providers fairly reflected the cost at which funding could have been obtained in the market.         

In this respect, their Lordships were particularly influenced by the fact that the plan companies and their existing secured creditors had not revisited their initial allocations of value after it became clear that the post-restructuring equity would be much more valuable than first thought. If the increase was such that the price became disproportionate to the price at which equivalent finance could have been obtained in the market, the fees paid would become a benefit, not a cost, of the restructuring, the allocation of which needed to be justified. The plan companies had failed to do so.

The judgment ends with the Court expressing its view that the proper use of cross-class cram down is to enable a restructuring plan to be sanctioned against the opposition of those unreasonably holding out for a better deal, where there has been a genuine attempt to formulate and negotiate a reasonable compromise between all stakeholders.

Prior to the Court of Appeal’s decisions in Thames Water and Petrofac, it was possible to argue that the "in the money” creditors were the sole owners of the benefits created by a restructuring plan and therefore able to allocate them as they saw fit. It is clear that such an argument is no longer sustainable. 

The IBMG restructuring plans

What did the IBMG plan companies do? 

IBMG operates a builders’ merchants business with a network of 176 branches. It employs approximately 2,000 people. Thirteen companies in the group proposed inter-conditional restructuring plans which would release a portion of the secured debt owed to IBMG’s lenders, and compromise the unsecured liabilities owed to five classes of landlord creditors, to various local authorities in respect of business rates and to a number of other property-related creditors. The remaining liabilities owed to the secured lenders would be amended and extended, and further loan facilities would be provided.

In light of the Court of Appeal’s judgment in Petrofac, the plan companies submitted that, when exercising its discretion to sanction a restructuring plan, the Court should ask four key questions:

Concluding thoughts

Clearly IBMG’s restructuring was different in nature to that of Petrofac. However, we nevertheless believe that:

• the above four questions should be those which a Court asks when exercising its discretion to sanction any future restructuring plan; and
• a “Plan Benefits Report” should be a standard part of the evidence provided for any future restructuring plan, likely forming part of the expert analysis in relation to the relevant alternative.   

Three appeals have now been heard against decisions sanctioning restructuring plans, and two of those appeals have been successful. We hope that if our suggested approach becomes standard practice this will help to reduce the number of further appeals and thus make the restructuring plan process an even more useful tool going forwards. 

Macfarlanes LLP has a market leading Restructuring and Insolvency practice in London, having advised on various restructuring plans with unique elements - to understand our experience with restructuring plans further, please click here. If you would like to discuss any of the themes raised in more detail, please do not hesitate to get in touch.   

[1] Re Petrofac Ltd [2025] EWHC 1250 (Ch)
[2] Kington S.a.r.l. v Thames Water Utilities Holdings Ltd [2025] EWCA Civ 475