The Court's Discretion in Relation to the Part 26A Cram Down

This article explains that a fundamental purpose of the Court’s discretion whether to exercise its cram down power under the new UK Companies Act Part 26A process would be to ascertain whether the dissenting class was promised a "just and equitable" distribution of the restructuring surplus, i.e. the value expected to be preserved and perhaps created by the proposed plan itself. The concept is familiar from US Chapter 11 practice, where the courts are required to ensure a “fair and equitable” treatment of members of the dissenting class. In the US, however, the much-misunderstood Absolute Priority Rule (‘APR’) supposedly governs this exercise. This article shows that the APR is untenable and is honoured more in breach in US practice than in observance. Similarly, the cram down powers under the new Dutch and the proposed German restructuring regimes also envisage ‘exceptions’ to the APR which are likely in practice to swallow the rule. Understanding why the APR cannot and should not govern the distribution of the restructuring surplus goes a considerable way to establishing a more rational starting point. An important consideration here would be whether the plan allocates the restructuring surplus with due regard to the likely contribution to the creation of that surplus by members of the dissenting class. This contribution is proxied by the ratio of returns in the “relevant alternative” of dissenting class members and any junior classes to whom returns are proposed under the plan. For example, if dissenting class members would receive 40% on their claims in the relevant alternative while members of a junior class would receive 20%, then this 2:1 ratio is presumptively the just and equitable share of the restructuring surplus of members of the two classes. Any departures from this relative priority would likely require justification by reference to one or more significant restructuring goals of the sort recognised in US jurisprudence, such as preserving the debtor’s business as a going concern, making members of the crammed down class better off, and protecting reliance interests. The article also considers the appropriate treatment of “new money” and “sweat equity”, and of classes excluded from the plan.