Restructuring plans post-Petrofac – How do you make a Waldorf salad?
03 September 2025In a well-known episode of the comedy “Fawlty Towers”, hotel boss Basil Fawlty was frustrated. A guest had asked for a Waldorf salad. Basil had no idea how to make such a dish, and his attempts to do so were criticised by the guest.
On 19 August 2025, Mr Justice Hildyard gave judgment declining to sanction the restructuring plan proposed by Waldorf Production UK plc. He held the plan company had failed to establish that the plan that it had proposed was fair to its out -of-the-money creditors. In contrast to the hapless Mr Fawlty, the plan company had believed that it knew the correct recipe for a restructuring plan. However, it turned out that, following the Court of Appeal’s decisions in Thames Water and Petrofac, its recipe was out of date.
The courts have nevertheless given little guidance as to what a plan company should now propose to its out-of-the-money creditors to convince a court that its plan is fair, so we offer our own thoughts here.
Background
Waldorf Production UK plc is part of an oil and gas production group which operates in the North Sea. Its financial difficulties stemmed originally from the UK Government’s decision to introduce, and then extend, the Energy Profits Levy (EPL), a new tax on the profits of oil and gas companies. Certain third-party financing arrangements on which the group relied for working capital were also withdrawn in April 2024 and the group could not find a replacement financier.
In June 2024 the parent companies in the group were placed into administration to create a stable platform while they sought to sell the plan company and its fellow subsidiaries. However, no buyers had emerged, and more than $100m of secured bonds issued by the plan company were due to mature in September 2025. The plan company had been considering a restructuring plan as an alternative since mid-2024. After an extended period of negotiation with an ad hoc group of its bondholders, it launched its plan in February 2025.
Other than the bondholders, the plan involved only two parties:
- HMRC, for approximately $75m of unpaid liabilities arising under the EPL; and
- Capricorn Energy plc and Capricorn Energy UK Limited (together Capricorn), for approximately $30m of unpaid sums arising out of an asset sale.
The plan divided the creditors into two classes:
- The bondholders. The maturity date would be extended to May 2027, although a mandatory early redemption provision would apply in certain circumstances. Interest of 13% would continue to be cash paid. Other covenants would be amended.
- The unsecured plan creditors, comprising Capricorn and HMRC. All liabilities to these creditors would be compromised in exchange for a cash payment of 5% of the amount due, and contingent upside payments in certain circumstances.
The plan company had had no discussions with these unsecured plan creditors prior to launching its plan. The bondholders duly voted in favour of the plan and the unsecured plan creditors opposed it.
The sanction hearing took place a few days before the Court of Appeal handed down its judgment in Petrofac, but the judge allowed the parties the opportunity to submit further legal argument to take account of this decision prior to giving his judgment.
Statutory conditions for cross-class cram-down
Under “Condition A” of the statutory conditions for cross-class cram down, a court is only entitled to cram down a dissenting class if it is satisfied that none of the member of the dissenting class would be any worse off under the plan than they would be in the relevant alternative.
The plan company maintained that the relevant alternative was a liquidation or distributing administration in which the unsecured creditors would recover little or nothing. Since under the plan they would receive 5%, they would therefore be better off. The bondholders suggested that they themselves would prefer to suffer a lower recovery in a formal insolvency than to concede any further value to the unsecured plan creditors.
Capricorn and HMRC argued that the plan company and the bondholders would not be so commercially irrational and that the relevant alternative was a different compromise between the company and its plan creditors. They pointed out that this would not be a complicated multi-party process. Only two unsecured creditor groups would be involved, and they had already suggested two alternative set of terms that they would be prepared to accept.
The judge noted that whatever is put forward as a relevant alternative must be sufficiently clear, certain and defined for the purpose of satisfying its role in the statutory scheme. An inchoate alternative such as that put forward by HMRC and Capricorn, even if it was likely to be achieved, would not suffice. In addition, in view of the fact that the bondholders had so far specifically and unequivocally rejected the terms suggested by HMRC and Capricorn, he did not feel that he could properly conclude that they would in reality still accept a different compromise in preference to a formal insolvency.
He therefore concluded, albeit with some reluctance, that the relevant alternative in this case would be a formal insolvency process. Condition A was therefore satisfied. Condition B was also satisfied as the bondholders, being a class who would receive a payment or have a genuine economic interest in the plan company, had voted in favour.
Exercise of discretion
The judge chose nevertheless not to exercise his discretion to sanction the plan. He noted that the plan company and proponents of a plan need to do more than just establish that each creditor class would be better off under the plan that under the relevant alternative. Following the Court of Appeal’s decisions in Thames Water and Petrofac, they needed to satisfy the court that that plan would achieve a fair and reasonable allocation of the benefits of the restructuring, having regard to the amounts contributed by each creditor class including the class proposed to be crammed down.
He also emphasised the following passage from the Court of Appeal’s judgment in Petrofac:
“…the proper use of the cross-class cram down power is to enable a plan to be sanction 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.”
He indicated that the pattern and results of a previous negotiation between the plan company and the dissenting class are likely to offer a very useful perspective, both in setting upper limits to the expectations of the dissenting class and in providing a useful insight into whether the dissenting class has negotiated fairly and reasonably, or whether it has in truth been seeking to extract too much in terms of value. Where there have been no negotiations, nor any explanation as to why not, the plan company will, at the least, find it harder to satisfy the court that its plan is fair.
He observed that the present plan had been devised between the plan company and the bondholders without any input from the unsecured plan creditors and without any consideration of what might be a fair allocation of the benefits of the plan. Rather, the bondholders had arbitrarily determined what they thought was a suitable amount to pay over.
The plan company had failed therefore to discharge the burden of showing that the plan was fair and that it is appropriate, just and equitable to exercise the court’s discretion to sanction it.
What is now the recipe for a successful restructuring plan?
We have already given our views on the questions which we think a Court should now ask when exercising its discretion to sanction any restructuring plan, and we think that these remain the correct questions; see our article. However, neither the Waldorf decision nor the Court of Appeal decisions that preceded it have shed much light on what a plan company actually does need to offer to the out-of-the-money creditors. Our thoughts on this are as follows.
1. What can the plan company afford?
There will be an upper limit to the offer that a plan company can make as it cannot offer more than it can afford to pay, either at the date the plan is sanctioned or in the future. In Waldorf, the plan company claimed in correspondence that it would be unaffordable for it to make a 15% (rather than a 5%) upfront cash payment to HMRC and Capricorn, which would have required it to find an additional $10m of cash. However, it produced no evidence to support this.
A plan company will need to produce such evidence to convince a court. It will potentially need to share this evidence with the plan creditors in question prior to launching its plan, subject to first receiving appropriate confidentiality undertakings. The plan creditors are likely to request that the plan company pay their costs in taking advice of their own on the evidence supplied.
2. How should any upside payment be calculated?
It will be more difficult for a plan company and the other proponents of a plan to argue that they cannot afford to relinquish benefits which they never would have received had the plan not been sanctioned. In Waldorf, HMRC and Capricorn had proposed a second alternative where, in addition to the 5% cash payment under the plan, they received (between them) 25% of any recoveries made by the bondholders in excess of $38m. The rationale for this was that, in the relevant alternative proposed by the plan company, the bondholders would have received less than this sum.
It might be interesting to apply game theory to this calculation process. In an experiment known as the “ultimatum game”, two players interact to decide how to divide a sum of money. The first player, the proposer, proposes a division of the sum with the second player, the responder. The responder can either accept the proposed division or reject it. If the responder accepts, the money is split according to the proposal; if the responder rejects, neither player receives anything. Both players know in advance the rules of the game.
The results showed that the average minimum amount which needs to be offered by the proposer to the responder in order to “win” is around 30%. These results could be said to reflect the value that people place on “fairness”. Whilst the percentage suggested by way of an upside payment did not ultimately prove to be a determining factor in Waldorf, it may be that the figure of 25% that the unsecured plan creditors indicted that they would be prepared to accept is actually lower than that which a bystander would regard as “fair”.
3. What are the in-the-money creditors prepared to relinquish?
The question of what the plan company can afford to pay the out-of-the-money creditors will depend in part on the contribution which in-the-money creditors are prepared to make, whether in the form of new money, through the write-off of existing debt or by otherwise foregoing benefits which they would have been due to receive. In Waldorf, the ad hoc group of bondholders gave evidence that they did not wish to acquire a reputation for allowing junior creditors to “jump” senior creditors in line to improve their recoveries at the senior creditors’ and their investors’ expense, as it set a dangerous precedent for them. They felt that this line of thinking just encouraged ransom behaviour. Their evidence assisted in convincing the court that the relevant alternative really was a formal insolvency but assisted rather less in convincing the court that the plan was fair.
The Waldorf plan had been put together at a time when it was still possible to argue that, following the decision in Virgin Active, 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. Waldorf’s Counsel attempted to argue that the Thames Water and Petrofac decisions were applicable only to the types of plan involved in those cases, and not to the type of plan involved here. However, the judge made clear that the decisions in Thames Water and Petrofac have together now overruled Virgin Active in respect of all types of restructuring plan. The in-the-money creditors can expect now to need to make a more material contribution, particularly where they themselves would not have made a full recovery under the relevant alternative.
4. What might the plan company be able to recover from third parties in a formal insolvency?
If the relevant alternative to a restructuring plan is a formal insolvency, the administrators or liquidators may have opportunities to recover sums from directors and other third parties which would be lost once the restructuring plan was sanctioned. In Waldorf, the unsecured plan creditors identified two events which they claimed had exacerbated the plan company’s financial difficulties. The first was the payment of a shareholder dividend of approximately $70m in late 2022. The second was a refinancing in July 2024 which had significantly increased the company’s total financial indebtedness. HMRC and Capricorn had originally required that there be an independent committee of enquiry led by a King’s Counsel to prepare joint opinion for the plan company and plan creditors as to whether there were any viable claims arising from either of these events.
The expert engaged by a plan company to report on the relevant alternative would ordinarily consider the possibility of attacking antecedent transactions as part of their report, but a rigorous legal analysis of this kind would be going a stage further. Whilst the absence of such an analysis did not ultimately prove to be a determining factor in Waldorf, it would be wise for a plan company in Waldorf’s position to be ready to deal with any similar request in the future.
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.
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