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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> AGPS Bondco Plc, Re [2023] EWHC 916 (Ch) (21 April 2023) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2023/916.html Cite as: [2023] EWHC 916 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF AGPS BONDCO PLC
AND IN THE MATTER OF THE COMPANIES ACT 2006
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
____________________
| IN THE MATTER OF AGPS BONDCO PLC |
____________________
MR TOM SMITH KC and MR ADAM AL-ATTAR (instructed by Akin Gump LLP) for an ad hoc group of opposing creditors
Ms FELICITY TOUBE KC and MR HENRY PHILLIPS (instructed by Milbank LLP) for a steering committee of creditors
Hearing dates: 3 to 5 April 2023, 12 April 2023
____________________
Crown Copyright ©
Mr Justice Leech:
I. The Application
II. Background
(1) The Debt Structure
(1) the 400,000,000 1.5% notes due in 2024 (the "2024 Notes");
(2) the 400,000,000 3.25% notes due in 2025 (the "2025 Notes");
(3) the 700,000,000 1.875% notes due in January 2026 (the "January 2026 Notes");
(4) the 400,000,000 2.75% notes due in November 2026 (the "November 2026 Notes");
(5) the 500,000,000 2.25% notes due in 2027 (the "2027 Notes"); and
(6) the 800,000,000 2.25% notes due in 2029 (the "2029 Notes").
|
SUNs |
Principal Amount |
Coupon (% p.a.) |
Maturity |
|
2024 Notes |
400,000,000 |
1.500 |
26 July 2024 |
|
2025 Notes |
400,000,000 |
3.250 |
5 August 2025 |
|
January 2026 Notes |
700,000,000 |
1.875 |
14 January 2026 |
|
November 2026 Notes |
400,000,000 |
2.750 |
13 November 2026 |
|
2027 Notes |
500,000,000 |
2.250 |
27 April 2027 |
|
2029 Notes |
800,000,000 |
2.250 |
14 January 2029 |
(1) 500,000,000 of 1.875% senior unsecured notes due on 27 April 2023 (the "Adler RE 2023 Notes");
(2) 300,000,000 of 2.125% senior unsecured notes due on 6 February 2024 (the "Adler RE 2024 Notes"); and
(3) 300,000,000 of 3% senior unsecured notes due on 27 April 2026 (the "Adler RE 2026 Notes").
(2) The Issuer Substitution
(3) The Group's Financial Difficulties
(4) The Lock-Up Agreement
(5) The Commitment Letters
(6) The New Money
(1) A term loan facility of 322,500,000 will be used by the Parent Company to fund a 265,000,000 repayment of an intra-Group loan the proceeds of which will then be applied by Adler RE to fund the repayment of the Adler RE 2023 Notes. 57,500,000 will also be used to pay fees incurred in relation to the New Money Funding, namely, the Backstop Fee (above) and the Ticking Fee, Early Bird Fees and the OID Fee (below).
(2) A 235,000,000 term loan facility will be made available to the Parent Company to be used to fund a shareholder loan to Adler RE which will also be used to fund the repayment of the Adler RE 2023 Notes. The inter-company loan will not carry interest.
(3) A 80,000,000 term loan facility will be made available to Consus or certain property-owning subsidiaries of Consus to fund capital expenditure.
(4) A 300,000,000 term loan facility will be made available to the Parent Company and will be used to fund another shareholder loan to Adler RE to fund the repurchase or redemption of the Adler RE 2024 Notes.
(1) The Group will pay an "Early Bird Fee" of 1% of the amount which each Plan Creditor committed to provide on or before the "Early Bird Fee Deadline". This was initially 2 December 2022 but the Plan Company extended the deadline for other Plan Creditors until 31 March 2023. The extension allowed all Plan Creditors to be eligible to receive the Early Bird Fee if they contributed to the New Money.
(2) The Group will also pay a "Ticking Fee" of 5% on committed but undrawn New Money lending commitments. This is intended to reflect the opportunity cost to the New Money Providers who will need to ensure that they have sufficient funds available to satisfy their lending commitments.
(3) Plan Creditors who executed Commitment Letters before 14 December 2022 are entitled to the Ticking Fee calculated on their initial commitments for the period 9 January 2023 to 31 March 2023. From 1 April 2023 their Ticking Fee is calculated on the basis of their final commitments because other Plan Creditors could participate in the New Money until 31 March 2023.
(4) Finally, the Group will pay an "Original Issue Discount Fee" or "OID Fee" of 1% calculated on the nominal amount of the New Money notes issued by the new SPV to the New Money Providers. It is said that this is part of the pricing of the notes (comparable to the interest rate) and is available to anyone who participates in the New Money.
(5) The Ticking Fee and the Early Bird Fee were to be payable whether or not the wider restructuring plan was implemented and, if not, those fees were to rank as unsecured claims against the Parent Company in any insolvency proceedings. The OID Fee will be financed via an increase in the nominal amount of the notes to be issued by the SPV in relation to the New Money and will only accrue if those notes are actually issued.
(6) Finally, each New Money Provider will be allocated a pro rata entitlement to new shares in the Parent Company in a total amount equal to 22.5% of the Parent Company's share capital (on an as-converted basis). It is the Plan Company's evidence that the total value of the new shares would be approximately 32.6 million on the basis of the Parent Company's market capitalisation at the commencement of these proceedings.
(7) The Consent Solicitation
(8) The AHG
(9) The Acceleration
III. The Plan
(1) The 2024 Notes: Maturity Extension
(2) New Covenants
(3) Interest Payment Holiday and Uplift
(4) The New Money
(5) Reporting Covenants
(6) The Notes Representative
(7) The Intercreditor Agreement
"The New Parent Company Intercreditor Agreement will be executed if the Restructuring Plan becomes effective and will be made, inter alios, between the Parent Company, the Plan Company, certain subsidiaries of the Parent Company, the LendingCo, certain intra-group lenders, the Notes Representative and the Security Agent and govern, inter alia, the administration and enforcement of the guarantees and the transaction security (as described in section 6.1 (Summary of the post-restructuring security structure and hive-down) in this Part) and the distribution of the proceeds from such enforcement and the relationship between the LendingCo, the SUN Holders and the Convertible Notes holders, the SSD lenders and the holders of and claims under any instrument by which the Loan Notes and/or the Convertible Notes may be refinanced. The Notes Representative will act as such in respect of each series of the SUNs."
(8) Power of Attorney
IV. Procedural History
(1) The jurisdictional or threshold requirements of section 901A had been fulfilled: see [14](i).
(2) Sufficient notice had been given to the Plan Creditors and the Practice Statement Letter was in an appropriate form: see [14](ii).
(3) The classes of Plan Creditors had been correctly identified and constituted. As he pointed out, the Plan Company had adopted a conservative approach to class constitution and had treated each set of SUNs as a separate class: see [14](iii).
"As regards the correct constitution of classes, I accept the point made by Mr Dicker that if a judge has heard full argument at the Convening Hearing and has decided on the appropriate constitution of classes, it is not ordinarily appropriate for a different judge at the sanction hearing to take a different view of his own motion in the absence of any creditor appearing to contend that the classes were not correctly constituted."
review an updated version of the Explanatory Statement which was made available on 15 March 2023.
(1) At the meeting of the holders of the 2024 Notes (the "2024 Plan Creditors"), the Plan was approved by 98.50% in value of those voting (with a turnout of 96.60% in value).
(2) At the meeting of the holders of the 2025 Notes (the "2025 Plan Creditors"), the Plan was approved by 92.93% in value of those voting (with a turnout of 96.93% in value).
(3) At the meeting of the holders of the January 2026 Notes (the "January 2026 Plan Creditors"), the Plan was approved by 95.00% in value of those voting (with a turnout of 94.87% in value).
(4) At the meeting of the holders of the November 2026 Notes (the "November 2026 Plan Creditors"), the Plan was approved by 91.97% in value of those voting (with a turnout of 94.35% in value).
(5) At the meeting of the holders of the 2027 Notes (the "2027 Plan Creditors"), the Plan was approved by 80.68% in value of those voting (with a turnout of 90.48% in value).
(6) At the meeting of the 2029 Plan Creditors, the Plan was approved by 62.28% in value of those voting (with a turnout of 95.46% in value) (as stated above).
V. The Law
"(1) This section applies if the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors or (as the case may be) of members of the company ("the dissenting class"), present and voting either in person or by proxy at the meeting summoned under section 901C.
(2) If conditions A and B are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning it under section 901F.
(3) Condition A is that the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (see subsection (4)).
(4) For the purposes of this section "the relevant alternative" is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F.
(5) Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative."
"[W]here a company applies for the sanction of a restructuring plan in reliance on section 901G, three questions must be considered by the Court:
Condition A: If the restructuring plan is sanctioned, would any members of the dissenting class be any worse off than they would be in the event of the relevant alternative? This is often described as the "no worse off" test.
Condition B: Has the restructuring plan been approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative?
General Discretion: In all the circumstances, should the Court exercise its discretion to sanction the restructuring plan?"
(1) Condition A: The NWO Test
"[106] The "no worse off" test can be approached, first, by identifying what would be most likely to occur in relation to the Plan Companies if the Plans were not sanctioned; second, determining what would be the outcome or consequences of that for the members of the dissenting classes (primarily, but not exclusively in terms of their anticipated returns on their claims); and third, comparing that outcome and those consequences with the outcome and consequences for the members of the dissenting classes if the Plans are sanctioned.
[107] It is important to appreciate that under the first stage of this approach, the Court is not required to satisfy itself that a particular alternative would definitely occur. Nor is the Court required to conclude that it is more likely than not that a particular alternative outcome would occur. The critical words in the section are what is "most likely" to occur. Thus, if there were three possible alternatives, the court is required only to select the one that is more likely to occur than the other two.
[107] Having identified the relevant alternative scenario, the Court is also required to identify its consequences for the members of the dissenting classes. This exercise is inherently uncertain because it involves the Court in considering a hypothetical counterfactual which may be subject to contingencies and which will, inevitably, be based upon assumptions which are themselves uncertain."
"37. As to the first step, the court is not required to be satisfied that a particular alternative would definitely occur, merely (where there are possible alternatives) which one is most likely to occur: Virgin Active at [107].
38. As to the second step, the outcome or consequences for the shareholders is to be assessed primarily, but not exclusively, in terms of the anticipated returns on their claims: Virgin Active, at [106]. In Re Deep Ocean 1 UK Ltd [2021] EWHC 38 (Ch), Trower J said of the phrase "any worse off" that it is " a broad concept and appears to contemplate the need to take into account the impact of the restructuring plan on all incidents of the liability to the creditor concerned, including matters such as timing and the security of any covenant to pay." I consider a similarly broad approach is required in determining whether shareholders are "any worse off" as a result of the Plan: it is necessary to take into account all incidents of their rights as shareholders.
39. As Snowden J pointed out in Virgin Active the exercise at the second stage is inherently uncertain, "because it involves the Court in considering a hypothetical counterfactual which may be subject to contingencies and which will, inevitably, be based upon assumptions which are themselves uncertain". Virgin Active was a case where the relevant alternative involved an immediate insolvency process. In such a case (which is more typical in restructurings generally) disputes between stakeholders will often focus on the appropriate value to ascribe to assets and liabilities in that insolvency process. That is not the case here where (as I will develop below) the relevant alternative is the continuation of trading for at least a further year.
40. Where the threshold conditions are satisfied, although the starting point is the approach to the exercise of discretion adopted in relation to schemes under Part 26, the fact that the case involves the application of the cross-class cram-down power in section 901G requires important modifications to that approach: see Deep Ocean (above), per Trower J at [44] to [46]. In particular, the reluctance of a court to depart from the outcome of a properly convened meeting of a class of creditors cannot have the same place in the court's approach to sanctioning a restructuring plan to which section 901G applies."
"In my view, the court should recognise that the directors are normally in the best position to identify what will happen if a scheme or restructuring plan fails. Where the evidence appears on its face to reflect a rational and considered view of the company's board, the court will require sufficient reason for doubting that evidence. As no creditor or member appears today to challenge the director's conclusion on this aspect of the test and as the evidence appears to reflect a rational and considered view by the board, there is no basis on which I can or should doubt it."
"[T]he phrase used is 'any worse off', which is a broad concept and appears to contemplate the need to take into account the impact of the restructuring plan on all incidents of the liability to the creditor concerned, including matters such as timing and the security of any covenant to pay."
(2) Condition B
(3) Discretion
(i) Overall Support
(ii) Fair Distribution of Benefits
"62. The next discretionary factor that may apply in s.901G cases relates to the relative treatment of creditors under the proposals and has much in common with what has come to be called the "horizontal comparison" that the court will often carry out when considering an unfair challenge to a company voluntary arrangement. It is the second of the two heuristics referred to by Norris J in the Debenhams case at [12] (in a passage immediately following the citation I set out earlier in this judgment). It compares the treatment of creditors under the CVA inter se. As Norris J said: "whilst there is no prohibition on differential treatment, any differential treatment must be justified".
"63. In my view, because a 'class' right of veto is removed by the operation of s.901G, justice may require the court to look at questions of horizontal comparability in the context of a cross-class cram down to see whether a restructuring plan provides for differences in treatment of creditors inter se, and if so whether those differences are justified. In particular the court will be concerned to ascertain whether there has been a fair distribution of the benefits of the restructuring (what some commentators have called the "restructuring surplus") between those classes who have agreed the restructuring plan and those who have not."
"106. Prejudice to a creditor, in the context of a CVA, is likely to be readily identifiable and readily established, for example if the amount owing to it is reduced (without receiving payment) or if it loses a benefit relating to the debt, for example if its security is impaired. More difficult to pin down are the circumstances that render the prejudice "unfair".
107. In considering whether an arrangement is unfairly prejudicial, while recognising that it is necessary to have regard to all the circumstances of the case, the courts have developed two helpful tests, labelled the "vertical" and "horizontal" comparators: see Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2007] EWHC 1002 (Ch) ("Powerhouse"), at [75].
108. The vertical comparator, described by Henderson J in Mourant & Co Trustees Ltd v Sixty UK Ltd [2010] EWHC 1890 (Ch) ("Sixty") at [67] as the "irreducible minimum" below which the return in a CVA cannot go, is a comparison with what the creditors' position would have been in the event that the CVA was not approved, typically therefore their position in a winding up or bankruptcy: see the Cork Report (at [378]) and Re T&N Limited [2004] EWHC 2361 (Ch) , per David Richards J at [82], where he considered it difficult to envisage a court not interfering with a CVA which was " likely to result in creditors, or some of them, receiving less than they would in a winding up of the company, assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale".
109. It is emphatically not enough, to preclude a finding of unfair prejudice, that the vertical comparator test is satisfied in respect of objecting creditors. It is also necessary to consider the position as between creditors the horizontal comparator. Indeed, it was established relatively early on that unfairness in the context of section 6(1)(a) stems from differential treatment as between creditors: see, for example, Re a Debtor (No.222 of 1990), ex p the Bank of Ireland [1992] BCLC 137, per Harman J at p.145d-e. In Doorbar v Alltime Securities Limited (No.2) [1995] BCC 728, Knox J, put it this way: "Unfair prejudice, therefore, is a reference to a degree of prejudice to one creditor or class of creditors as compared with other creditors or class of creditors. It involves an assessment of any imbalance between possible prejudices to one or the other "
110. Knox J's conclusion on the question of unfair prejudice was upheld on appeal: [1996] 1 WLR 456, per Peter Gibson LJ at pp.467-468."
"111. The mere fact that there is differential treatment does not, however, establish unfair prejudice: see Re a Debtor (No.10 of 1999) [2001] 1 BCLC 54. At p.63c, Ferris J held that it gave cause for inquiry, but might turn out to be justified.
112. Lightman J in IRC v Wimbledon Football Club Ltd [2004] EWHC 1020 (Ch), at [18] summarised the effect of the authorities to that date as follows: (1) the unfairness must be caused by the terms of the arrangement; (2) unequal or differential treatment of creditors of the same class will not of itself constitute unfairness, but may give cause for inquiry and require an explanation; (3) it is necessary to consider all the circumstances including, as alternatives to the arrangement proposed, not only liquidation but the possibility of a different fairer scheme; (4) differential treatment might, in some circumstances, be required to ensure fairness (citing, as an example, Sea Voyager Maritime Inc v. Bielecki [1999] 1 All ER 628). Further, he noted that differential treatment may be justified where necessary to ensure the continuation of the business that underlies the arrangement: see also, Powerhouse, at [90], Sixty at [67], and Debenhams, at [110].
113. Differential treatment is also justified where it is required by section 4 IA 1986 (relating to secured and preferential creditors, see [52] above). There is no inconsistency, however, between such differential treatment and the basic principles of good faith and equality, because "equality" in this context does not mean equal treatment in the abstract, but equal treatment in the context of the established insolvency principle of pari passu. The pari passu principle is not an absolute rule, but is subject to important exceptions. For example, secured creditors are entitled to rely on their security outside of bankruptcy or liquidation (and the assets of the debtor subject to security have been treated as excluded from the bankruptcy estate) and for policy reasons preferential creditors have for a long time ranked ahead of other unsecured creditors upon insolvency (although the precise definition of a preferential debt has changed over time).
114. The pari passu principle also recognises that some creditors may have additional rights which they are entitled to retain in an insolvency, for example a right in some circumstances to pursue third parties for the debt owed to them by the insolvent debtor. There is no inconsistency with the principles of good faith and equality if a voluntary arrangement affords different treatment to a creditor in order to preserve those rights."
"There is one submission of Counsel for Crowdstacker that I must specifically address. Counsel submitted that the scheme failed the "fairness" test purely and simply because none of the benefits (if any) from future trading accrued to the compromised creditors; the benefits accrued solely to the Amicus shareholders. I have previously expressed some sympathy with this view when considering schemes for the compromise of compensation claims against a company, where it is those who have been wronged by the company who sacrifice their redress to enable the wrongdoing company to be rescued for the benefit of its shareholders: Re Provident SPV [2021] EWHC 1341 (Ch) at [44]-[46]. But the situation here is very different. Crowdstacker enabled investors using its platform to risk commercial advances to Amicus for reward, advances of which Crowdstacker is now (on its own case) the sole beneficial owner. The context is an entirely straightforward commercial one in which it is very well established that it is not the role of the Court to consider whether the scheme submitted for sanction is the best scheme or the only fair scheme or could be improved in some respect, but rather to assure itself that it is one approved by the requisite majority of properly informed and consulted creditors acting in accordance with their ordinary class interests and not oppressively in pursuit of some special interest: Re Telewest Communications [2004] EWHC 1466 (Ch) at [21]-[22]. For the purpose of this part of the analysis I do not accept the submission of Counsel for Crowdstacker."
"191. Whether unfair prejudice exists depends on all the circumstances, including those that would be taken into account in exercising the discretion to sanction a Scheme, per Hildyard in Lehman (above), and in exercising the discretion to cram-down a class in a part 26A plan".
"192. Without attempting to define what all the circumstances in any case might be, I make the following four points which are of particular relevance on the facts of this case".
"193. First, an important consideration is whether there is a fair allocation of the assets available within the CVA between the compromised creditors and other sub-groups of creditors. That will include considering the source of the assets from which the treatment of the different sub-groups derives, and whether they would or could have been made available to all creditors in the relevant alternative".
"194. For example, if secured creditors receive favourable treatment solely by reference to the existence of their security so that, insofar as they are unsecured creditors and thus vote at the creditors meeting they are treated no better than other creditors, then the fact that their vote was decisive in approving the CVA is unlikely to be unfair".
"195. In contrast, if assets that would, in the relevant alternative, have been available for all unsecured creditors are allocated in a greater proportion to other creditors (e.g. where critical creditors are paid in full), then the fact that the requisite majority was reached by reason of the votes of those creditors may point towards the CVA being unfairly prejudicial, even if there was an objective justification for their payment in full".
"196. For the reasons I have expressed at [147] above, in considering whether the allocation of assets is fair, the court is necessarily required to consider whether a different allocation would have been possible, so the principle adopted in scheme cases, against considering whether an alternative arrangement would have been fairer, needs to be modified."
"Fourth, a finding of unfair prejudice ought not to be precluded merely because the same result might have been achieved in a part 26A plan. As Mr Arden QC pointed out, the process under part 26A contains important safeguards for creditors that are absent from the CVA process. Most importantly, there is significant court oversight before the scheme becomes effective. In particular, the court is closely involved with identifying whether the class meetings are properly constituted before they are convened. Creditors know at the outset, therefore, with whom they are to consult and are able to negotiate with the company and other groups of creditors with clarity as to the strength of their position. In addition, creditors are likely to have significantly more time to consider the plan, and to consult with other creditors, before the plan meeting: all creditors are required to be sent a "practice statement letter" sufficiently in advance of the convening hearing so as to enable creditors to have an effective opportunity to appear at and take part in the hearing; and the court will direct that the period of notice for the class meetings is sufficient in all the circumstances, including the complexity of the plan. In contrast, in a CVA creditors are entitled to receive only one notice within a much tighter timetable: not less than 14 days before the decision date, but not more than 28 days from the date the nominee's report was filed at court: IR 2016, Rule 2.27."
"Thirdly, there is no reason to consider that the benefits of the restructuring plan, what is sometimes called the restructuring surplus, is being shared in an inequitable manner which does not reflect plan creditors existing rights. The plan itself respects the current ranking of creditor claims. In my view it is also relevant that the members of the dissenting class are very nearly out of the money even on a high case return. It follows that to the extent they have an interest in the restructuring surplus, it can fairly be described as one that is minimal. The closer the members of the dissenting class are to being out of the money, the less clearly it can be seen that they might have an entitlement to an enhanced share."
"61. I do not think though on further reflection that it is possible for me to conclude that this is or even might be the case. From a legal perspective, all members of the dissenting class are permitted to obtain an elevation of their existing ranking through the advance of new money. Even if they do not do so, the undisputed evidence is that they will be in a much better position than they would be in the relevant alternative, i.e. if the plan were not to be approved.
62. Furthermore, there is a helpful analysis of the reason why a structure of this sort is not intrinsically unfair in Meade J's judgment sanctioning the 2020 scheme, reported at [2020] EWHC 2505 (Comm), at paragraph 27 , which is worth reciting in full: "I asked Mr Allison forensically what disadvantage could be suffered by any of the creditors in either class, and his answer, which I accept, was that the only conceivable disadvantage would be to creditors in the consolidated creditors' class who did not want to participate in the provision of new money and therefore who could not achieve elevation of any of their existing debt. Clearly this is a theoretical possibility and may turn out in due course to be a real possibility, but to my mind the key answer is that all creditors in that class are able to subscribe for the new money instruments pro rata the debt which they hold, so there is no unfairness in that respect, and it is no doubt for this reason again that the scheme achieved the level of support that it did."
63. Michael Green J also addressed this point in his convening judgment at paragraph 75: "Even though it is more relevant to the sanction stage, I can see that there are very good commercial reasons why such an elevation structure is used in this plan, providing certainty that the new money will be raised and potentially reducing the pricing of the new facility. It also avoids a backstop or underwriting fee."
64. At the end of day, and having regard to the approach that was taken by both Michael Green J and Meade J, I think there is nothing unfair in a structure which enables the B noteholders, who are either out of the money or very nearly so, to lend new money and obtain the prospect of a 100% return but have only the prospect of a reduced 40% return if they do not. It seems to me that there are, as Michael Green J anticipated in his convening judgment, very good commercial reasons for introducing a structure of this sort and the precise nature of the terms which are included within the structure seem to me to be entirely reasonable."
"40. First, the new value generated as a result of the plan comes principally from the capital injection from members. This does two things. First, it provides a fund from which a substantial part of the restructured debt due to the Bank can be paid down. Second, it provides essential liquidity to enable the Company to continue trading so as to generate funds to pay dividends to HMRC and to the ordinary unsecured creditors. This is not, therefore, a case where assets that would have been available in the administration of the Company are being applied in a manner inconsistent with the order of priorities applicable in that administration.
41. To some extent, the relinquishment of the greater part of their debt by all creditors also contributes to the value created by the plan. That is because it is only by relieving the Company of all but approximately 25% of the debt due to the Bank, 20% of the debt due to HMRC and 5% of the debt due to ordinary unsecured creditors that the Company is able to continue trading so as to generate funds to pay a higher dividend to the Bank and HMRC, to pay anything at all to ordinary unsecured creditors, and ultimately to generate value for shareholders. This point is of limited strength, however, where there are no circumstances in which the Company could realistically pay any part of the relinquished debt.
42. Second, the only creditor who is disadvantaged in the sense only that they will receive a smaller share of the distributions in the plan than they would have been entitled to if the order of priorities in administration had been respected is HMRC. HMRC are a sophisticated creditor able to look after their own interests. They have had full notice of the plan and, although they voted against it, they have not attended the hearing to oppose the plan, or presented any arguments against sanctioning the plan.
43. Third, even HMRC stand to receive a better outcome if the plan is sanctioned than in the relevant alternative. As I have noted above, the only explanation I have for their vote against the plan is that contained in their email of 22 June 2022, i.e. they would not agree to relinquish their preferential status. It appears, from that email, that this was a decision reflecting a general policy, or at least not a decision taken with specific regard to the circumstances of this particular case. HMRC have not otherwise engaged with the Company or with the members who have agreed to inject new capital. They have not sought, for example, to negotiate an alternative deal.
44. Accordingly, the issue facing me is a binary one; to sanction the plan, or not. While it would in theory be possible to require the Company to start again and seek to negotiate with HMRC, that is highly undesirable, where the costs and delay in requiring it do so would impose a disproportionate burden on the Company, a small to medium enterprise. In any event, without knowing what HMRC's position would be, it may be that nothing at all would be gained by requiring the Company to start again.
45. If I refuse to sanction the plan, then the evidence indicates that all creditors, including HMRC, will be worse off. As HMRC have not opposed the sanction of the plan, I do not know that they would wish of the two options open to me to choose that one. In some cases, a creditor (particularly one with an interest in many company insolvencies such as HMRC) might be concerned to ensure that the debtor is placed into a formal insolvency process such as liquidation or administration to enable investigations to be carried out in relation to the directors' management of the business or potential claims against third parties. As I have already noted, the Company's financial difficulties appear to be a consequence of the pandemic, rather than anything which might justify such investigations. HMRC have certainly not suggested that this is a case where they would prefer a formal insolvency process for that reason. Aside from that, I would expect HMRC's interest to be in recovering more, rather than less, tax and, as such, in relation to the binary choice that faces me, their interests lie in sanctioning the plan.
46. In these circumstances, I am prepared to exercise my discretion so as to sanction the plan."
(iii) Holdings
"The questions at the heart of the matter at this stage are (a) whether the majority creditors had some "special interest(s)" different from and adverse to the other members of the Higher Rate Creditor class by which it is shown (b) they were predominantly motivated in voting as they did; if so (c) whether their votes are to be (i) disregarded or (ii) discounted and (d) what effect that should have in terms of whether or not the court should decline to sanction the scheme."
"103. In summary, and whilst wary of any exclusive or binary test and not intending to suggest any mechanistic restriction on the discretion of the court at each stage, I continue to think that with suitable caution or nuance in its application, the "but for" test may be helpful in conveying the extent to which the special interest must be demonstrated to be an adverse one before the vote of a member of a class at a duly constituted class meeting is to be discounted or even disregarded. As it was out in the Administrators' skeleton argument, 'the "but for" test is a useful heuristic for determining whether a causal link exists'.
104. In the application of such a test, or a nuanced version of it, two important and inter-linked considerations are and, as it seems to me, usually will be, (a) whether other creditors without the special interest have, apparently reasonably, approved the scheme proposed as being in their interests as members of the class concerned and (b) whether having regard to what would be the position if there were no scheme there is more to unite the members of the class than divide them.
105. The first speaks for itself: if creditors in the class without the special interest have, on an informed basis, voted in favour of the proposed scheme that further supports the conclusion that the majority had the interests of the class in mind, and not merely their own."
(4) "Blot" or "Roadblock"
"Accordingly, despite the skilful arguments presented on this application, my conclusion is that the provisions of clause 2.4.1 of the scheme relating to the surrender of the leases are outside the jurisdictional scope of Part 26. As I have already indicated, the draft scheme was modified at the convening hearing so as to allow for the excision of the relevant parts of clause 2.4. That possibility was publicised to scheme creditors in the explanatory statement in accordance with the directions imposed at the convening hearing. There is no prejudice to the landlords or to any other creditor. So far as the landlords are concerned, the company remains willing to give up possession, so it lies in each landlord's hands to agree to a surrender if it so desires."
VI. The Witnesses
(1) Mr Trozzi
(2) Mr Wolf
(3) Mr Gunther
(4) Mr Gerlinger
(5) Ms Rickelton
(6) Professor Thole
(7) Professor Pfeiffer
VII. Jurisdiction: The Issuer Substitution
"In a sense, of course ... what is sought to be achieved in the present case is forum shopping. Debtors are seeking to give the English court jurisdiction so that they can take advantage of the scheme jurisdiction available here and which is not widely available, if available at all, elsewhere. Plainly forum shopping can be undesirable. That can potentially be so, for example, where a debtor seeks to move his COMI with a view to taking advantage of a more favourable bankruptcy regime and so escaping his debts. In cases such as the present, however, what is being attempted is to achieve a position where resort can be had to the law of a particular jurisdiction, not in order to evade debts but rather with a view to achieving the best possible outcome for creditors. If in those circumstances it is appropriate to speak of forum shopping at all, it must be on the basis that there can sometimes be good forum shopping."
(1) The Terms and Conditions
"(1) Substitution. The Issuer may, without the consent of the Holders, if no payment of principal of or interest on any of the Notes is in default, at any time substitute for the Issuer any affiliate of the Issuer as principal debtor in respect of all obligations arising from or in connection with these Notes (the "Substitute Debtor") provided that:
(a) the Substitute Debtor, in a manner legally effective, assumes all obligations of the Issuer in respect of the Notes;
(b) the Substitute Debtor and the Issuer have obtained all necessary governmental and regulatory approvals and consents for such substitution, that the Substitute Debtor has obtained all necessary governmental and regulatory approvals and consents for the performance by the Substitute Debtor of its obligations under the Notes and that all such approvals and consents are in full force and effect and that the obligations assumed by the Substitute Debtor in respect of the Notes are valid and binding in accordance with their respective terms and enforceable by each Holder;
(c) the Substitute Debtor can transfer to the Paying Agent in the currency required and without being obligated to withhold or deduct any taxes or other duties of whatever nature levied by the country in which the Substitute Debtor or the Issuer has its domicile or tax residence, all amounts required for the fulfilment of the payment obligations arising under the Notes;
(d) the Substitute Debtor has agreed to indemnify and hold harmless each Holder against any tax, duty, assessment or governmental charge imposed on such Holder in respect of such substitution;
(e) the Issuer (in such capacity, the "Guarantor") irrevocably and unconditionally guarantees (the "Guarantee") in favour of each Holder the payment of all sums payable by the Substitute Debtor in respect of the Notes on terms which ensure that each Holder will be put in an economic position that is at least as favourable as that which would have existed if the substitution had not taken place; and
(f) the Issuer shall have delivered to an agent appointed for that purpose one legal opinion for each jurisdiction affected of lawyers of recognized standing to the effect that subparagraphs (a) to (d) above have been satisfied."
"Governing Law. The Notes, as to form and content, and all rights and obligations of the Holders and the Issuer, shall be governed by German law without giving effect to the principles of conflict of laws. For the avoidance of doubt, Articles 470-1 to 470-19 of the Luxembourg law of 10 August 1915 on commercial companies, as amended shall not apply to the Notes."
(2) BGB §307
"(1) Provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract with the user. An unreasonable disadvantage may also arise from the provision not being clear and comprehensible. (2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision 1. is not compatible with essential principles of the statutory provision from which it deviates, or 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised. (3) Subsections (1) and (2) above, and sections 308 and 309 apply only to provisions in standard business terms on the basis of which arrangements derogating from legal provisions, or arrangements supplementing those legal provisions, are agreed. Other provisions may be ineffective under subsection (1) sentence 2 above, in conjunction with subsection (1) sentence 1 above."
"(1) If the assumption of the debt is agreed between the third party and the obligor, its effectiveness is subject to ratification by the obligee. Ratification may only occur when the obligor or the third party has informed the obligee of the assumption of the debt. Until ratification, the parties may alter or cancel the contract.
(2) If ratification is refused, assumption of the debt is deemed not to have occurred. If the obligor or the third party requests the obligee, specifying a period of time, to make a declaration relating to the ratification, the ratification may only be declared before the end of the period of time; if it is not declared it is deemed to be refused.
(3) As long as the obligee has not granted ratification, then in case of doubt the transferee is obliged to the obligor to satisfy the obligee in good time. The same applies if the obligee refuses ratification."
(3) SchVG §3
"According to the bond terms and conditions, it must be possible for the performance promised by the debtor to be determined by an investor who is knowledgeable with regard to the respective type of bonds."
"(1) The bond terms and conditions may provide that the creditors of the same bond may agree to amendments to the bond terms and conditions by majority resolution in accordance with this section and appoint a joint representative for all creditors for the purpose of exercising their rights. The bond terms and conditions may thereby deviate from sections 5 to 21 to the detriment of the creditors only to the extent expressly provided for in this Act. An obligation to perform cannot be established for the creditors by majority resolution.
(2) Majority resolutions of the creditors shall be equally binding on all creditors of the same bond. A majority resolution of the creditors which does not provide for equal terms and conditions for all creditors shall be ineffective unless the disadvantaged creditors expressly consent to their disadvantage.
(3) The creditors may, by majority resolution, agree in particular to the following measures: 1. a change in maturity, reduction or exclusion of interest; 2. a change in maturity of the principal amount; 3. a reduction of the principal amount; 4. a subordination of the claims arising from the bonds in the debtor's insolvency proceedings; 5. a conversion or exchange of the bonds into shares, other securities or other performance commitments; 6. an exchange and release of collateral; 7. a change in the currency of the bonds; 8. a waiver of the creditors' right of termination or its restriction; 9. a debtor's substitution; 10. an amendment or cancellation of ancillary provisions of the bonds. The bond terms and conditions may limit the possibility of creditors' resolutions to individually designated measures or exclude individually designated measures from this possibility.
(4) The creditors shall decide by a simple majority of the voting rights participating in the vote. Resolutions by which the material content of the bond terms and conditions is amended, in particular in the cases of paragraph 3 numbers 1 to 9, require a majority of at least 75 per cent of the participating voting rights in order to be effective (qualified majority). The bond terms and conditions may require a higher majority for individual or all measures.
(5) If it is stipulated in the bond terms and conditions that the termination of outstanding bonds can only be declared by multiple creditors and uniformly, the minimum share of the outstanding bonds required for the termination may not exceed 25 per cent. The effect of such termination shall lapse if the creditors so resolve by majority vote within three months. A simple majority of the voting rights is sufficient for the resolution on the ineffectiveness of the termination, but in any case more creditors must agree than have terminated.
(6) The creditors shall decide either in a meeting of creditors or by way of a vote without a meeting. The bond terms and conditions may provide for only one of the two options."
"The present draft aims to eliminate these weaknesses of the current law. In doing so, it does not disregard the fact that Anglo-American contract law is clearly predominant worldwide in the field of international bonds, which are subject to the free choice of law. Obviously, this cannot be countered merely by referring to the freedom of contract applicable under German law. In particular, the possibility of
The question of whether bond terms and conditions are to be regarded as general terms and conditions (GTC) and are subject to
Independent of this question of principle, however, the draft provides for a special statutory transparency requirement for bond terms and conditions with regard to the issuer's performance promise, especially with regard to the sometimes highly complex terms and conditions of so-called structured bonds. It became apparent during the financial market crisis that many investors did not sufficiently understand the risks arising from these products because they could not understand from the bond terms and conditions under which conditions and to what extent the issuer's performance promise would be reduced."
(4) Professor Thole's Evidence
"The jurisprudence of the German Federal Court of Justice (Bundesgerichtshof) ("BGH") (as well as the predominant view in the relevant literature) supports the view that the terms and conditions of bonds and notes fall within the scope of the general rules of §§ 305 ff. BGB. In particular, the validity of terms and conditions must be assessed against the background of the general rule of § 307 BGB, which prohibits the use of unfair terms. Some scholars argue that the §§ 305 ff. BGB do not apply but rather that the specific provision of § 3 SchVG 2009 as lex specialis takes precedence over the general law. SchVG 2009, at § 3, declares that the terms and conditions of notes need to be transparent. However, in a recent judgment of the BGH, dated 16 January 2020, the Court confirmed the applicability of the §§ 305 ff. BGB. The exception of § 310 para. 4 BGB which concerns matters of "company law" does not apply to notes."
"Furthermore, it should be taken into account that a contract for the purposes of §307 para. 2 BGB includes the legal relationship between a noteholder and an issuer. This relationship is widely governed by the specific provisions of SchVG 2009 which describe the issuer's substitution as one of the standard methods of restructuring a note (§5, para. 3, no. 9 of SchVG 2009. Thus, issuer substitution clauses do not deviate from statutory provisions. Where there is no such deviation, an unfairness and disadvantage within the meaning of §307, para. 2 BGB is excluded by law, § 307, para. 3 BGB. According to §4 SchVG and based on the premise of contractual freedom, parties are free to amend the terms and conditions and to effect such a restructuring by way of a contractual amendment agreement between the issuer and the noteholders. A fortiori, it must be permissible to validly agree on an issuer substitution at the time of issuance of the notes: If a majority of noteholders can validly impose an issuer substitution on all of the noteholders even absent a substitution clause pursuant to 5, para. 3, no. 9 of SchVG 2009, then a fortiori a mutual agreement between each subscriber of a note and the issuer must be permissible. There is no deviation from statutory provisions."
"Q. I'd like to get a sense -- because it may shorten what the judge has to decide -- about how much the debate between you and Professor Pfeiffer as to the application of Bond Act section 3 versus 307(1) sentence 2 matters. As I understand it, just to have your words, it is a debate between the lex specialis versus the lex generalis. That's the debate you are having. I just want to ask you some questions to see whether and how much that matters. If we can look first at how Professor Pfeiffer puts his position. If we go to. If you read in the middle of the paragraph -- just a little bit bigger -- Professor Pfeiffer's position is that: "An unconstrained discretion for the user to decide whether to apply the clause [the substitution clause] because of the absence of specification or the circumstances of its permitted exercise is unacceptable." That's, I think, the shortest expression of Professor Pfeiffer's view. Before I ask you a question, I just want to compare that to one part of your opinion at. In paragraph 5.41, you say "Some scholars argue that, in general, substitution clauses are valid as long as the relevant clauses are sufficiently transparent. This does not necessarily require that the specific reasons for initiating a substitution are outlined in detail in the substitution clause." I have already picked up on it because a few times in the transcript you tend to express yourself "not necessarily". And when you say "not necessarily" here, it obviously implies that there are circumstances in which it may be appropriate to specify the reasons. Can I just get a sense of whether you accept that or not? That's what is written and that's the implication. A. No, what I was trying to say here is that there is no requirement for that list of scenarios and circumstances in which you want to conduct the issuer substitution. But of course, the issuer may introduce and integrate such a list in the terms and conditions, of course subject to the transparency requirement. So that is what I was trying to say. Q. When I read that second sentence, I should read it as: this does not necessarily require that all the specific reasons should be stated? Is that what you are saying? When you say "a list", do you mean a complete list? A. Well, it might have been a problem with my English here. What I was trying to say is that you don't have to have that exhaustive list, this list of circumstances -- Q. Yes, exhaustive, complete. A. Right, right. That is what I was trying to say, yes."
"The law does not impose substantive requirements on a resolution. On the other hand, in the run-up to the reform of SchVG in 2009, there was discussion about the conditions under which the debtor should be able to make reservations in the bond conditions regarding the possibility of changing debtors without the decision of the creditors. This question is still topical today, but it does not affect the case of § 5 (3) sentence 1 no. 9 SchVG. The legally regulated situation only concerns the granting of consent by resolution at the creditors' meeting. In this respect, no additional creditor protection is required, as the majority requirement already sufficiently safeguards the overall interests of the creditors. The case of the issuer, in the bond conditions, reserving the right to replace the debtor without further consent from the creditors is more difficult. This entails, in particular, the risk that, for example, a SPV will become a debtor without sufficient resources of capital and assets. However, it is generally considered permissible in principle that the debtor reserves this right or vice versa that creditors do not receive a co-determination right134. This is not called into question, as far as can be seen, with regard to § 5 (3) sentence 1 no. 9 SchVG, although it could certainly be argued that § 5 SchVG with the opt-in solution contains a priority of the creditor resolution. In fact, however, § 4 SchVG continues to allow unilateral rights to determine performance (§ 4 SchVG marginal no. 16). This then, consequently, also applies to the replacement of debtors. The legal problem arising here is ultimately one of § 3 SchVG and the material scope of the bond conditions, not the majority principle. The preliminary drafts of the SchVG anticipated particular provisions, which were intended to achieve the result that after the replacement the creditor has available a debtor of equal value with regard to their liability expectation (§ 23 SchVG Draft Bill). In the literature it has been required that "the economic fundamentals" should not change, in particular in relation to the question of whether the risk to creditors significantly increases. The problem with this criterion is that it is barely workable because the risk changes with every debtor change. Whether it has increased or decreased usually only becomes apparent afterwards. Nevertheless, it will be possible to assume that a unilateral debtor replacement, which is made possible in the bond conditions without further prerequisites, is to be assessed as rather non-transparent (see, however, § 3 SchVG marginal no. 51)."
"The German legislator expressly stated in the explanatory notes to the SchVG, that the transparency of contractual terms and the conditions of notes requires the terms to be "clear and unambiguous" (eindeutig und klar). However, nowhere did the German legislator provide for a need to enumerate any relevant and potential scenarios in which the clause may be relied upon. Under German law on moveable and immoveable property, a similar transparency test applies. In respect of this test, the BGH has previously held that a reference to "all" goods in a pledge agreement is sufficiently transparent (which I referred to at Thole 1, at para. 5.43 contrary to what the Pfeiffer Report suggests at para. 91). The BGH case provides guidance here, too. The basic assumption of the BGH was that, where the agreement refers to "all" goods, no doubts remain. The same holds true if a clause like § 12 of the SUN Notes Terms and Conditions refers to an issuer substitution "at any time". This term is equally all encompassing."
(5) Professor Pfeiffer's Evidence
"34. In the case at hand, the Substitution Clause does not include any statement or restriction of potential cases and reasons for a substitution. It purports to allow a substitution whenever the obligor chooses to make use of the Substitution Clause and for whatever reason. 35 Therefore, the Substitution Clause does not comply with the applicable transparency requirements under §307 para 1 sentence 2 and para 3 sentence 2 BGB and §3 SchVG. Hence, the clause is invalid as a matter of German law."
"The substitution of the debtor is likely to deviate from essential basic ideas of contract law (§ 307(2) no. 1 BGB), which is not sufficiently mitigated by the continued existence of the guarantee."
"The fact that it may be economically desirable to reduce existing claims against companies, in this case the guarantor, in order to safeguard them, cannot lead to an encroachment on the contractual rights of individuals, even if objective criteria of interpretation are applied. The purpose of facilitating restructuring measures does not require interference with the contractual principle ("pacta sunt servanda"), which is one of the pillars of German law of obligations, for the transitional period until the old bonds expire."
"Such a compensation has to be, as compared to the disadvantage caused, of an equivalent value. This means that a guarantee by the original debtor could constitute a compensation sufficient under §307 BGB, but only if it is of at least equal value to the bondholders compared to the original obligation of the debtor. In this respect, the main criterion is that the risk of non-performance of the original obligation may not be increased. This criterion is not only recognized in relation to substitution clauses but also in relation to other types of contracts under § 309 no. 10 BGB, including a loan contract which must allow the other party to free himself from the contract if the user wishes to substitute a third parties to perform the rights and duties of the user. It also reflects the prevailing interpretation of EU Directive 93/13 on Unfair terms in consumer contracts (Annex no. 1 letter p to Art. 3 para 3 of this Directive. A substitution clause will be, e.g., unacceptable if the bondholder would have to bear a higher risk of non-performance, e.g. in relation to an insolvency, because of the substitution. Moreover, the BGH ruled that compensation may even be insufficient if it brings about "unreasonable consequential costs or similar obstacles".
"51 The guarantee does not provide for full compensation as required for the validity of a substitution clause by §307 BGB. As already explained, a sufficient compensation would require that full payment by the substitute debtor or under the guarantee is not less probable or likely than payment by the original debtor under the Bonds. 52 However, the effect of the Substitution Clause is to permit the guarantee of the primary debt (or the primary debt itself) to be restructured or amended pursuant to an English law procedure more easily than this would otherwise have been the case for the original primary debt owed under German law by the original Luxembourg issuer. Accordingly, the probability of full repayment of the original pre-substitution debt has therefore decreased to a certain degree because of the increased ability to discharge the debt or its guarantee under English law specifically by a restructuring plan as applied to the new English substitute issuer, as compared to the original legal position in respect of the original Luxembourg issuer. Therefore, the Substitution Clause does not provide for sufficient reasonable compensation for substituting the original obligor without the Bondholders' consent. Consequently, the Substitution Clause is invalid under § 307 BGB."
"Q. If that's the test that section 3 requires, section 3 being expressly addressed to bonds, the point is that it would make absolutely no sense to then apply section 307(1) second sentence, which focuses on a lesser understanding being required? A. I disagree to that for the following grounds. The first is if we could go back to the legislative explanation of that provision, because the legislative explanation confirms what I say. It firstly states that there is -- or that there was in 2009 or 2008 -- a controversy whether 307 would apply. It also says there is an uncertainty whether the application is required by the EU Unfair Terms Directive. And then it continues and say "irrespective of that ..." And the term "irrespective", in my understanding, expresses that regardless of whether 307 applies or not, the legislator put as a precaution, if you will, article 3 into the Bond Act. And I conclude it is the express purpose of the Bond Act not to take any stand on the application of 307. And if the provision does not take a stand, it does not replace it. This is what -- and this is only the first reason. The second reason is -- and that is also not only in my writing, but it is also confirmed in the legislative material."
"Q. But the conclusion that you reach is that both transparency requirements apply, which means that the second transparency requirement, the new one in the Bond Act, is completely pointless? A. Not necessarily. As you see, from what we have on screen, the legal consequences of both provisions are different. It says here that under certain conditions a lack of transparency may result in payment obligations, damages, whereas 307 always results in the invalidity of the clause. So there is a reason -- and a good cause -- for applying both parallel. Q. Professor, we are going to come back to that point later on. It's an important point. But that makes no sense. If it was the Bond Act that resulted in invalidity and section 307(1) only resulted in damages, then section 3 would serve an important purpose. But actually it's section 3 that doesn't necessarily result in invalidity and section 307 that does, which again renders section 3 of no application. A. As I said several times this afternoon, the provision was enacted irrespective of the dispute whether 307 applies. Because at that time in 2009 there was uncertainty in this respect. We don't have this uncertainty anymore. So when the legislature passed that, there was a good reason and the only thing that happened is that the provision was never amended, because there was no practical need for doing so. Q. German law recognises the concept of lex specialis, doesn't it? A. To the extent it applies, it does."
"MR BAYFIELD: We are moving on to a slightly new topic. It is something that we touched upon earlier, which is the consequence of a breach of a transparency requirement. The third piece of paper I gave you is another Hartwig Jacob extract. I want see what you make of this. If you could turn, please, firstly to paragraph 157. The first sentence says: "There is agreement in the literature that the invalidity of the bond terms as a consequence of a violation of the transparency requirement of section 3 can be assumed only in exceptional cases." Do you see that? A. Yes, I see it. Q. Can you turn to paragraph 160, the next piece of paper. They continue: "Furthermore invalidity as a legal consequence of a violation of the transparency requirement would have a considerable impact on the function of the bond market. Such a violation does not only have an effect vis-a-vis the bond holder who claims invalidity but vis-a-vis all bond holders. This follows from the purpose of the principle of collective bonding set out in section 4." A. I have the German. Q. The English is behind A. The English is behind it. I didn't recognise that. Q. Now, can you read paragraph 161 and 162 to yourself, as well, please? A. Yes. Q. Professor, what they are saying is if you were right that the issuer substitution clause in this case breached section 3 of the German Bonds Act and the transparency requirement, then it wouldn't follow that the clause was a nullity, would it? It's more likely that that claim in damages would apply. Do you agree with that? A. As a consequence of section 3, that seems to be the position of Hartwig Jacob, but it is in no way settled law. Q. Do you agree with them? A. I have not stated any position on that, because I did not need to in my report. Because my report is based on the reasoning that 307 BGB applies, which results in the nullity of the substitution clause. And by the way, how should I say, the parade of horror in paragraph 160 of Hartwig Jacob does not relate to substitution clauses specifically, it relates to bond terms as a whole which might result in destroying the complete bond. That would indeed have these consequences, whereas that is not necessarily the case if only the substitution clause is invalid."
"Q. If that were right, surely all substitution clauses would fall within the scope of section 307(2) and be invalid, wouldn't they? A. The first part of your question, yes. The second part no. All substitution clauses -- and that is not doubtful under German law -- fall under the scope of 307(2), 1. But this provision only sets forth a presumption of invalidity. Not more and not less. Therefore the question is has there been sufficient compensation? That might in spite of the presumption render the clause valid. Maybe. Under circumstances."
"Cited in footnote 23, 40 and 121: Bliesener/Schneider in Langenbucher/Bliesener/Spindler, Banking Law Legal Commentary (Bankrechts-Kommentar), 3. Ed. 2020, Section 5 SchVG, para 30
The discussion draft of April 2003 contained as already the working group's draft of 1996 (in Section 7), a provision (Section 795a BGB) that the bond conditions may, under certain conditions, provide for the debtor to be replaced by an affiliated company. The subsequent discussion drafts of September and November 2004 described the preconditions for the admissibility of a change of debtor in more detail (in Section 3). The 2008 draft bill took the plan even further (in Section 23). The government draft and finally the Act abandoned the plan of all previous drafts. The legislator did not consider it necessary to provide statutory requirements for such terms, which could be regulated by cautel in such a way as to meet the legal requirements and the expectations of investors. In order to take these requirements into account and to exclude an unreasonable disadvantage of the creditors, debtor substitution clauses must regulate the prerequisites and consequences of the change of debtor in such a way that the economic basis of the risks borne by the creditors remains essentially unchanged and the legal position of the 0014 creditors does not deteriorate, requirements which these clauses in the issuance programmes of the issuers of corporate bonds meet almost without exception. All the more astonishing is the opinion expressed by the Higher Regional Court of Frankfurt a. M. in an obiter dictum, according to which a (classic) debtor substitution clause deviates from essential basic ideas of contract law and is therefore ineffective according to Section 307 (1), (2) no. 1 BGB on the grounds of unreasonable disadvantage to the bondholder, which is rightly described by critics as "untenable" and as likely to "drive [...] capital seekers into the 'safe harbour' of foreign legal systems"."
"A. Yes. Indeed this is the Bliesener Schneider quotation that I asked to have in a break for to retrieve. There you have it. Q. Okay. Which is extremely helpful to me, isn't it? A. I note that Mr Bliesener and Mr Schneider find the decision astonishing -- Q. No, no, the bit we just read was very helpful to me, before we get on to what they say about Frankfurt. If we go back to it, go back a page. In order to take these requirements into account and to exclude an unreasonable disadvantage, debtor substitution clauses must regulate the prerequisite and consequences of the change of debtor in such a way that the economic basis of the risks formed by the creditors remains essentially unchanged and the legal position of the creditors does not deteriorate, requirements which these clauses in the issuance programmes of the issuers of corporate bonds meet almost without exception. What they are getting at there is the guarantee requirement, aren't they, which is standard? A. It seems so. But I note that Mr Bliesener and Mr Schneider don't refer to any case law in support of their position. They don't consider it necessary to -- Q. Because no one has taken this point before, before you, Professor Pfeiffer? A. There is always the Columbus."
"Q. Now do you appreciate that the original issuer is not able to make repayment in full and your clients are not suggesting otherwise? A. I have no exact details of this part of the economic background of the case so I can't comment on that. Q. You said that repayment in full has been decreased by the issuer substitution, so presumably that's based on something? A. Yes. That is placed on the legal mechanism that I understand applies in restructuring procedures in the UK, which permit a cramdown, which is a legal disadvantage that would not be applicable, so I have been instructed -- not based on my own knowledge -- in Luxembourg proceedings. Q. Okay. Do you appreciate that a restructuring plan will not be sanctioned by the English court if any of the creditors would be worse off if the plan were to be sanctioned? A. In my report, I made the distinction between the economic position in the moment of substitution and the economic outlook. What I say is if the clause permits a substitution that is fine in the moment of the substitution but is connected with an increase of risk as relates insolvency, as relates to legal mechanism, that is not essentially the same position, which would be necessary. Q. Do you realise that the original issuer could itself have proposed this restructuring plan had it moved its COMI to this jurisdiction? A. I have been instructed, as I wrote in my report, that its COMI is in Luxembourg. I have no idea whether the issuer could move its COMI to Luxembourg. In any event, I understand it hasn't. Q. Do you accept also that the restructuring which has been carried out through the restructuring plan could in fact have been carried out through a StaRUG proceeding in Germany initiated by the original issuer, assuming that it has its COMI in Germany or moved its COMI to Germany? A. That may be possible. Let me add one aspect. Germany introduced the umbrella proceedings in 2012 as an option for restructuring of debts. And since 2012, never, ever has anyone argued that the contract law legal standards in relation to substitution clauses have been somehow influenced by the option of restructuring of debts under the umbrella proceedings. So I think for the contract law analysis, that is not relevant."
(6) The Parties' Submissions
(i) The Plan Company
(1) The starting point is that substitution clauses are generally permissible and effective as a matter of German law. Consent can be given by a resolution of noteholders under SchVG, §5 or by including a substitution clause in the notes when issued. Moreover, no substitution clause in the same or similar terms has been found to be invalid by the German Courts.
(2) Professor Pfeiffer was wrong to focus on BGB, §307(1). He accepted that there is a general principle of lex specialis in German law and SchVG, §3 is the lex specialis in the present case. Moreover, it is very hard to see how both provisions could apply at the same time and the Explanatory Memorandum does not suggest that they do.
(3) But in any event there is no requirement under German law that the issuer must specify a non-exhaustive list of the circumstances in which a substitution may take place. The academic textbooks upon which Professor Pfeiffer relied were either equivocal or did not support this proposition.
(4) Professor Pfeiffer was wrong to suggest that BGB, §307(2) applied because there is no reason to conclude that the holders of the Notes are unreasonably disadvantaged as a result of the substitution. Clause 12(1)(e) expressly imposed a condition requiring the issuer to ensure that each holder was put in an economic condition that was at least as favourable as before the substitution and the Parent Company had guaranteed the Plan Company's obligations.
(5) Professor Pfeiffer's reliance upon the pacta sunt servanda principle and the decision of the Higher Regional Court of Frankfurt am Main was misplaced. The facts of that case were very different, the decision on the point was obiter, it had not been followed and it had been heavily criticised.
(6) Professor Pfeiffer's reliance upon the fact that the rights of the Plan Creditors may now be restructured under English law goes nowhere. No prejudice can be caused to the holders of the SUNs because the Court has no jurisdiction under Part 26A unless the NWO Test is satisfied.
(ii) The AHG
(1) He had persistently caricatured the views expressed by Professor Pfeiffer and other commentators.
(2) His views on transparency had developed between editions by reference to two analogies a sale or pledge of goods and a landlord analogy which did not support his new conclusions.
(3) He was wrong to equate the inclusion of a substitution clause in a note as an "ex ante consent to the Issuer Substitution" and, therefore, equivalent to SchVG, §5.
(4) Professor Thole's view that the substitution clause was "market standard" was no more than an assertion which he repeated many times.
"Furthermore, the substitution authority must be sufficiently detailed in the corresponding clause and be limited to the extent reasonable for the creditors. In practice, the specification refers exclusively to the requirements usually described in detail in the bond and certificate conditions, which must be met by the old and new debtor before and after the replacement (see above margin no. 100f.). The conditions of bonds and certificates usually do not contain a list of reasons that entitle them to exercise the replacement authorisation. Therefore, when and for what reason the debtor decides on its own replacement is left to it. However, the requirement to determine the grounds for replacement in the issue conditions can be found in the transparency requirement of §3. In this respect, the list of reasons should be as detailed as possible. However, a definitive list of reasons is not necessary, as there will be grounds for replacing the debtor arising from events beyond the issuer's control and not to be anticipated."
"In case of substitution of the debtor, a person other than the issuer becomes debtor of the bond claim. The previous issuer ceases to be the primary debtor. This does not refer to the case of universal succession in accordance with the Transformation Act (Umwandlungsgesetz, "UmwG"). A debtor substitution also occurs in the context of the debt equity swap in the variant of the debt push-up. After a debtor substitution, the debtor change must be implemented under securities law. This is to be distinguished from debtor substitution on the basis of a corresponding power in the bond terms. With this provision, the issuer reserves the right to replace the debtor without further consent of the creditors. Such a debtor substitution clause is usually found in bonds issued through foreign financing subsidiaries, where the parent company guarantees the liabilities under the bond. Reasons for such a debtor substitution may be tax law changes at the issuer's domicile or its restructuring. This right is usually conditional on the parent company remaining obligated under the guarantee and the successor debtor assuming all obligations. Such a debtor substitution clause, which specifies the cause, procedure, consequences and preconditions of the change of debtor and does not place the bondholder in a significantly worse economic position after the change of debtor has taken place, is permissible."
(7) Decision
(i) The Background
(ii) Assessment of the Evidence
(1) As I have stated (above), I found Professor Thole to be a good witness and I reject Mr Al-Attar's submission that he changed his evidence. Although the first passage which I have set out from Thole 1 (above) appears to express a tentative view, Professor Thole was very clear in the remainder of that report that he considered Clause 12(1) to be valid and he stated this conclusion without qualification. In my judgment, he did not change his evidence between Thole 1 and Thole 3.
(2) I also reject Mr Al-Attar's submission that Professor Thole's view was "developing" in the sense that he had changed the view of the law because he had been instructed in these proceedings. I accept Professor Thole's evidence that he made the amendment to the text of Hopt/Seibt in November or December 2022 although he did not submit it until earlier this year. Moreover, Mr Al-Attar did not put it to Professor Thole that he was guilty of sharp practice by changing the text of Hopt/Seibt and then relying on it in Thole 1 without making it clear that it was his own work.
(3) But in any event, I am not satisfied that there was any material change between the two versions of Hopt/Seibt or that this had any material bearing on the issue which I had to decide. Apart from the Frankfurt Decision (which they debated), neither expert was able to point to any decision in which a German Court had held that a substitution clause under BGB, §307 was invalid.
(4) I found Professor Pfeiffer to be an intelligent and articulate witness and he gave his evidence with both humour and a flourish. But I also found him to be evasive in some of his evidence and that he had no real answer to a number of Mr Bayfield's points. He refused to accept that Clause 12(1) was a standard clause until the terms and conditions from the Mahle bond issue were put to him and he also refused to accept that there was nothing inherently objectionable about a substitution clause.
(5) He also gave evidence that the apparent overlap between BGB, §307 and SchVG, §3 could be explained on the basis that the first rendered a clause invalid but the second gave rise to a claim for damages. But, as Mr Bayfield put to him, this might have been a sensible explanation if the effect of the first was to give rise to damages and the second made a clause invalid. But it made no sense the other way round.
(6) He also claimed that Bliesener/Schneider supported his case but when Mr Bayfield put it to him, it provided no support for his opinion at all. It was highly critical of the Frankfurt Decision and also supported the case which Mr Bayfield had been putting to him instead.
(iii) Analysis
"Within its scope of application, §3 replaces the general GTC law transparency requirement of §307 para 1 sentence 2 BGB. Although §3 and §307 para 1 sentence 2 BGB obviously have a similar "subject matter""
(iv) Findings
VIII. Condition A: The "No Worse Off" Test
(1) Introduction
(2) The Group: Gross Asset Value
(i) The Yielding Assets
"The "ADO Portfolio" comprises 366 "valuation units" which are made up of 14,783 residential units (of which 367 are under public rent control), 1,367 commercial units, 4,354 parking lots and 780 miscellaneous units. With the exception of two units, all units in the ADO Portfolio are located in Berlin, Germany. Berlin itself is divided into 12 boroughs and the 366 valuation units are spread across all 12 boroughs. Further, the properties in the ADO Portfolio have a wide range of construction dates from 1919 to 2002. 365 of the 366 valuation units are freehold-equivalent. 48 out of those 365 valuation units are separated into condominiums. A "valuation unit" can comprise a number of residential units (e.g. in a building), associated commercial units and parking lots."
"The "Adler and Westgrund" Portfolio comprises a total of 243 valuation units as at 30 June 2022. These valuation units are made up of 9,621 residential units (of which 281 are under public rent control), 492 commercial units, 1,994 parking lots and 313 miscellaneous units (e.g. antennas, advertisements, etc.). The valuation units are spread across the federal states Berlin, Brandenburg, North Rhine-Westphalia, Saxony, Saxony-Anhalt and Thuringia (see 8 map below). 242 of the 243 valuation units are freehold-equivalent and 6 of the 243 valuation units are separated into condominiums. The majority of the residential units are located in Berlin and Duisburg."
"The Capitalisation Rates used in our valuation of the Yielding Assets were derived from the average Net Initial Yield ("NIY") achieved in comparable transactions involving residential properties that were observed by CBRE and reflected the market situation as well as the yield expectations of a potential investor. They implicitly included rental growth assumptions. The Discount Rates, which explicitly reflected rental growth in the cash flows, were derived from the Capitalisation Rate plus the average rental growth.
The Discount Rate and Capitalisation Rate were adjusted individually for each local market to be valued, in accordance with the following criteria: (a) quality of the location; (b) demand and levels of value in the relevant local real estate market; (c) the prospects for the local market; and (d) development of rents and prices (yield compression)."
"The resulting net present values were checked against our analysis of comparable transactions (where available) from the sale price data collected by the relevant local valuation committees (Gutachterausschuss) and an analysis of the internal lease and sale database of the CBRE Valuation Department. If necessary, in the absence of transaction data, asking prices for comparable assets on offer at Value AG were also considered. If, in particular instances, results of our DCF calculations were found not to reflect the Fair Value of an individual building, the calculation was adjusted by means of a change in the Discount Rate and Capitalisation Rate using expert and experienced
"If I may add further, CB, for example, have only one piece of yield information in the whole report. This is coming from the city report which sits at the back. We remember the statement of Mr Schlatterer, that the cap rates -- well, no it is not different either. The discount rates are basically the cap rates plus explicit growth rate. It depends on the cap rate. Then the cap rate is based on net initial yields observed in comparable transactions. I have not observed any in the report. Not a single one. So they help them -- which is acceptable. So they help themselves with looking at the multiples, which is the reverse of the gross initial yields that I am talking about here. When you scroll towards the end of any report, whether it is ADO or A&W including Duisburg, you will find the city report. The city report has one graph in there depicting three sets of yield data, so an average, a maximum and a minimum multiple. So the maximum multiple would apply for the best in Duisburg; the average -- for the unknown average, and the minimum for what they perceive to be the minimum. If you like, we can go to the graph. Having looked at the characteristics of Rheinhausen, the main cluster in here, with all the buildings partly refurbished in a similar location, I am of the opinion that it can't be valued as a yield and a multiple, because that's what they used, which is the top multiple for Duisburg because it's not the best location in the town. It's probably not the most inferior as well, but somewhere closer to the average. If the judge liked we can scroll to the city report and there you will find an average multiple which is pretty close to the 6.7 per cent here. So the reverse of that, which is around then 16 times. So my perception is CBRE have moved too high in terms of multiples for the gross initial yield to base the cap rate on it, to base a discount rate on it. A very essential part of the relation is grounded on a very thin set of information, using three data points. My perception is that they have taken a too optimistic approach in selecting the yield. Q. Can you take the judge please to where in your report 15 you have outlined all of this, please? A. I do it in that shortform underneath the table. Can you please scroll down? The second bullet, pointing out that the 5.02 per cent are 167 BPS below the average gross initial yield for stronger years. I didn't necessarily scrutinise the CBRE approach so much. I preferred to try to demonstrate the own approach. But having spoken about the differences between their valuation and mine, the difference that becomes obvious is the choice of the yields. It's not the market rents. I agree on the market rent. It's not the description of the properties. I agree on that. It's the choice of yields applied by CBRE which is on my perspective fairly thinly grounded, especially considering the capital market presence they have which would have allowed for much more transactional data including yields."
(1) CBRE had seven years of experience in valuing both portfolios, they had valued them both on an asset-by-asset basis and Mr Gerlinger had no criticisms of the individual rental valuations. Given the time constraints, Knight Frank had been unable to carry out the same exercise.
(2) It is clear from Mr Schlatterer's evidence that CBRE adopted Capitalisation Rates for the purposes of their DCF calculations which were based on the general factors set out in the City Reports (as Mr Gerlinger pointed out). But Mr Schlatterer also gave detailed evidence that valuations were checked against comparable evidence and the sales data from the local valuation committees and that adjustments were made where necessary.
(3) I accept that evidence. Although the Plan Company may not have disclosed CBRE's working papers setting out the checks and adjustments which they made and Mr Gerlinger may not have had an opportunity to consider them, Mr Gerlinger candidly accepted that he had not provided the Court with his own analysis either or the calculations behind his individual yields. I add that the individual valuations by themselves covered many thousands of pages.
(4) Moreover, as Mr Gerlinger also accepted, CBRE Capital Markets had a unique database of investment transactions against which to test its valuations and this database would have been particularly useful in providing investment evidence for CBRE's Capitalisation Rates. Again, Mr Gerlinger had to accept that by comparison his assessment was largely based on intuition.
(ii) The Development Assets
"The LORA-based developer/residual calculation model of valuation outlined above is a detailed and orthodox methodology, which is routinely used to value the Adler Group's development portfolio (as it is used to value development properties generally). Furthermore, annual inspections of all of the Development Assets were carried out to verify the information about them provided by the Adler Group. I am satisfied that the approaches taken by NAI apollo in performing the Q2 2022 Valuations were the correct ones; certain of the developments are intended to be high-end, luxury residential accommodation. Calculating the market value of such a property will necessarily start with a higher projected sales proceeds figure. I am also satisfied that NAI apollo's valuation model appropriately values project costs, which is another factor that would affect the valuations arrived at."
review each of NAI Apollo's valuation reports critically. He gave evidence, however, that Knight Frank had valued eight of the assets for a different client or clients:
"3.127 As indicated above I am of the opinion that in Q3 2022 these selected eight developments were in total worth 50.1% less than the reported GAV of Q2 2022. The discount appears drastic. Selected
"My opinion of Gross Asset Values and Proceeds under the RA & RP
... For the forward sales I adopted the BCG assumption as the stipulations of the sales contracts and prepayments are unknown.
... For the unidentified, sold asset I also adopted the BCG assumptions.
... For the one in Mannheim under advanced negotiations, that was completed already in Q2 2022, I used a similar valuation approach than BCG.
... As my valuation was undertaken mostly in August 2022, when markets had further deteriorated in comparison to Q2 2022, for the subject exercise I reduced the 50.1% discount to 40% for Q2 2022 and then extrapolated the 40% discount to all 21 developments."
"Q. I understand the point that you say it was difficult in the timeframe to look at the 22 development assets. What do you mean by "discussing them here would exceed the scope of the report"? A. Where is that? Q. 3.124, the final part of the paragraph. A. I think if I was to discuss 22 development projects, they are quite large and complicated development projects. That alone would take, obviously, a long time to prepare for myself -- Q. That's your timeframe point? A. Exactly. Similarly it would take at least two hours per property to discuss it, to get to a meaningful outcome. Q. So you were worried about the length of the trial and not being able to deal with them adequately in cross-examination? A. Okay, no, I am speaking here about the scope of this report. So let's focus not on the time in trial. That would also be true, but actually on the volume of the report. That would be thousands of pages of reading. Q. You knew that CBRE and NAI Apollo had put in thousands of pages of reading, didn't you? A. I saw that later on, yes. But I didn't see any benefit of adding another 5,000 pages. Q. Okay. A. To get a meaningful outcome you would have to read, understand and compare them and discuss them. Q. You say in that paragraph that you agree that the development assets can't be valued in groups. They have to be valued individually, right? A. Sorry, where is that? Q. "But need to be looked at on a case-by-case basis, with which I agree"? A. Correct. Q. But you haven't provided valuations of any of the 22 individual development assets, have you? A. I have conducted eight valuations. I have not provided them to the court, if that is your question. Q. Okay. Can you remind yourself of what you say in paragraph 3.125, please. At 3.126 you compare the values that NAI Apollo gave with your own valuations, don't you? A. In the bottom line, exactly, yes. In the lower bottom line of the table, yes. Q. Can I ask you, given that you haven't produced any of the valuations to the court, how on earth the judge is meant to decide between your valuation and the NAI Apollo valuation? A. I have no opinion on the ruling of the judge, or of the opinion making of the judge. I agree it's a very broad brush approach and I have taken a shorter section of that in my report, but it's my true and fair view."
"Q. Thank you. I want to show you what Mr Stark says about this point. He's a director of NAI Apollo as you know. Can we go to please. Can you remind yourself of paragraphs 44 to 45? He's right, isn't he, Mr Stark, that the current situation of the Adler Group is not relevant to the market value of the assets, particularly in circumstances where the group is requesting to be borrowing that money to fund CAPEX? A. I have a disagreement. If the development -- well, the state of the development is relevant, and that the state of development is not only relevant because Adler is in insolvency issues and therefore couldn't proceed with them. But this has an impact on the developments themselves. You have seen photographs of strip buildings where -- concrete buildings, high rises -- who are sitting now exposed to weather conditions for three winters now. It obviously deteriorates the quality of the concrete massively, any frost going into the steel. There are developments that don't progress for a certain reason, say in the Offenbach Hafen development the tower is sloping six degrees to the side. That needs additional CAPEX to remedy. Some developments have been -- they all have been stopped, basically, or almost all. So all these effects that led to delay, the actual delay that we have seen, leads to a deterioration of the project. In terms of image, in terms of the bare construction, bare quality of concrete, in terms of many more aspects, to marketability to end investors. So I disagree with 44 regarding your second sentence that this will be kind of yield by Adler receiving CAPEX to progress with -- or capital to progress with developments. My understanding is that the most of the CAPEX will be spent on -- correct me if I am wrong -- two properties only, which need to be completed and these are some of the forward sales. Whereas the majority -- the vast majority -- will be sold in present condition, maybe secured a little bit. Secured against so that the current building doesn't deteriorate even more. So my understanding was that under both options, so insolvency -- well, relevant alternative or restructuring plan -- Adler will not continue to complete most of the developments save for these selected forward sales. Q. One point I want to clarify, Mr Stark doesn't say that the condition of the development assets is irrelevant. He's talking about the characteristics of the progression of the development. That's right, isn't it? A. I would say that one leads to the other. If you don't progress with a building which is sitting three years unexposed, then the condition of the bare concrete will deteriorate."
(1) NAI Apollo carried out individual valuations of 27 of the 28 Development Assets and it was Mr Stark's evidence that the approach which NAI Apollo adopted was correct and that each valuation model appropriately valued the relevant project costs. In the absence of any evidence to the contrary, I am prepared to accept that evidence.
(2) I am not satisfied that the AHG were able to adduce any compelling evidence to the contrary. Mr Gerlinger accepted that he had not had time to review each of these valuations critically and he effectively accepted in cross-examination that he could not challenge the valuations directly.
(3) Moreover, Mr Gerlinger was only able to challenge Mr Stark's evidence on the basis of the eight valuations of the Development Assets which Knight Frank had carried out earlier. As I understood his methodology, Mr Gerlinger had taken those valuations and calculated that he had valued the properties at 50.1% less than NAI Apollo. He had then applied a discount of 40% to the remaining 21 Development Assets.
(4) I am not satisfied that this exercise provides clear evidence that NAI Apollo's valuation was wrong. Knight Frank had only valued 8 of the 28 Development Assets and Mr Gerlinger did not explain why he chose to reduce the discount which he had applied from 50.1% to 40%. In my judgment, this reflected a concern that the overall difference between his own valuations and the NAI Apollo valuations could not really be explained. In his report he described the difference as "drastic" and in his oral evidence he described it as "brutal".
(5) To compound the difficulty, Mr Gerlinger did not produce the eight valuations which formed the basis for the discount which he had applied (although he accepted in cross-examination that he could have done so). It was not possible, therefore, for me to understand the differences between those valuations and the ones which NAI Apollo had prepared and whose should be preferred. In the end, therefore, I am left with a choice whether to accept the individual NAI Apollo valuations or to reject them entirely on the basis of the eight valuations which Knight Frank had carried out and which were not before the Court. I am not prepared to do so.
(6) Finally, it is not possible for me to assess how far the numerical difference between the NAI Apollo valuations and the Knight Frank valuations was generated by the difference of principle which I have identified above. Mr Bayfield pointed out to Mr Gerlinger that Mr Stark had not ignored the condition of each Development Asset only the progress of the development. But even if that difference was a substantial one, Mr Gerlinger did not suggest that Mr Stark was wrong in his application of the ISV definition of Market Value in the Red Book. I therefore accept that NAI Apollo's approach on this issue was the correct one.
(3) Stage 1: The Relevant Alternative
(1) In the first year, the administrators (as the Plan Company called them) would dispose of all non-critical entities and over the next four years it would dispose of critical entities and self-sustaining assets. BCG expected the first distribution to unsecured creditors to be made after 3 years and a final distribution after 5 years.
(2) The Parent Company would realise 2.435 billion from the sale of its own portfolio of assets. It would also realise 400 million by shareholder distributions from Adler RE (after repayment of its creditors) which would in part be realised by Adler RE from the sale of its interest in Brack Capital Properties or "BCP". The Parent Company would also realise 400 million by the repayment of company loans by Consus resulting in total realisations of 3.288 billion.
(3) 2.147 billion would be available to unsecured creditors after payment of secured debt and the costs of the insolvency process or processes and 2.023 billion would be distributed to the Plan Creditors of all classes. On slide 80 of the BCG Report BCG summarised their calculation of these realisations as follows:
- "GAV as per latest available valuations (Yielding: September 30, 2022; Development: June 30, 2022)
- Sale of Parent Company's asset portfolio to realize ~2.4B proceeds, incurring ~1.1B in market & insolvency effects on GAV
- Parent Company to receive ~0.4B of excess cash from liquidation of Adler RE and ~0.4B from Consus, after repayment of external debt in respective boxes
- Secured debt to be repaid with proceeds from sale of respective collateralized assets
- ~65M interest received on accruing cash balance from sales proceeds until distribution
- Proceeds to unsecured lenders distributed in Q1 2026 and Q1 2028
- Repayment of ~2.1B to unsecured creditors (o/w ~2,023M SUNs (excl. New Money Fees), ~16M SSDs, ~64M Convertible), resulting in recovery of ~63%"
(4) 506 million would be paid to the 2029 Creditors in 2026 and 2028. This amounts to 63.25% of the principal of 800 million payable under the 2029 Notes. But it does not include any element of interest.
"8.3 I have worked for creditors in such a scenario, having previously set up, controlled, and operated bidcos. I also set up bidcos in distressed situations for and on behalf of stakeholders other than creditors, including customers, large industrial enterprises, and employees.
8.4. Examples of this work include:
a) Bidco assuming control of Primacom, Germany's fourth largest cable operator, 390m of syndicated debt on behalf of creditors. Expert witness report on insolvency discount
b) Bidco assuming control of Deutsche Lichtmiete AG, industrial services group, 200m of bonds and bilaterals on behalf of bondholders.
c) Bidcos taking ownership of approximately 30 vessels, German ship operators, >600m of bank debt, on behalf of ship finance banks
d) Bidco assuming control of Neue Halberg Guss, Europe's 3rd largest grey iron foundry, on behalf of General Motors, VW Group, Daimler, Deutz, Opel, and IG Metall.
e) Bidco assuming control of Industriecenter Obernburg, the industrial park and power generation on behalf of syndicated loan creditors.
f) Bidco assuming control of Makro Cash & Carry Belgium, former Metro AG subsidiary, 700m turnover, 1,800 employees.
8.5. I would like to point out that my experience does not include bidcos in real estate situations. To the best of my knowledge, in my professional experience in Germany such problems did not exist in any material numbers or volume, given the favourable market environment for German real estate over the past ten years.
8.6. However, I believe that it is not implausible to infer from market reactions, most importantly customers (comparable to real estate investors) and supplier reactions, in the above cases that a change of control to a Bidco does not cause the same reactions as one would experience in insolvency. The opposite is the case, as external stakeholders consider such a move stabilising ..
8.8. In summary, I see no conceivable change of the disposal conditions between a solvent wind-down under the current ownership and a Bidco shareholder. In other words, no Insolvency Discounts should apply under a Bidco scenario."
"Q. I see. You don't say this expressly in your report, but I think you're saying that in the plan scenario, there would be no insolvency discount at all to market value, is that right? A. I haven't looked at this question. I was asked what the insolvency discount are, and we have looked at the experience we have, what we did over the last five years in Germany, and we came to the conclusion that the discount of approximately 25 per cent is a correct estimation. Q. That's very interesting, Mr Gunther, because that's exactly what I was going to ask you. That you haven't looked at the discount under the plan scenario, have you? A. No."
"Q. Now if we go back to 8.1 of your report, which we were looking at a moment ago,, you referred there in the second sentence to all shares of the Adler Group being transferred to a special purpose vehicle "bidco" controlled by the creditors. Do you see that? A. I see that, yes. Q. I think there you are referring to the shares in the Luxembourg holding companies, is that right? A. Yes. Q. What are you assuming would then happen in relation to the properties? A. So then we believed this would avoid an insolvency situation. Q. I understand you say that. What in practical terms did you think would happen to the properties following the transfer of the shares? How are you assuming they would, in fact, be sold? A. After the transfer of the shares? Q. Yes. A. In the usual way. Q. When you say "in the usual way", you mean in the ordinary course of business? A. In the ordinary course of business, yes. Q. I see. So your opinion is dependent on those sales being made in the ordinary course of business; is that right? A. Yes."
"From my own experience and having spoken to investors with significant insolvency experience I would comment that all above arguments have some validity, but not to the extent that they would justify a 22.5% discount in comparison to a sale by Adler Group under the RP. Also, a recapitalised Adler Group has an even greater debt burden and a greater time pressure to sell the assets than under the RA. Hence, I am of the opinion that a discount of 5% (in comparison to the proceeds under the RP) is appropriate for the RA to reflect higher due diligence and insurance cost and reward for any remaining risk."
"Q. I accept of course that ED&F Man is a very different group than Adler. But I want to focus on the principle. I think you would accept, would you not, that an inability to give representations and warranties is relevant to determining the relevant discount, how relevant may depend on the asset being sold? A. Yes, that's right. I think there is always a number of factors that one should consider when thinking about insolvency discounts. But then you have to apply it to the specific circumstances of the company. Q. The perception of financial distress is likewise relevant to determining the appropriate discount, isn't it? A. Yes, it's again a relevant factor to consider, and then apply it to the specifics of the case. Q. If we go to page 58 now, please, this is dealing with the discount applicable to a specific unit of the Commodities business called MLP. Can you read the final bullet point to yourself in its entirety, please? A. Yes, I have read that. Q. I think you are applying a 15 per cent discount to the valuation of assets belonging to companies which would not themselves be in a liquidation, but which would be affiliated with other companies in the same Commodities business which would be in liquidation. Is that correct? A. That's correct. Q. And you applied that discount because of the perception of distress and the inability to provide reps and warranties, didn't you? A. They were sort of the topics considered but it was applied to the situation and the impact that those factors would have in relation to this business and this group. Q. Yes. And those factors would be relevant to greater or lesser degrees in the appropriate insolvency discount in all cases? A. Yes. The sort of -- the backdrop can be very different for different kinds of businesses. That's often sort of based on how challenging it is to trade that sort of a business during an insolvency. You know, certain businesses can withstand an insolvency and be traded for quite a long time in that process and not impact value significantly, and other businesses, you know, are very susceptible to deterioration very quickly and there is a wide spectrum."
(1) It is relevant for me to consider whether Mr Gunther's assumption about the sale of the assets in the ordinary course of business was correct when I address the Plan Company's alternative case at Stage 3: see (6) (below). But there is no real dispute that CBRE and NAI Apollo valued the Group's assets by reference to Market Value (as defined by the Red Book) and I am satisfied that Mr Gunther's assumption was correct for the purpose of deciding what the likely outcome would be if the Parent Company and the Group companies went into an insolvency procedure (or, indeed, what the consequences would be for the Plan Creditors).
(2) On the other hand, I am not satisfied that Mr Gerlinger really addressed this issue. In the Knight Frank Report he compared a sale by the Group in insolvent liquidation (or the equivalent) and a sale under the Plan: see Ά3.31 (above). He was cross-examined on that paragraph and his evidence was that the greater debt burden and the time pressure to sell under the Plan justified a small discount only. Again, I return to this evidence at Stage 3: see section (6) (below). But this was not the basis on which CBRE and NAI Apollo had performed their valuations.
(3) In any event, I prefer Mr Gunther's evidence for the reasons which Mr Bayfield put to Ms Rickelton. I am satisfied that the perception of insolvency and the inability to provide the usual representations and warranties on a sale would justify a much higher discount. Although I accept Ms Rickelton's evidence that the Insolvency Discount will vary depending on the nature of the business being sold, I can see no reason why the discount should be less for property assets than for, say, commodities. Indeed, if administrators are unable to give title guarantees in relation to the land itself or warranties in relation to the performance of repairing obligations in leases of residential properties or compliance with an employer's obligations in relation to development properties, this inability is likely to generate a healthy discount.
(4) Mr Gunther's evidence was supported by the survey of other experts carried out by BCG. Although Mr Gerlinger and Ms Rickelton also relied on anecdotal evidence of this kind from investors and property professionals, they did not provide any detail, unlike BCG who set out in the BCG Report the substance of their interviews, the discounts identified by their interviewees and the reasons for adopting them.
(4) Stage 2: The Consequences for the Dissenting Class
(5) Stage 3: Primary Case
(i) The BCG Report
" Under the Restructuring Plan, SUN noteholders are expected to recover 100% of FV plus interest and fees (in line with contractually agreed interest and fee payments). A general assumption for creditor recoveries is that the Group will repay debts as and when sufficient funds are available. Based on current projections and economic assumptions, an early repayment of the 2027 and 2029 SUNs at par per end of 2026 (prior to their respective contractual maturity) appears to be possible
In the Relevant Alternative, noteholders are expected to recover 63% of FV, with the delta to returns under the Restructuring Plan being primarily attributable to insolvency effects on realized asset prices
The comparator analysis concludes that all classes of creditors are better off under the Restructuring Plan in terms of quantum and timing of recoveries
The average maturity of recoveries for the SUNs is between 3 and 4 years as compared to 4 and 6 years under the Relevant Alternative"
" The Management Case foresees a disposal of 2.8B GAV yielding assets (three pre-defined disposal portfolios) and 1.7B GAV development assets through upfront sales by Q4/'24 (additional ~250M GAV development assets disposed through pre-agreed forward sales). With proceeds generated from the disposal plan, the Group would have sufficient liquidity (through net proceeds from sale of assets) available to service its debt obligations as they become due and repay the New Money Facility during '24
The remaining portfolio of 9,744 residential units (2.6B GAV) and some development assets (0.4B GAV) is forecast to be sold until Q4/'26 to further support a deleveraging of the Group, while capitalizing on an expected market recovery
Given the significantly reduced asset base, the Restructuring Plan is complemented by an organizational scale down, which (i) foresees to gradually reduce the current organization of ~680 FTE as per January 2023 (~52M personnel cost base in FY22) in line with planned asset disposals, and (ii) assumes a significant reduction of non-personnel costs
Provided that asset disposals are executed as planned, the Restructuring Plan would allow the Group to repay its outstanding financial liabilities at par plus interest and fees. Based on current projections and economic assumptions, an early repayment of the 2027 and 2029 SUNs at par per end of 2026 (prior to their respective contractual maturity) is forecast to be possible"
"Company and shareholder structure
The Group consists of three boxes: the Parent Company, Adler RE and Consus; the Parent Company and Adler RE are publicly listed
The Parent Company is incorporated in Luxemburg and listed on the LAX, its ownership structure includes a 20.5% share held by Vonovia SE, a 7.4% share held by Gerda Caner and a 6.1% share held by Gόnther Walcher, with the remaining 66.0% being free float
The Parent Company holds a 96.7% stake in Adler RE and a 93.9% share in Consus; Adler RE has 3.3% free floating shares
Adler RE also holds a 63.0% stake in Tel-Aviv-based BCP, which itself is listed on the Tel Aviv Stock Exchange; additionally, BCP holds a 3.0% stake in Consus
While the yielding portfolio is held by the Parent Company and Adler RE, the development portfolio is primarily held by Consus and Adler RE"
" Market model forecasts declining property values in Germany until end of 2023, average decrease of ~10% vs. CBRE valuation per June 30, 2022 (index)
Recovery expected to begin in 2024, property prices then grow with ~3% CAGR until 2030, enabling prices to surpass (nominal) 2022-levels in 2027
Berlin accounts for ~85% the Group's yielding portfolio GAV, thus driving overall development of its yielding portfolio valuation"
" We note, that based on updated valuation reports per December 2022, which have been provided by CBRE and NAI Apollo prior to the finalization of this report, the GAVs as per the BCG market model correspond with the actual valuations and show no material differences in total GAV for the yielding portfolio per 31.12.2022
Outlook for '23 in line with market expectations: Deutsche Bank, Berenberg, Moody's and S&P forecast real estate asset values of listed peers LEG, TAG, & Vonovia to decline by 10% in '23
Limited availability of projections after 2024: however, while market is expected to remain depressed throughout 2023, there is a consensus view that fundamentals of the German residential real estate market remain strong (see Background to Restructuring Plan chapter for more detail), driving market recovery in the medium- to long-term"
"Discount calculation based on project analysis, considering:
Signed LOIs and/or offer letters for disposals in advanced negotiations or finalization stage (six projects with total GAV of 544M; one of them disposed in Jan. '23)
Previously obtained but withdrawn/declined offers
Price paid by Consus/Adler RE to purchase the project (with a focus on land value) and already spent CAPEX
Projects' future prospects with regard to micro-location and intended use (i.e., residential, commercial or mixed)"
"10. To forecast the proceeds of future asset disposals by the Group, BCG developed a market model to forecast the gross asset value of the Group's yielding assets through to 2030. As detailed at pages 38 and 39 of the Comparator Report, the model is based upon a range of commonly accepted macroeconomic factors which drive asset prices generally, and in the German real estate market in particular. 11. It was necessary to build a bespoke market model because, although short-term analyses are available publicly (e.g., from brokers/bankers) there is no reliable data forecasting price developments on the German real estate market in the medium to long-term (i.e. beyond 2024 when the Group expects to make asset disposals if the Restructuring Plan is implemented, or a liquidator would do so in the Relevant Alternative). In my experience, market models of the type developed by BCG are often used for the purpose of forecasting future prices. Ms. Rickelton acknowledges that such models are often necessary, but she questions the reliability of BCG's model, principally on the basis that interest rates and interest rate forecasts have increased since the model was finalized (as to which see further, paragraph 25 below)."
"Net cold rent model methodology
Identification of main drivers (input variables) through research, correlations and expert knowledge; forecasts were made based on historical net cold rent, location (16 states plus 4 focus cities), maintenance costs, disposable income, and vacancy rate
Calculation of regression coefficients for each input variable (YoY) on net cold rent (YoY) based on historic data from 2012 to 2021
Aggregation of YoY-change for each input variable until 2030 based on official sources e.g., EUROSTAT, DESTATIS, Oxford Economics, Haver Analytics, BBSR
Prognosis of future net cold rent development (YoY) until 2030 based on determined coefficients and forecast of input variables
Backtesting and adjustment for market inertia and crisis years (COVID-19 and Ukraine war)
Multiplier model methodology
Multiplier primarily driven by interest rate development; differentiated for location (16 states plus 4 focus cities) and property type
Derive multiplier YoY/CAGR change, based (historically) observed asset value changes and net cold rents
Analysis of sensitivity and strength of correlation between interest rate hikes and multiplier YoY/CAGRs
Determination of adjustment factor for inelasticity of interest rate changes, e.g., accounting for lag effects
Projection of short-term asset value evolution, based on lag effects of already carried out interest rate hikes, and impact of expected further interest rate adjustments"
"Q. I just want to ask you about the projected scenario under the restructuring plan if this is to be sanctioned. It is correct, I think, that this envisages a wind-down of the group and a disposal of all the assets leading to a liquidation of all the entities in 2027; is that right? A. Yes, that's correct. Q. And for these purposes, I understand it, you have relied on something called the "management case"? A. Yes, that's correct. Q. Is the management case actually a document that you have reviewed or is it something that you were told orally by management? A. No, it's not a document that we reviewed. It's a management case that has been laid out in the business plan model, so to say. It's on a system called Anaplan and there is basically for the -- I would say the relevant entities, there is the business plan, there's a P&L, cash flow and the balance sheet. Q. I understand. Just to get the position clear, let's just look at the relevant parts of your report. If we go firstly to page 3 of the BCG report, we can see there, the basis of preparation: "The comparator analysis builds upon information provided by the group's management during the engagement and primarily includes (but is not limited to) the following; latest management case per ... 2023." Then if we just pick it up, the second bullet point from the bottom: "For the outcome analysis under the restructuring plan, we have built on the management case, it's underlying assumptions and adjustments made as set out by management." So if you like, that's the core material that you started with, isn't it? A. Yes, it is. Q. That, I assume, sets out management's assumptions, amongst other things, as to the timing of disposal of the properties; is that right? A. That's correct."
"Q. Exactly. And you have two models because one model is effectively trying to produce the growth in net cold rent, that's correct? A. That's correct. Q. And the other methodology is trying to predict how the multiplier is going to change over time? A. And the methodology is all the same. It is all regression analysis. Q. Exactly. Then what you need to do is look at your figure for future predicted cold rent and your figure for future predicted multiplier, you bring them together and hopefully that gives you your output, is that correct? A. That's correct. Q. I think we do in fact agree. I just want to look at those two methodologies in turn if I may. I am going to start with the net cold rent model methodology. If we look at the bullet points at the top of the page there, I just want to go through what this in fact involves. The first step -- this is the first bullet point -- is that you have tried to make an assessment of the main factors which you think affect market rent, is that right? A. That's correct. Q. And you have come up with location, maintenance, cost, household disposable income and vacancy rates? A. That's correct. Q. Anything else? A. No, we chose those. Q. Right. You are not property experts so how do you know what are the main factors that affect market rent? A. As I said, I am not a property expert. We had two in our team. Mr Jan Duken and Mr Olaf Rehse, and we also kind of checked that obviously with the company and other experts. Q. So it is essentially based on their judgment, is it, as to what sort of factors affect market rent? A. No, that's not correct. Because we tested whether there is a sufficient relevant -- with the regression analysis, we tested whether there is a sufficient correlation. Q. I see. So you have identified those factors and then this, I think, is the second bullet point, isn't it? You have undertaken some sort of statistical analysis to try to quantify the relationship between each of those factors and the level of rent, is that right? A. I think in general that's correct. We kind of tested the year on year development and how the impact of those factors is on the year on year development. Q. And this is the calculation of regression coefficients. What you have tried to do now is quantify the relationship between a change in a particular factor and then the change in rent? A. That's correct. Q. Based on a historical statistical analysis, correct? A. That's correct. Q. Thank you. The third step as I understand it, is having identified the factors that affects net cold rent, you have then sought to forecast each of those factors out to 2030, is that right? A. Yes. And we used what is available on market intelligence and information to do so. Q. I understand. So that involves forming a view on the level of each of household disposable income, vacancy rates, inflation and maintenance costs, and interest rates in Germany out to 2030, doesn't it? A. The interest rate is not relevant for the net income. Not directly. But in principle your assumption is correct. Q. So in relation to each of those other factors, apart from interest rates, you effectively have to form a view on how they are going to develop out to 2030? A. Yes."
"Q. Do you understand why we are concerned about it? A. Of course I can understand why you are concerned about it. Q. It undermines the reliability of your whole report, doesn't it? A. I wouldn't think so. It would undermine our report if our assumption would be wrong. Or not wrong -- anyway, as a difficult statement for an assumption. But we made an assumption on the interest rate. To my understanding on the forecasts that are shown on page 85, which are on the screen. We added the margin and then kind of go with that. And as we -- and as I agreed earlier on, if those interest rate assumptions are wrong, or if it would be different and if the development would be different, and our assumptions, of course there would be different results. At the moment I can't -- I understand your argumentation, but I say I am very sorry, I can't reconcile whether those Bloomberg ECB main financing rate to what extent relate to the assumption that we made in the report. Q. So were you involved in or did you supervise the exercise of obtaining these forecasts and inputting them into the model? A. Technically I am the responsible partner for the whole comparator report. Of course I am. But I didn't check whether and what kind of rate has been locked into the model in detail. If that could be your question -- Q. So you don't have personal knowledge of what's happened here? A. No. Q. Just go back a page on page 84 of the BCG report. Page 1511. Do you see under "Multiplier Model Methodology": "Multiplier primarily driven by interest rate development." Do you see? A. Yes. It in fact forecasts future interest rates are the key driver on the multiplier methodology, aren't they? A. That's correct. Q. So getting the forecast interest rates right is absolutely critical, isn't it, to the projection of the future multiplier? A. That's correct. Q. Do you accept it appears you have made some kind of error in relation to these forecasts? A. No. Because at the moment I can't reconcile that."
"You started -- if you just go on a page, please. And go on a page and another page. Yes, it is this page. So page 43,. You started as I understand it with a gross asset value of 2.426 billion, which is at June 2022, right? A. Yes, that's correct. Q. That's based on the NAI Apollo valuations, right? A. Correct. Q. Then you deducted certain forward sales of 249 million? A. Yes, that's correct. Q. Then you assume that the reminder of the portfolio is sold between 23 and 2025 for 1.764 billion euro? A. I see that, yes. Q. That involves a discount to the gross asset value of 414 million euro, correct? A. That's correct. Q. And you say in the box that we sort of see in the middle of page, that's a discount calculation based on: "Project analysis, considering: signed [letters of intent] and/or offer letters ... previously obtained but withdrawn/declined offers. "Price paid by Consus/Adler RE to purchase the project (with a focus on land value) and already spent CAPEX Projects' future prospects with regard to micro-location and intended use (ie residential, commercial or mixed)." So those are the factors you have taken into account in working out the discount to gross asset value, right? A. Yes. Q. So that exercise described in the box is something that's been undertaken by BCG, isn't it? A. The values have been laid out in the management case and we checked that to kind of understand the assumption that the management does in terms of values and so on, and wanted to have the supporting material, and so there are some letter of intent or things like that for certain real estates that we would like to see to justify those values. Q. I see. So actually it is a figure that was produced by management, was it, in the management case? A. The 414 is not produced in the management case. We actually reviewed that, and they were in -- in the process of reviewing there were changes. Q. Who came up with the figure of 414 million for the discount? A. It was the result of the
"What I am failing to understand at the moment is given that they have reduced the value by 42.5 million, why that doesn't reduce the 600 million figure you have used in the BCG report. A. As I said it arrived very -- in due course before that, and we hadn't had any chance to actually understand what the -- what drives the 42 million. My assumption is that it is driven by a revised assumption on the real estate market as well because BCP is also something. And then it could be, you know, a fair assumption, but I am not -- we haven't done that analysis and that's also why we didn't -- we just flagged the number and didn't incorporate it in any model. My assumption would be that their prediction, or assumption for the real estate values for BCP in 23 are significantly lower than in the report that Mr Smith has just shown. We do not have applied any methodology like on how that predicts in -- Q. That's very interesting, Mr Wolf. You said that your assumption is that Van Lanshot Kempen's assumption for real estate values of BCP in 23 are significantly lower than in the report. A. No, I didn't say that. Q. So you are assuming that they have lowered their view of property values, is that right? A. No. I just said as we -- we also assume in 23, a further drop in values, as you have seen early on, yes, compared to 2022. I don't know whether they have done a similar valuation. That might be the reason for that. But again, you know, we haven't tested that or tried to understand that, because it has been provided very late, the information -- Q. You did say -- A. And then just -- that can -- if the valuation holds then of course it will reduce. I have to just be very clear on that question. Q. As I understand it, you haven't actually spoken to Van Lanshot Kempen about the reasons for the reduction in their valuation? A. The valuation, please, no, I haven't. Q. You haven't? A. No, I haven't. Q. So you don't know why they have reduced the valuation, is that right? A. No. Q. Why didn't you speak to them about it? A. Again, the information came very late. There is a couple of other things that we have done. It is not -- we just haven't spoken to them, compared to the other things that we also need to prepare. Q. You don't know -- although I think you speculated on this a moment ago -- whether that reduction in value is because they have reduced their own view of likely property values? A. No, I don't know. Q. But it could be that, couldn't it? A. Since I don't know, it could be the case, yes. But again it's a current valuation and not -- then to be for the point in time when it is actually going to be sold."
(ii) The Knight Frank Report
"Q. Okay. So then when we reach your opinion on value, in the table at 3.28, it appears to be the case that your position is that the GIY for the entirety of portfolio is 5.58 per cent for Q2/2022, 6.30 per cent for Q1/2023, and 6.09 per cent for 2024. Is that right? A. Correct. Q. Where have you got those figures from, Mr Gerlinger? A. The calculation I made. It's based on different yield assumptions for different subsections of the portfolio. So I separated the Duisburg cluster, which is the largest in portfolio 1. I treated that one. I treated Dόsseldorf separately and Cologne separately and Dortmund separately and a few other smaller ones and these are the averages which result. Q. Where do we see the calculations leading to those averages? A. It's not on the report. Q. Why not? A. Because I thought were enough figures in there. How much can you read? Q. So what caused you to give a GIY for 2024 of 6.09 per cent rather than, say, 6 per cent? A. That's an average that results from the subclusters underneath. Q. Which we can't see because we don't have any of the calculations? A. Correct."
"Q. And the forecasts are based entirely on your intuition, aren't they? A. The forecast, yes, after the date of valuation of 15 March 2023 is predominantly based on intuitive explication. And part of the help to form an opinion would obviously be the yield table. So looking back, might history repeat. And, yes, yes, the period. Q. You haven't provided the court with any analysis that underlies your forecasts of future GIYs, have you? A. Not a formal analysis, no. Q. All you can offer is a bare assertion that if the refinancing costs remain on the current level, the economic indicators strongly suggest that the average reported GIY in Duisburg will grow above the level of 2020/2021. That's what you say? A. Correct."
"Q. Let's look at the Red Book. Can you go to page 54, please? There is a heading at E: "Basis/Bases of valuation adopted. Can adopted." Can you read paragraph 3 to yourself in full? A. Okay. Q. Do you see the final sentence there: "In particular, it must never be described or represented as market value when you are looking at a future potential price for that property." Do you see that? A. I see that, yes. Q. Okay. Can we go back to your report, please. If we could look, first, at 1.12. What you say is: "I have undertaken market valuations as at the following valuation dates ..." Do you see that the third bullet for the yielding portfolios and the second bullet for the development portfolio are future dates? Can we now go to 1.14 of your report, just below that? What you say is: "As a result the market values are not property-specific but relate to the selected portfolios of yielding assets 1-5 and the group development assets." Okay. So you use the term "market values", in relation to all of the figures that you come up with in this report, don't you? If you can go to of the report, do you see at the top of the page you have a definition of market value? A. Yes. Q. And Red Book approaches, market approach, do you see that? A. Yes. Q. So actually, in purporting to give market values at future dates, you have in fact not acted in accordance with the Red Book, you have done the polar opposite of what the Red Book says, where it says it must never be described or represented simply as market value? A. You could be right. I should have stated that more clear the circumstances under which the forecasted future value have been stated."
(iii) The Rickelton Report
"Ms Rickleton, I think you will agree that figure 19 sets out your analysis of what the holders of the various series of SUNs will receive under the plan but using the Knight Frank valuations of the yielding assets and the development assets at the planned sale dates under the plan, is that right? A. That's correct. Q. I want to check a few points with you. Would you agree that this analysis shows that every series of the SUNs would be paid in full plus interest, other than the 27s and the 29s? A. Yes, that's correct. Q. And it suggests that the 29s would only make a recovery of 10.6 per cent? A. Yes, that's correct. Q. And that's of capitalised PIK interest, isn't it? A. Yes, you can see in the table under the column for 2025, the PIK interest of 98 which is paid then. That comprises the 10.6 per cent. Q. Therefore you say they will receive nothing on the principal owed to them on this basis? A. That's correct. Q. Actually, you say that adjustments have to be made to the figures, which may even result in a worse return for the 27s and the 29s. They were in an FTI document that was put to Mr Wolf yesterday. I think you were in court then, weren't you? A. Yes, so I think you're referring to the adjustments which came out of the reply evidence. Q. Yes. A. Yes, that's correct."
(iv) The Parties' Submissions
"It goes without saying that there is no certainty in the projection of future property prices. However, the Court is required under Part 26A to form a view as to the likely returns to creditors in the relevant alternative. The evidence will rarely be straightforward, but the Court must do the best it can. Where there is a conflict between the evidence adduced by the company and an opposing creditor, it is submitted that the Court should seek to determine which party's evidence can be regarded as the best available evidence. The existence of uncertainty is not fatal; if it were then Part 26A would be at risk of becoming a dead letter.
It is important to bear this point in mind when reviewing the AHG's skeleton argument. The AHG submits, for example, that "the fact that there is no reliable data forecasting real estate values beyond 2024 might be thought to suggest that such values cannot be forecasted with any acceptable degree of certainty." This line of reasoning involves a misunderstanding of what Part 26A is all about. If taken to its logical conclusion, the AHG's argument suggests that it will rarely be possible for a company to cram down a dissenting class, since future recoveries will always be subject to significant uncertainty."
(1) BCG's market model has already proved itself to be reliable. In particular, in Appendix 6 they noted that they had been provided by CBRE with updated valuations of the Yielding Assets as at 31 December 2022 and there was no material difference between those valuations and the market model.
(2) They drew the Court's attention to the technical details of the market model and Mr Wolf's description of its development over two months. They also pointed out that in response to the Rickelton Report, Mr Wolf had performed a sensitivity analysis, which showed a deviation of only 50m still enabling the SUNs to be repaid in full.
(3) They also pointed out that BCG had made certain corrections to the Explanatory Statement, which demonstrated BCG's diligence. In particular, Mr Wolf had drawn attention to the reduction in the amount of headroom which is what an independent expert should do.
(4) They countered the AHG's criticism that the market model was inherently unreliable by pointing out that the input data was from reliable sources. In relation to interest rates, they accepted that Mr Wolf was not able to provide an immediate answer to the 2.7% figure on slide 85 (and I have set out the relevant passage from his cross-examination above). But they submitted that he confirmed in Wolf 2 that the source was taken from the ECB Survey of Professional Forecasters, which BCG considered to be the most reliable and authoritative source of information.
(5) They contrasted this with Mr Gerlinger's evidence. They submitted that the GIYs which he had adopted were "plucked out of thin air" and that he had not provided the relevant calculations or data. They also submitted that he had "breached the Red Book" by treating his projections of future property prices as if they were market valuations.
(1) The identification of the relevant factors which were said to affect the net cold rents and multipliers which were used to generate the model was very vague.
(2) The regression analysis which BCG had conducted to try and identify the statistical links between the various factors was opaque and "a black box" and it was not possible to interrogate what they had actually done.
(3) BCG had predicted household income, vacancy rates, inflation, maintenance costs and interest rates out to 2030 and this was fraught with uncertainty and any change in these inputs would have an effect on the output of the model.
(4) Mr Wolf accepted that the forecast of future interest rates was absolutely critical to the projection of the future multiplier but the position in relation to the data used by BCG was "shambolic" and Mr Wolf was unable to explain the errors made. Moreover, the data used by BCG for the January 2023 forecast did not correspond to the Bloomberg data (or any Bloomberg data).
(5) The BCG Report was inadequate because BCG did not conduct any sensitivity analysis. Mr Wolf accepted that there was a range of reasonable views and he was evasive when asked to explain why no sensitivity analysis had been carried out.
(6) The position in relation to the Development Assets was even more unsatisfactory because they were not the subject of the model but a project-by-project analysis. Moreover, it was entirely opaque how BCG had made the discount on slide 43 (in which NAI Apollo were not involved).
(7) BCG forecast a 600 million recovery on the sale of BCP was based on a single page valuation.
(v) Findings
(1) The BCG Report is based on the valuations of CBRE and NAI Apollo as at 30 June 2022 and 30 September 2022. I have already found on a balance of probabilities that those valuations were accurate and I have preferred them to the valuations in the Knight Frank Report.
(2) The BCG Report is also based on the Management Case. Indeed, it is in large part a reflection of management's own forecasts. Although Mr Trozzi has been with the Group only a short period of time, I recognise that the management of the Group as a whole are best placed to forecast the likely outcome of the planned disposal of the Group's assets over the next 3 to 5 years.
(3) Moreover, BCG's forecast of property price development appears to me to be a "rational and considered view": see Re ED&F Man Holdings (above). On slide 40 they projected a decrease in asset values of about 10% to reflect the current fall in prices in Germany recovering to their current values in about 2026. Given that management proposes to dispose of all of the Group's assets by the end of 2026 a forecast that the Group's assets will be sold for less than their current GAV seems reasonable. The position would be very different if the Plan required a significant increase in property prices before the 2029 Plan Creditors were paid in full.
(4) I turn next to the evidence of Mr Gerlinger. I do not accept that he "breached the Red Book" in the sense that he undertook an improper or impermissible exercise and should not have undertaken an engagement which involved expressing an opinion on the likely prices which the Group would achieve in the future. But he did accept that it was not possible for a valuer to provide a Red Book valuation based on Market Value at a future date. Mr Gerlinger should, therefore, have qualified the Knight Frank Report (as he very fairly accepted) and both this and the fact that he could not provide Red Book valuations undermines the weight which I can attach to his forecasts of future sales proceeds.
(5) Given the time constraints of the very significant exercise which he was asked to undertake, Mr Gerlinger had to fall back on intuition or "feel" to arrive at his GIYs. Moreover, he did not provide his workings or any of the data upon which he relied or the eight valuations of the Development Assets which he had undertaken. I make no criticism of Mr Gerlinger himself but this was another reason why I was unable to attribute much weight to his future valuations.
(6) Given that the Red Book does not permit a valuer to provide a future valuation at Market Value, this explains why CBRE and NAI Apollo did not give expert evidence (and Mr Gerlinger accepted that this was the reason why they were unwilling to do so). In those circumstances, it seems to me that the Plan Company cannot be criticised for choosing to instruct BCG to build a model to forecast the future proceeds of sale of the Yielding Assets based on a combination of the Management Case and macro-economic data.
(7) I turn next to the specific criticisms of Mr Wolf's evidence and the contents of the BCG Report. Although I have found that he was not an entirely satisfactory witness and that he was plainly unfamiliar with those slides which dealt with interest rates, I am not satisfied that the BCG Report can properly be described as "shambolic" or that Mr Wolf's evidence undermined the reliability of either the model or the report as a whole. I accept his evidence that the source of the forecast of 2.70% for Q4/23 on slide 85 was the ECB Survey of Professional Forecasters and I was provided with a copy. I also accept that this was the best available forecast.
(8) I am not satisfied either that BCG can be criticised for failing to carry out a sensitivity analysis in the BCG Report when the point was first taken by Ms Rickelton. As Mr Wolf explained, it was not simply a question of plugging in a different set of rates but involved a much more complicated exercise. But in any event, BCG did carry out a sensitivity analysis based on different interest rate assumptions when Mr Wolf came to make Wolf 1 and it demonstrated that the Group would realise 50 million less in 2024 and 2025. Mr Smith did not challenge this analysis and it did not demonstrate that minor changes in interest rates would undermine the forecasts entirely.
(9) Mr Smith's other criticisms of the BCG Report were largely directed either at uncertainties which were either inherent in the forecasting process or unsupported in evidence by additional workings or information. I accept that these criticisms affected the weight which I could attach to the BCG Report. But I bear in mind the tight time constraints under which all parties were operating and the nature of the application. This was an application to sanction a restructuring plan and not a trial of an action after exchange of statements of case, full disclosure and meetings of experts. Indeed, many of the issues did not evolve and crystallise until days before the hearing.
(10) I must also compare the supporting information which BCG set out in the BCG Report and in Mr Wolf's evidence with the lack of supporting information which Mr Gerlinger was able to provide in relation to his GIYs and the changes which he made to them to reflect future sales. For the reasons which I have given, I make no criticism of him. But in the end, I have to choose between the detail in the BCG Report (acknowledging the gaps in the supporting data) and Mr Gerlinger's expert opinion based on his professional experience and feel for yields. In those circumstances, I prefer the evidence of Mr Wolf and accept the contents of the BCG Report.
(11) Finally, I accept Mr Bayfield's submission that there was no material difference between the model and the valuations carried out by CBRE as at 31 December 2022. The differences between the two were immaterial and this provides clear support for my conclusion that both the model and BCG's forecasts provide a rational and considered view of the amounts which the Group will realise in the future on the sale of both the Yielding and Development Assets.
(6) Stage 3: Alternative Case
(i) The LTV Covenant
"(3) Maintenance of Loan-to-Value-Ratio The Parent Guarantor will ensure that on each Maintenance Reporting Date the Maintenance Loan-to-Value-Ratio shall not exceed 87.5%.
"Maintenance Loan-to-Value-Ratio" means the ratio of
(i) the net financial indebtedness of the Parent Guarantor and any of its Subsidiaries, calculated on a consolidated basis determined in accordance with IFRS as "corporate bonds", "convertible bonds", "other loans and borrowings" and "other financial liabilities" less "cash and cash equivalents" (each as shown in the Consolidated Financial Statements of the Parent Guarantor) as of the relevant Maintenance Reporting Date
to
(ii) the Group's Total Assets less "cash and cash equivalents" as of the relevant Maintenance Reporting Date, provided, however, that any "trade receivables" or "other receivables" which have been written-down or written-off in the Consolidated Financial Statements of the Parent Guarantor as of June 30, 2022 that are still reflected in the Consolidated Financial Statements of the Parent Guarantor as of the relevant Maintenance Reporting Date shall, for the purposes of this definition, be included in the calculation at the lower of (x) their value in the Consolidated Financial Statements of the Parent Guarantor as of June 30, 2022 and (y) their value in the Consolidated Financial Statements of the Parent Guarantor as of the relevant Maintenance Reporting Date."
"A. Scenario 1: Gerlinger asset values and Comparator Report disposal timeline
46. In this scenario, we assumed that Mr. Gerlinger's opinion as to the asset values as at June 2022 and as to projected sales prices are correct. As to Mr. Gerlinger's opinion 5 Numbers are rounded on projected values, we note that he did not provide data on the development of value on a monthly or annual basis, hence we have assumed linear value development over time. We illustrate our sale price assumptions on page 14 of Appendix 2 for yielding assets and on page 15 for development assets in this scenario verses those assumed under the Restructuring Plan in the Comparator Report.
47. On slide 16 of Appendix 2, we illustrate how asset valuations and sales prices under the Plan assumed in the Comparator Report interact with the Group's obligations under the "LTV Covenant" (which provision is described in detail in Mr. Trozzi's third witness statement ("Trozzi 3"). This slide is extracted from the Comparator Report.
48. On slide 17, we rework the previous slide to contemplate Scenario 1. The red dotted line on the chart shows that, by Q4 2024, the asset values and sales prices (assuming annulment of the Release Price Mechanism on all sales) forecasted by Mr. Gerlinger on the disposal timetable he assumes will result in infringement of the LTV Covenant. Moreover, as this slide notes, asset sale proceeds will not be sufficient to cover the Group's cash requirements in Q1 2026, an earlier disposal of Portfolio 5 would be required to mitigate this (potentially incurring lower sale proceeds).
B. Scenario 2: Gerlinger asset values and Release Price Mechanism impact on timeline
49. On slide 18, we show the same template slide again but in the scenario that takes into account the "Release Price Mechanism" that Mr. Trozzi describes in Trozzi 3. The red dotted line on the chart shows that, by Q4 2024, the asset values forecasted by Mr. Gerlinger on the disposal timetable he assumes will result in infringement of the LTV Covenant. Moreover, as this slide notes, the Group's cash requirements will not be covered anymore in Q3 2025."
(ii) Event of Default
"(1) Events of Default. If an Event of Default occurs and is continuing, each Holder shall be entitled to declare due and payable by submitting a Termination Notice pursuant to paragraph (2) to the Paying Agent its entire claims arising from the Notes and demand (subject to paragraph (4) below) immediate redemption at the principal amount thereof together with unpaid interest accrued to (but excluding) the date of actual redemption. Each of the following is an "Event of Default":
(b) the Issuer fails to duly perform any other material obligation arising from the Notes (including the obligations under § 11) and such failure, if capable of remedy, continues unremedied for more than 40 days after the Paying Agent has received a request at least in text form (section 126b of the German Civil Code, Bόrgerliches Gesetzbuch) thereof in the manner set forth in paragraph (2) from a Holder to perform such obligation; ..
(e) insolvency proceedings against the Issuer or the Parent Company are instituted and have not been discharged or stayed within 90 days, or the Issuer applies for or institutes such proceedings; or
(f) the Issuer or the Parent Company enters into liquidation unless this is done in connection with a merger or other form of combination with another company and such company assumes all obligations of the Issuer in connection with the Notes
(2) Termination Notices. Any notice by a Holder (i) in accordance with paragraph (1)(b) or (ii) to terminate its Notes in accordance with this § 10 (a "Termination Notice") shall be made by means of a declaration made in text form (section 126b of the German Civil Code, Bόrgerliches Gesetzbuch) to the Paying Agent in the German or English language delivered together with evidence by means of a certificate of the Holder's Custodian (as defined in § 17(4)) that such Holder, at the time of such Termination Notice, is a holder of the relevant Notes."
(iii) The Notes Representative
"(1) If insolvency proceedings have been opened in respect of the debtor's assets in Germany, the creditors' resolutions shall be subject to the provisions of the Insolvency Code unless otherwise provided in the following paragraphs. Section 340 of the German Insolvency Code shall remain unaffected. (2) The creditors may by majority resolution appoint a joint representative for all creditors for the purpose of exercising their rights in the insolvency proceedings. The insolvency court shall convene a meeting of creditors for this purpose in accordance with the provisions of this Act if a joint representative for all creditors has not yet been appointed. (3) A joint representative for all creditors shall be solely entitled and obligated to assert the rights of the creditors in the insolvency proceedings; in doing so they need not submit the debt instrument. (4) An insolvency plan shall offer equal rights to the creditors. (5) The insolvency court shall arrange for notices under the provisions of this Act to be additionally published on the internet at the address provided in section 9 of the Insolvency Code. (6) If a debtor includes claims from bonds in an instrument of the stabilisation and restructuring framework under the German Act on the Stabilisation and Restructuring of Enterprises [Unternehmensstabilisierungs-und Restrukturierungsgesetz], the preceding paragraphs shall apply mutatis mutandis."
"(2) The joint representative shall have the duties and rights granted to it by law or by majority resolution of the noteholders. It shall comply with instructions given by the noteholders. To the extent that it has been authorised to assert certain rights of the noteholders, the individual noteholders shall not be entitled to assert such rights on their own, unless expressly provided for in the majority resolution. The joint representative shall report on its activities to the noteholders.
(3) The joint representative shall be liable to the noteholders as joint and several creditors for the due performance of its duties. In the performance of its duties, it shall act with the care of a prudent business manager. The joint representative's liability may be limited by resolution of the noteholders. An assertion of compensation claims against the joint representative shall be decided by the noteholders."
"(2) Duties and Powers. The Notes Representative shall have the duties and powers provided by law (including in accordance with §19 SchVG) or granted by majority resolution of the Holders. The Notes Representative shall comply with the instructions of the Holders. To the extent that the Notes Representative has been authorized to assert certain rights of the Holders, the Holders shall not be entitled to assert such rights themselves, unless explicitly provided for in the relevant majority resolution. The Notes Representative shall provide reports to the Holders on its activities. The Notes Representative is, in particular, entitled to agree on the terms of and perform all actions, measures and declarations attributed to it in the Intercreditor Agreement and acts, in this regard, where relevant, on behalf of all Holders and without the need to obtain a prior resolution of, or instructions from, Holders. The Holders are excluded from enforcing their rights in this regard.
19(3) Duties and Powers following an Event of Default. If the Notes Representative has been notified in writing by the Issuer, the Parent Guarantor, a Subsidiary or any party to the Intercreditor Agreement that an Event of Default has occurred, the Notes Representative shall have the exclusive right to enforce the Holders' rights under the Notes. Notwithstanding anything to the contrary in these Terms and Conditions, the Holders have no individual right of enforcement under the Notes in such event. The Notes Representative is authorized to take any actions and make any declarations it deems prudent during the continuation of such event; in particular, without limitation, to declare a standstill on any receivables under the Notes, to temporarily or permanently waive a right of acceleration under the Notes or to release security or take any other action pursuant to section 5 paragraph 3 of the SchVG without the need to obtain a prior resolution of, or instructions from, Holders."
"(5) Liability. The Notes Representative shall be liable for the performance of its duties towards the Holders who shall be joint and several creditors (Gesamtglδubiger). In the performance of its duties it shall act with the diligence and care of a prudent business manager (Sorgfalt eines ordentlichen Kaufmanns). The liability of the Notes Representative is limited to willful misconduct and gross negligence. The liability for gross negligence is limited to an amount of 10,000,000. The Holders shall decide upon the assertion of claims for compensation of the Holders against the Notes Representative."
"(3) Cure. For the avoidance of doubt, the right to declare Notes due in accordance with this §10 shall terminate if the situation giving rise to it has been cured before the right is exercised and it shall be permissible to cure the Event of Default pursuant to paragraph (1)(c) by repaying in full the relevant Financial Indebtedness. In addition, the Notes Representative shall be authorized to waive all past or existing Events of Default (except with respect to non-payment of any amounts hereunder) and rescind any such acceleration with respect to the Notes and its consequences within three months of the acceleration, but only if rescission would not conflict with any judgment or decree of a court of competent jurisdiction, without the need to obtain a prior resolution of, or instructions from, Holders, provided that if Holders representing more than 50% of the aggregate principal amount of the Notes then outstanding instruct the Notes Representative (including by letter, fax or email) to waive an Event of Default and/or rescind any such acceleration, the Notes Representative shall be bound to waive the relevant Event of Default and/or rescind the relevant acceleration accordingly (as may be specified in more detail in such instruction)."
"Other Remedies. If an Event of Default occurs and is continuing, the Notes Representative may (a) in its discretion proceed to protect and enforce the rights of the Holders by such appropriate
(iv) The Release Price Mechanism
"(a) No Obligor shall (and the Obligors shall ensure that no other member of the Group will) enter into a single transaction or a series of transactions (whether related or not and whether voluntary or involuntary) to sell, lease, transfer or otherwise dispose of any Property (whether by way of asset deal or share deal), which: (i) is for consideration other than cash (ii) is not on arm's length terms; or (iii) is made for a Net Purchase Price (or, in the case of individual apartment or condominium sales within an individual building complex in any period of twelve (12) Months, an average Net Purchase Price per sqm) that is, (A) in relation to yielding Properties, below 80% of the relevant gross-asset value (in the case of individual apartment or condominium sales within an individual building complex calculated as a per sqm value off the gross-asset value of that building complex); and (B) in relation to development projects, below 70% of the relevant gross asset value (in the case of individual apartment or condominium sales within an individual building complex calculated as a per sqm value off the gross-asset value of that building complex), in each case based on the relevant gross-asset value as reflected in the Company's IFRS financial report as of 30 June 2022."
"In addition, under Luxembourg law and German law (as applicable), the members of the management board of the Parent Company or Adler RE may be held personally liable to shareholders and/or creditors if the respective boards approve a sale of assets at deep discounts to gross asset value (particularly if a transaction deviates significantly from normal market conditions to the detriment of the company and there are no significant long-term benefits that could be reasonably expected to arise out of the sale). Furthermore, the respective boards must ensure that the proceeds from the asset disposals are at least sufficient (according to reasonable liquidity planning) to fully meet all payment obligations vis-ΰ-vis all creditors of the relevant company when due. Forced sales at an undervalue would also likely result in a negative perception of the Group's business and will adversely impact the perception of the Group's remaining property portfolio."
"21. There is no obvious reason why lenders under the agreement (i.e., New Money Providers), let alone a majority, would agree to waive this provision except in limited circumstances where the individual asset's circumstances justify a higher discount and the lenders (which, as I explain below, include holders of later-dated SUNs) conclude as a result that such waiver is consistent with their commercial interests. First, New Money Providers have bought into the New Money Funding based on their belief that the German real estate market will recover. 22. Second, waiver of the Release Price Mechanism would threaten their own recoveries as creditors of the Group. Several New Money Providers have material holdings in the later dated SUNs, such that it would not be rational for them to waive the Release Price Mechanism to allow assets to be sold at steep discounts and applied towards the New Money, and thereby reduce the pool of assets available in any subsequent liquidation for the remaining SUNs."
"Q. And it says: "Management's development asset disposal plan is expected to be compliant with the Release Price Mechanism (no development asset sales at discount in excess of 30% in relation to GAVs as of Q2/'22), except for Development 3, 10 & 23 sales ... a simple majority of holders of new money notes would need to give consent to proceed with these sales." Do you see that? A. Yes. Q. They assume, as part of their programme of disposals as contemplated by the report that those waivers will be given, don't they? A. Yes. Q. So what the report contemplates is that where necessary in order to allow the property to be disposed of, the waiver of the RPM will be given by the new money lender, doesn't it? A. Yes, insofar as it would be a consideration on an asset by asset basis, which would then be taken by the lenders and the company looking at overall asset disposal programme. Q. Let me ask you just finally on this topic. If the release precise mechanism was genuinely intended to protect the holders of the SUNs, why wasn't it included in the terms of the amended SUNs? A. As I touched on at the beginning, it was deemed that it would be impractical and actually would -- would actually go counter to the ability of the company to properly manage asset disposals if every time there was a potential waiver needed, even if by a small amount, it would need to get consent from all six series of the SUNs, which again is a public process and would involve the sort of a lengthier exercise than securing the waiver from the new money providers. Which is a private instrument. Q. This rather suggests that this is not something intended to benefit the holders of the SUNs compared to the holders of the new money, do you accept that? A. I think this mechanism is designed to protect value and give the new money providers a say in the event that, again, asset sales are being asked to be considered at a higher discount than 30 per cent, and in this way it provides protection for all lenders."
(v) The Intercreditor Agreement
"If either (i) the Stabilisation Debt Lender or (ii) the Majority Eligible Noteholders wish to issue Enforcement Instructions, the Stabilisation Debt Lender or the Notes Representative(s) representing the Eligible Noteholders (as the case may be) shall deliver a copy of those proposed Enforcement Instructions (an "Initial Enforcement Notice") to the Security Agent and the Security Agent shall promptly forward such Initial Enforcement Notice to the Stabilisation Debt Lender or each Notes Representative respectively. The relevant Notes Representative(s) shall promptly forward the Initial Enforcement Notice to the Eligible Noteholders."
"If, pursuant to the terms of this Agreement, a decision, instruction or consent of the "Majority Eligible Noteholders" is required or requested, that decision, instruction or consent may be obtained through the decision-making procedure set out in paragraphs (b) to (h) below."
"(g) If Noteholders representing over 50 per cent. of the aggregate principal amount of a series of Eligible Notes vote (in accordance with the relevant Note Documents and applicable law) "yes" in respect of a Decision Request or if the Notes Representative otherwise obtains the relevant instruction from Noteholders representing over 50 per cent. of the aggregate principal amount of the relevant series of Eligible Notes, that series of Eligible Notes will be deemed to have voted "yes" to that decision in the full aggregate outstanding principal amount of that series of Eligible Notes.
(h) If the aggregate principal amount of Notes represented by Eligible Noteholders voting "yes" in respect of a Decision Request (based on the information provided to the Security Agent by the relevant Notes Representatives and taking into account the provisions of paragraphs (f) and (g) above) is more than 50 per cent. of the aggregate outstanding principal amount of all Eligible Notes at the relevant time, the Security Agent shall be deemed instructed accordingly by the Majority Eligible Noteholders."
"The Instructing Group comprises either the Lender SPV (representing a greater than 50 per cent. majority of the commitments under the New Money Facilities Agreement) or the Notes Representative acting on the instructions of the majority eligible noteholders (being those noteholders holding together at least 50 per cent. of the total outstanding principal amount of the SUNs at such time). To the extent that either the Lender SPV group or the Notes Representative issues instructions to the Security Agent to enforce the transaction security, such instruction would be forwarded to the respective other group and this begins a 30-day consultation period between the two groups (which such period may be waived by agreement, or dispensed with in certain circumstances (including in case of an insolvency of the relevant debtor)). At the end of such period, if no agreement has been reached as to the manner of enforcement, then the instructions provided by the noteholders will prevail. In this way, the SUN Holders (i.e. including the 2029 SUN Holders) essentially control the enforcement process. Assuming the full consultation period were used, this would put the earliest date for enforcement at the end of April 2025/beginning of May 2025."
"Subject to Clause 20.2 (Prospective liabilities), all amounts from time to time received or recovered by the Security Agent in connection with the realisation or enforcement of any Guarantee or any Transaction Security (including by way of any Distressed Disposal) (for the purposes of this Clause 20, the "Recoveries") shall be held by the Security Agent on trust to apply them at any time as the Security Agent (in its discretion) sees fit, to the extent permitted by applicable law (and subject to the provisions of this Clause 20), in the following order of priority:
(a) in discharging any sums owing to the Security Agent (other than pursuant to Clause 2 (Guarantee) and Clause 22.2 (Parallel Debt)), any Receiver or any Delegate and in payment to the Creditor Representatives of the relevant Creditor Representative Amounts;
(b) in discharging all costs and expenses incurred by any Primary Creditor in connection with any realisation or enforcement of the Transaction Security taken in accordance with the terms of this Agreement or any action taken at the request of the Security Agent under Clause 10.5 (Further assurance Insolvency Event);
(c) in payment or distribution to the Stabilisation Debt Lender for application towards the discharge of the Stabilisation Debt Liabilities in accordance with the terms of the Stabilisation Debt Documents;
(d) ranking equally amongst themselves and on a pro rata basis, in payment or distribution to the 1.5L Creditors (or, as the case may be, to their Creditor Representative(s)) towards the discharge of the 1.5L Liabilities in accordance with the terms of the 1.5L Debt Documents;
(e) ranking equally amongst themselves and on a pro rata basis, in payment or distribution to the 2L Noteholders (or to their Creditor Representative(s)) towards the discharge of the 2L Liabilities in accordance with the terms of the relevant Note Documents;
(f) if none of the Debtors is under any further actual or contingent liability in respect of any Primary Liabilities, in payment or distribution to any person to whom the Security Agent is obliged to pay or distribute in priority to any Debtor; and
(g) the balance, if any, in payment or distribution to the relevant Debtor."
"1. In this Schedule 5: "Enforcement Objective" means maximising, to the extent consistent with a prompt and expeditious realisation of value, the value realised from Enforcement. "Fairness Opinion" means, in respect of any Enforcement, an opinion from a Financial Adviser that the proceeds received or recovered in connection with that Enforcement are fair from a financial point of view taking into account all relevant circumstances.
2. It shall be the primary and over-riding aim of any Enforcement to achieve the Enforcement Objective.
3. The Guarantee and the Transaction Security will be enforced and other action as to Enforcement will be taken such that either: (a) all proceeds of Enforcement are received by the Security Agent in cash for distribution in accordance with Clause 20 (Application of Proceeds); or (b) if and to the extent that the Secured Parties who would otherwise be entitled to receive a cash distribution in accordance with Clause 20 (Application of Proceeds) so agree, in any form other than cash (including, without limitation, by way of shares or debt securities)."
""Acceleration Event" means: (a) the acceleration of any Liabilities other than the SSD Liabilities or the making of any declaration that any Liabilities other than the SSD Liabilities are prematurely due and payable by any Primary Creditor or group of Primary Creditors or Creditor Representative as a result of an Event of Default (other than as a result of it becoming unlawful for a Primary Creditor to perform its obligations under, or of any voluntary or mandatory prepayment arising under, the Debt Documents or in case of a termination following a change of control having occurred with respect to the Company or the Issuer);
"Distress Event" means any of: (a) an Acceleration Event; or (b) the enforcement of any Transaction Security or the making of a demand under any Guarantee
"Distressed Disposal" means a disposal or an appropriation of any Charged Property which is: (a) being effected at the request of the Enforcement Instructing Group in circumstances where the Transaction Security has become enforceable; (b) being effected by enforcement of the Transaction Security (including the disposal of any Property of a member of the Group, the shares in which have been subject to an Appropriation); or (c) being effected, after the occurrence of a Distress Event, by a Debtor to a person or persons which is, or are, not a member, or members, of the Group."
""Security Documents" means: (a) each of the security documents set out in Schedule 2 (The Security Documents); (b) any other document entered into at any time by any of the Debtors creating any Security in favour of any of the Secured Parties as security for any of the Secured Obligations; and (c) any Security granted under any covenant for further assurance in any of the documents referred to in paragraphs (a) and (b) above."
(vi) The Plan Company's Exit Strategy
"The Luxembourg Share Pledge provides for various rights and remedies which become exercisable upon the occurrence of an Event of Default which is continuing, including appropriation and a power of sale in favour of the Security Agent. In the absence of a willing third party purchaser, it seems reasonable to assume that the Instructing Group would require the Security Agent to appropriate or sell the share(s) subject to the Luxembourg Share Pledge to an SPV established by a group of the secured creditors (including the Plan Creditors, assuming they remained holders of the SUNs), such that the secured creditors would assume control of the Group."
"Having assumed control of the Group, the result of such enforcement would be that the Group's assets would be held by a Plan Creditor-owned SPV, a solvent entity. It would then be a matter for the Plan Creditors to decide what to do with the underlying assets. One would expect the Plan Creditors to act rationally so as to maximise their recoveries. The Plan Creditors will be able to continue operating the business, possibly with additional investment or recapitalisation, in the interests of either delivering the Group's business plan or alternatively finding a third-party buyer for the business, so as to access a near-term cash recovery for all of the Plan Creditors still holding SUNs. Plan Creditors would also be able to avoid the deep discounts to asset values which would arise in insolvency proceedings, which is dealt with in more detail in Gunther 1 in Section 5."
"Now as I understand it you derive that figure because you proceed on the basis that under your envisaged enforcement scenario, all of the 2025 to 2029 SUNs would rank pari passu, is that right? A. Yes. Q. And secondly, that there would be no "insolvency discount" applicable to the disposals? A. Yes. Q. I suggest to you, Mr Trozzi, first of all, this is a rather specific enforcement scenario which you are envisaging. I just want to go through with you the very steps that are involved in it, and let's see if we agree. First of all there has to be a breach of the LTV covenant? A. Yes. Q. Secondly, one has to assume that wouldn't be waived but enforcement would follow? A. Yes. Q. Thirdly, the SUNs, including the 2029 SUNs, would have control of the enforcement process? A. Yes. Q. Fourthly, they would cause an enforcement to take place under which the shares would be acquired by the new creditor owned SPV? A. Yes. Q. Fifthly, that would be carried out by way of a credit bid? A. Yes. Q. Sixthly, that new SPV would then be funded with any additional investment or recapitalisation required? A. Yes. Q. And finally the properties would then be disposed of orders of an insolvency process for no insolvency discount, is that right? A. Yes. Q. So there are effectively seven separate steps involved in the scenario, aren't there? A. Yes."
"Q. If we just follow the definitions through. If we go to, we can see that majority eligible noteholders, in the middle of the page, is more than 50 per cent of the eligible notes. Do you see that? A. Yes. Q. And we perhaps don't need to turn it up, but the eligible notes include all of the SUNs, don't they, including the 2024 SUNs? A. Yes. Q. Now, if we just go back to the body of the intercreditor -- this time clause 13.2(g), . 13.2(g), if you just look at that very quickly, first of all. That deals with note holder votes. Do you see that that provides that if over 50 per cent of the noteholders in one series vote yes, then the entire series is deemed to have voted yes, do you see? A. Yes. Q. So effectively it is sort of a grossing up provision in the voting, isn't it? A. Yes. Q. So just to give it an example, if 50.1 per cent of the 2024s vote in favour, then that is treated as a vote in favour by 100 per cent of the 2024s? A. Yes. Q. Then if we look at (h). What (h) then deals with is the aggregate position and all you need in order to trigger (h) is 50 per cent of the aggregated principal amount of all notes. That is obviously taking into account (g), isn't it? A. Yes. Q. So in practice you may have a majority instruction even if you don't hold 50 per cent of the entirety of the SUNs, do you follow? A. Yes. Q. Now. just pausing there, what I suggest to you is certainly so far as the 2029 notes are concerned, they do not have definite rights of enforcement as a series, do they? A. Not as an individual series. Q. Rather the right of enforcement, such as it is, is controlled by 50 per cent majority of all eligible notes, correct? A. Yes. Q. And that can be achieved by holding a simple majority in a sufficient number of individual series of notes, correct? A. Yes."
"Q. So in order to have a disposal for a non-cash consideration you need the agreement of all the parties, don't you? A. Yes. Q. And you have simply assumed that that agreement will be forthcoming, don't you? A. Yes. Q. You don't know whether it will be forthcoming or not, do you? A. I assume it will be forthcoming on the basis that an enforcement would be the best mechanism to ensure value is protected for all secured parties. Q. Do you know who the secured parties are for these purposes? A. Well, in the end, it's the SUNs and that is why. Q. So you are assuming that there will be consent by the SUNs to a credit bid, aren't you? A. Yes. Q. Why don't you say in your witness statement that that's one of the assumptions that you have made that underlies all of this? A. I think enforcement structures process, as laid out in my witness statement, are -- have been used before. So I didn't go into that level of detail to describe it. But again this is something that is -- I believe, I understand -- is understood by all the -- by the lenders."
"Q. And are you assuming, therefore, that the sales of the underlying properties are all achieved by way of the realisation or enforcement of security? A. I am assuming that security would be enforced at the top of the structure and then once sort of the -- in a post enforcement waterfall, once the properties are disposed and the asset -- and the monies realised, it gets distributed according to the form. Q. But if the properties aren't sold as a result of the enforcement or realisation of the security why would the waterfall apply? Let's assume the underlying company just sells the property in the ordinary course of its business, why is the waterfall going to apply to that? A. The scenario that I described in my witness statement is an enforcement scenario. So I have assumed that this waterfall would apply in that scenario. Q. Right. So you were assuming that the individual properties are sold by way of the realisation or enforcement of security, are you? A. What I am assuming -- sorry, can you please clarify? Q. Are you assuming that the underlying properties are disposed of by way of the realisation or enforcement of security? A. What I am assuming is that the security would be enforced at the top of the structure for the lenders to own -- their intermediate company, to be able to in fact own the group. Then further down the structure, assets will be sold in an orderly manner, and then, again, once the proceeds have been realised would be distributed in accordance with the waterfall. Q. I don't think we can take this any further. We disagree with that as a matter of law, Mr Trozzi, but I have put the point to you and we will come back to that in closing submissions."
"Distribution to remaining pari passu SUNs 1,696
2025-2029 Notes FV Claim 3,238
2025-2029 Notes FV Recovery 52.4%"
"Q. At the very bottom of page, you refer to the notes "FV claim 3.238 billion", don't you? A. Yes, that's right. Q. And FV is fair value? A. Fair value. Q. That figure includes over 400 million euro of interest, doesn't it? A. Yes, I think so, yes. Q. And you have used that as the denominator to work out the recovery, haven't you? A. Yes, it would be consistent with the analysis we just looked at a moment ago. Q. But by including it you get a 54 per cent recovery in this scenario, don't you? A. That's correct, yes. Q. But if you were to exclude the interest, then actually the figure would be 50.6 per cent, wouldn't it? I am not expecting you to do the maths on the spot. A. That sounds about right, but that wouldn't then be a like for like comparison with any of the numbers in our report. Q. That, though, would beat your relevant alternative outcome, wouldn't it, if it was 60.4 per cent? A. But it isn't that number, because there's a higher claim under the restructuring plan."
(vii) The Parties' Submissions
(1) The LTV Covenant: The question whether a breach of covenant had arisen would depend on the valuations used, the Parent Company would rely on the CBRE and NAI Apollo valuations and the Notes Representative could waive any breach of covenant if instructed to do so by a majority of the Plan Creditors in each class.
(2) The Intercreditor Agreement: The right to enforce any breach of covenant would be controlled by the Majority Eligible Noteholders and a vote of each series was also controlled by a simple majority of that series. In practice, SteerCo would be likely to control the enforcement process.
(3) Credit Bid: A credit bid required the consent of all of the Secured Parties and Mr Trozzi had simply assumed that all of the necessary consents would be forthcoming.
(4) Distribution: Mr Trozzi and Mr Gunther had assumed that the Group would dispose of its assets on a going concern basis following the enforcement of the new share pledge but at the same time he had assumed that the proceeds would be distributed in accordance with the security enforcement waterfall. That only applied in relation to the proceeds of the realisation of security and most of the Group's assets did not form part of the security under the Intercreditor Agreement.
(5) Insolvency Discount: Mr Trozzi's assumption that the Group's assets would be sold on a going concern basis and without an Insolvency Discount could not be reconciled with his assumption that the proceeds of sale would be distributed down the security enforcement waterfall. Moreover, he was entirely vague about the additional investment or capital which would be required by the SUN Bidco to maintain the Group's assets pending their sale.
(1) The LTV Covenant: Mr Trozzi explained that the Group's consolidated financial statements were required to take into account the best available information as to asset values and if the Group's asset disposal programme was a failure, CBRE and NAI Apollo would take this into account. There was no evidence that either firm would deliberately overstate or inflate their valuations to prevent a breach of the LTV Covenant.
(2) The Intercreditor Agreement: Far from being to the disadvantage of the 2029 Plan Creditors, the provision for majority voting was advantageous to them since they represented the single largest series of SUNs. There was no basis for the AHG to suggest that the Plan Creditors might not give the relevant Enforcement Instructions and allow the New Money providers to control the process instead. Moreover, SteerCo were 30 million short of the required majority to control the process (as the AHG themselves acknowledged in their Skeleton Argument).
(3) Credit Bid: Although consent to a bid involving non-cash consideration would require the consent of the Secured Parties (who include both the New Money providers and the 2029 Plan Creditors), it was not correct that a sale to a SUN Bidco would necessarily involve a non-cash bid. A non-consensual sale could take effect for nominal consideration and this approach had been taken in many previous cases.
(4) Distribution: It was correct that the security enforcement waterfall only applied to the proceeds of sale of the Transaction Security. But if the Group's assets were to be sold after the acceleration of the SUNs, those proceeds would have to be distributed rateably even if the waterfall did not apply.
(5) Insolvency Discount: Mr Bayfield relied on section 8 of the Gunther Report (above) in which Mr Gunther explains that similar enforcement structures have been used in many previous cases and that there is no reason to believe that an Insolvency Discount would be applicable upon an orderly sale of the underlying property assets.
(viii) Findings
"c A requirement preventing a sale or disposal for nominal consideration or for non-cash consideration would be uncommercial as it would seriously restrict the ability of the Lenders to obtain a recovery on their claims, particularly in times where there is a shortage of liquidity in the market and where pure cash bids may not be forthcoming or may be low in amount. To take an example of a company with £200 million of debt: it would be very odd if the Security Trustee were required to accept a cash bid of £50 million free of all debt and was unable to accept a bid which purchased the equity for nominal consideration but subject to retaining £150 million of existing debt."
(7) Summary
(i) Stage 1: The Relevant Alternative
(ii) Stage 2: The Consequences
(iii) Stage 3: The Comparison
(iv) Condition A: The Statutory Test
IX. Discretion
(1) Maturity Dates
(1) The staggered maturity dates will avoid a "debt wall" in which all of the SUNs will fall due for repayment at the same time. This could have a negative impact on asset prices.
(2) The existing maturity dates reflect commercial reality. The Plan Creditors acquired SUNs with different maturity dates which carried a greater credit risk and was no doubt reflected in the prices which they paid.
(3) The Plan is the only deal which commands sufficient support among the Plan Creditors. The Group has been engaged in negotiations with them for many months and the great majority of creditors have already voted twice to approve the proposals through a Consent Solicitation and at the Plan Meetings.
(4) Moreover, the Plan is supported by those Plan Creditors with later-dated notes and, in particular, by 2029 Plan Creditors who hold 2029 Notes without any cross-holdings in the 2024 Notes.
(5) In their letter dated 10 January 2023 the AHG put forward a proposal in which shorter dated notes continued to be favoured and the existing maturities respected. The AHG were not concerned, therefore, to achieve pari passu treatment as a matter of principle.
"MR JUSTICE LEECH: Let me just get this. So let's say for the purposes of argument that I am against you on condition A. I find that on a balance of probabilities the most likely outcome is that you are no worse off. That's the finding that I have to make. MR SMITH: Yes. MR JUSTICE LEECH: That's the hard finding. MR SMITH: Yes. MR JUSTICE LEECH: I can arrive at that in a number of different ways, leaving aside questions about whether the explanatory statement holds up, et cetera. There are two particular routes through to that. MR SMITH: Yes. MR JUSTICE LEECH: And I can make that finding even without being certain in my own mind that par recovery will be achieved. MR SMITH: Yes. MR JUSTICE LEECH: You say when it comes to discretion, all of that is water under the bridge, because in order to meet your point of principle about pari passu distribution, he has to satisfy me that you will be paid out in full if you should have to wait. MR SMITH: Exactly. That's exactly it."
(1) The Plan preserves the existing maturity dates of the SUNs (apart from the 2024 Notes). This reflects the commercial risks which the 2029 Plan Creditors assumed when they purchased them. I am not satisfied that the Plan involves a significant change to the balance of those risks.
(2) I consider it most likely that they will be paid in full but if the Plan's primary purpose fails, I also consider it likely that the maturity dates will be accelerated and that the 2029 Plan Creditors will recover more than if the Group goes into insolvency measures. Equally importantly, I am satisfied that it is likely that they will not be treated differentially and that the pari passu principle will be respected.
(3) But even if the Group achieves neither of these outcomes, I am satisfied that the Group will not miss the Relevant Alternative by very much. Mr Bayfield submitted, and I accept, that the Group would have to realise at least £0.5 billion less than BCG has forecasted before it is in danger of producing a worse outcome than it would if it went into insolvency now. Moreover, even on Ms Rickelton's figures, the difference was between 56.1% and 52.4% (or possibly slightly less) assuming a pari passu distribution. This is my "near miss" point.
(4) The power of AHG's case on unfairness really rests on Ms Rickelton's Figure 1 and the comparison between the treatment of the near-dated SUNs (who all recover their claims in full) and the 2029 Plan Creditors (who recover only 10.6% of their claims). But I consider it to be unrealistic that the 2029 Plan Creditors will be unable to exercise their legal rights under the Plan to accelerate the 2029 Notes and even less realistic to assume that they will not attempt to do so.
(5) A majority of the 2029 Plan Creditors clearly take the same view and in my judgment their view of their own interests is a relevant factor to which I may (and do) attach weight. I also attach greater weight to their views than I would otherwise have done because, as Mr Bayfield pointed out, a number of 2029 Plan Creditors do not have holdings in the 2024 Notes.
(6) I accept Mr Bayfield's submission that as a matter of law I do not have to be satisfied that the Plan is the best plan available or that it could not be fairer. I also accept that the Plan involved detailed and lengthy negotiations and that it was ultimately the only restructuring plan which commanded a significant measure of agreement between the Group and the Plan Creditors.
(7) Nevertheless, I consider this to be a weak reason for sanctioning the Plan (as Zacaroli J did in Houst) and I do not attribute much weight to it. Despite the volume of evidence filed by the parties, I was not given a compelling reason why the Plan Creditors wished to preserve the maturity dates and not to agree to harmonise them at the outset. If they had agreed to this, a great deal time and intellectual effort might have been saved in demonstrating to the Court why a default would result in a pari passu distribution.
(8) Again, I accept that the avoidance of a "debt wall" is a good reason for preserving the maturity dates. But in my judgment, this would not by itself justify the Court in sanctioning a scheme which was otherwise unfair. Moreover, Mr Bayfield's reliance on this point was undercut by Mr Trozzi's acceptance that the Plan itself involves a debt wall of sorts in 2025. It is clear, therefore, that this was not the most important reason for preserving the existing maturity dates and I also give it limited weight.
(9) Ultimately, I am persuaded by Mr Bayfield's very final oral submission at the end of the hearing. If the Plan works, he submitted, everyone is better off and the best judges of this are the Plan Creditors themselves, who voted by the requisite majority in every class for the Plan and by 62% in the dissenting class. Given the balance of risk, the right exercise of discretion is to give the management of the Group the opportunity to implement it.
(2) The Intercreditor Agreement
(i) The 2024 Notes
(1) There is no issue between the parties that the Court may sanction a scheme which has the effect of altering the priority of different classes of creditors: see Houst (above). Rather, the issue for the Court in this case is whether it would be unfair to the 2029 Plan Creditors to approve the Plan on the basis that it involves an alteration to the priority of the 2024 Notes. I accept Mr Bayfield's submission that the Court should approach this question on the basis that Condition A has been satisfied.
(2) The Plan involves an extension to the maturity date of the 2024 Notes but not to any other series of the SUNs. The quid pro quo for the agreement of the 2024 Plan Creditors to this extension is to give the 2024 Notes priority over the other SUNs. The holders of the 2024 Notes have temporal priority over the other holders of SUNs and they were being asked to agree both to an additional element of risk and to lock up their funds for another year and to compensate them they are to be given priority. In my judgment, this is a good reason why an honest intelligent person might approve the Plan on these terms: see, e.g., ED&F Man Holdings at [54].
(3) Mr Smith's primary submission was that this was unfair because it involved a departure from the pari passu principle. But for the reasons which I have given I do not consider the Plan to involve a departure from the pari passu principle. If the Plan succeeds, the maturity dates of the other SUNs will remain unchanged and the 2029 Plan Creditors will be paid in full. But if it fails and the Group goes into default, then pari passu principle should be respected. On either assumption the 2029 Plan Creditors will be no worse off than they would be in insolvency proceedings.
(4) Mr Smith objected that this reasoning amounts to a resurrection of the "fair wind" point. I disagree. His primary objection to this individual feature of the Plan was the same as his objection to the Plan as a whole, namely, that it involved an unfair and unjustified departure from the pari passu principle. It is unsurprising, therefore, that the answer to his point involves the same answer.
(5) This leaves the question whether there was anything sinister about the compromise between the Plan Creditors themselves which points to a flaw either in the substantive terms of the Plan itself or in the votes cast at the Plan Meetings. The first holdings table which Milbank sent to Akin Gump on 11 March 2023 shows that SteerCo members hold 57.25% of the 2024 Notes. This might tend to suggest that they might have been motivated by a desire to prefer the 2024 Plan Creditors.
(6) However, the second holdings table which Milbank sent to Akin Gump on 24 March 2023 shows that at least three SteerCo members have very much larger holdings in the 2029 Notes than the 2024 Notes. In particular, one member holds 101.8 million of the 2029 Notes and 27.8 million of the 2024 Notes, a second member holds 44.4 million of the 2029 Notes and 27 million of the 2024 Notes and a third member holds 30.7 million of the 2029 Notes and 4.3 million of the 2024 Notes.
(7) I am satisfied, therefore, that there was no imbalance between the holdings of members of SteerCo in the 2024 Notes and their holdings in the other series of SUNs from which I could properly draw the inference that they were motivated by a desire to prefer the interests of the 2024 Plan Creditors above the interests of the other classes of Plan Creditors.
(8) But even if the members of SteerCo drove a hard bargain or even refused to vote for the Plan unless it contained a term which advanced the priority of the 2024 Notes, I am not satisfied that this had any causative effect on the outcome of the Plan Meetings or that the other Plan Creditors would not have approved the Plan. As Ms Toube pointed out, 65% of the Plan Creditors holding about 1.15 billion of the SUNs voted for the Plan. By way of comparison, SteerCo hold 1.4 billion.
(ii) The Convertible Notes/SSDs
(1) The face value of the Convertible Notes is 165 million and the face value of the SSDs is 24.5m. They represent a small amount of the overall debt of the Group which amounted to 6.1 billion on 30 September 2022. Moreover, the Convertible Notes and the SSDs mature in 2023 and have temporal priority over all other tranches of the Parent Company's debt and the SSDs have priority over the SUNs (because the debt was issued by ADO Lux and guaranteed by the Parent Company).
(2) In my judgment, these are good reasons why an honest intelligent person might approve the Plan without including terms to vary the Convertible Notes or SSDs. One of the purposes of the Plan was to buy time to refinance or extend them and if the Group is unable to agree terms with the creditors, then it will have sufficient funds to pay them off.
(3) But even if I am wrong and these are not good reasons for excluding the Convertible Notes and the SSDs from the Plan, I am satisfied that the terms of the Plan overall are not unfair to the 2029 Plan Creditors for the reasons which I have given in relation to the 2024 Notes.
(iii) The New Money
(1) At least one SteerCo member holds more in terms of face value of the 2029 Notes than it does in the 2024 Notes, the Adler RE 2023 Notes and the Adler RE 2024 Notes combined. In particular, that member holds 44.4m of 2029 Notes as compared with 31m combined in the 2024 Notes and Adler RE 2023 and 2024 Notes.
(2) At least two SteerCo members have considerably larger holdings in later dated SUNs (i.e. November 2026 and later) than they do in earlier dated SUNs (i.e. January 2026 and earlier). In particular one member holds 187.5m in later dated SUNs and 78.2m in earlier dated SUNs and another member holds 79.6m in later dated SUNs and 49.4m in earlier dated SUNs.
(3) At least one member has no holdings in the Adler RE 2024 Notes and minimal holdings (approximately 4m) in the Adler RE 2023 Notes.
(4) At least three members hold more in terms of the face value of SUNs that are "primed" by the prior ranking security given to the 2024 Notes and the Convertible Notes than they do in those tranches.
(iv) The Backstop Fee
(3) The Shareholders
(1) The parties who are most affected by the retention of equity in the present case are the New Money Providers. They negotiated a 22.5% stake in the Group in return for providing the New Money and it is not suggested that they took anything other than a commercially rational approach (to use Snowden J's language in Virgin Active).
(2) The New Money Providers might have attempted to negotiate a deal for 100% of the equity in the Group on the basis that the shareholders no longer had any economic interest in the Group. But if they had, there was no evidence that this would have affected the AHG's attitude to the Plan or that they would have taken the opportunity to subscribe for New Money. They called no factual evidence at all.
(3) Indeed, the AHG's position throughout the hearing was that insolvency proceedings were the best alternative outcome for the Group and the shares had no value. They strongly contested Mr Wolf's evidence that there was headroom of 309 million and, on their own case, the shares had (and have) no economic value at all.
(4) Moreover, if the Plan Company had negotiated a better deal in which it agreed to issue equity to the New Money Providers which gave them a much higher equity share in the Group, it is highly likely that the AHG would have strongly objected on the basis that this was an improper incentive. In Amicus Finance this was a point of concern: see [44]; and in Virgin Active Snowden J said this at [290]:
"But putting that aside, the other common feature of such cases is a concern that the creditors given the opportunity to "risk participate" in the scheme cases might be receiving something that could be described as "an incentive" (per Zacaroli J in Re New Look Financing plc ) to skew the vote in the relevant class; or that the existing equity holders who had subscribed for new equity in the North La Salle Street case were not paying full value ("top dollar") for their new equity. In either situation, the underlying concern is not so much to impose a procedural requirement to offer an opportunity to all. The concern is that the terms of the "risk participation" or equity investment are not the best available, but include an element of disproportionate financial advantage or bounty for the relevant creditors which is not enjoyed by other similar or senior ranking creditors."
(5) It may be said that these are forensic points. But given that the likely outcome for the shareholders is that they achieve a 77.5% share in a restructuring surplus of 309 million, I am not satisfied that this is so unfair that I should refuse to sanction the Plan. The possibility (or even likelihood) that the shareholders might receive this windfall is not sufficient to justify putting the Group into insolvency proceedings at the expense of all of the Plan Creditors who have voted for the Plan.
(4) The Notes Representative
(1) The Notes Representative would have the exclusive ability to exercise the rights of the noteholders under each series of SUNs in any future German insolvency or StaRUG.
(2) Following an Event of Default the Notes Representative will have the extensive powers set out in SchVG. It could reduce the principal amount of the debt or release the security.
(3) The Notes Representative would have the ability to waive Events of Default without instruction from the Noteholders.
(1) SchVG §5(1) expressly permits the majority of creditors to appoint a joint representative to exercise the powers in SchVG, §5(3) and SchVG, §19(2) expressly permits the majority of creditors to appoint a joint representative to deal with insolvency matters under the StaRUG. Indeed, SchVG, §19(2) requires the Court to convene a meeting of creditors to decide whether to appoint a joint representative if none has been appointed already. Mr Smith did not explain why it was unfair in principle to the 2029 Plan Creditors to permit a majority of the Plan Creditors to exercise powers expressly conferred on them under German law.
(2) Moreover, it is difficult to see how the holders of the SUNs could exercise their rights under the Intercreditor Agreement unless the bonds contained mechanics for an agent to act on their instructions and a process for deciding what those instructions should be. The mechanism which the Plan adopts is the appointment of a Notes Representative. I am satisfied, therefore, that it is not unfair in principle to amend each series of SUNs to appoint a Notes Representative and to confer the power to act on behalf of all of the noteholders in that series.
(3) I turn next to the scope of those powers. In his witness statement Dr Halasz placed emphasis on the width of the powers which Clause 19(3) confers (including the power to exercise the creditors' restructuring rights under SchVG, §5(3)). But neither he nor Professor Pfeiffer suggested that Clause 19 or, indeed, Clause 10(3) was inconsistent with the SchVG or invalid as a matter of general law. In particular, neither suggested that the limitation clause in Clause 19(5) was void or ineffective because SchVG, §7(3) does not permit a joint representative to exclude all liability except liability for gross negligence or wilful default. I have no doubt that both would have raised this argument if it had any prospect of success in a German court.
(4) I might have been prepared to find that the appointment of the Notes Representative was unfair if Clause 10(3) and Clause 19 went beyond the powers permitted or contemplated by the SchVG (or arguably so) or if they had been highly unusual and unacceptable to most noteholders. But Dr Halasz did not suggest that they were and a significant majority of Plan Creditors have approved the amendments to the SUNs. Again, I might have been prepared to find that the appointment of the Notes Representative was unfair if I had been satisfied that Clause 19(5) was unusual and in substance made the Notes Representative's obligations to each individual noteholder unenforceable. But Dr Halasz did not suggest that it was unusual to exclude liability except for gross negligence or wilful default and Mr Smith did not submit that it would be either unusual or unacceptable to noteholders to appoint a notes trustee under English or New York law on those terms.
(5) I accept that there are bound to be potential conflicts between the interests of individual noteholders within each series of SUNs and between the interests of holders of different series of SUNs. But the way in which the SchVG resolves those conflicts is to require the joint representative to act on the instructions of the majority. Moreover, SchVG §5 (which Dr Halasz did not quote in full) imposes some important limitations (both substantive and procedural) on that majority rule and this may explain why the individual noteholders are still entitled to give notice under Clause 10(2). In my judgment, therefore, there is no conflict between the duties which the Notes Representative owes to each individual noteholder under each series of SUNs. Those duties are set out in the SUNs themselves and are consistent with the general principle of majority rule in the SchVG.
(6) Moreover, the Notes Representative owes no duty to the noteholders under one series of SUNs to comply with the instructions of individual noteholders in another series or, indeed, an overall majority of all noteholders. There is not a shred of evidence to suggest that Dentons would be prepared to exceed their authority under the 2029 Notes and waive a breach of the LTV Covenant on the instructions of SteerCo or other Plan Creditors if no majority of 2029 Plan Creditors authorised them to do so. I have already expressed the view that this would be extremely unwise and that the limitations in Clause 19(5) might not save them.
(7) Finally, I am not satisfied that the exclusive powers conferred on the Notes Representative under the Intercreditor Agreement are unfair either. Although those powers can only be exercised by the Notes Representative, the Intercreditor Agreement contains a complex mechanism for voting on enforcement action. Mr Smith did not challenge Mr Trozzi's evidence (above) explaining how it was supposed to work in practice and I accept that evidence. In my judgment, that voting mechanism was intended to reflect the principles in SchVG, §5(3).
(8) Again, Dr Halasz did not suggest that the terms of the Intercreditor Agreement are invalid, unusual or generally unacceptable to holders of German bonds and a significant majority of the Plan Creditors have voted in favour of the Plan on these terms. In particular, he did not suggest that the voting provisions of the Intercreditor Agreement dealing with voting infringed the various safeguards in SchVG, §5 and, particular, the SchVG §5(2) which provides that a majority resolution will not bind disadvantaged creditors unless they expressly consent to that disadvantage.
(9) The AHG's complaint was in substance a complaint that the Intercreditor Agreement will give effect to majority rule and enable the Plan Creditors to use a Notes Representative to give effect to it. But the SchVG permits majority rule (apart from certain limited exceptions) and permits the appointment of a joint representative to act on behalf of all the noteholders on the vote of a majority. Part 26A also permits the Court to cram down a dissenting class of creditors where the majority have voted in favour of the restructuring plan.
(10) Finally, as Mr Smith recognised, the acid test is how Clause 10(3), Clause 19 and the provisions of the Intercreditor Agreement work in practice in the event of a breach of the LTV Covenant. I have made a series of detailed findings about how they are likely to work in that event in deciding whether Condition A is satisfied. Standing back and considering those findings, I do not consider that the likely outcome or the exercise of powers by the Notes Representative which it will involve is unfair to the 2029 Plan Creditors.
(5) Recognition
X. Acceleration
(1) Mr Smith and Mr Al-Attar did not suggest any reason why the Plan could not take effect whilst the question of acceleration is either resolved consensually or by the German Courts. In Instant Cash Loans, for example, Zacaroli J was prepared to sanction the scheme even though it left the company and the landlords to negotiate individual surrenders of the relevant leases.
(2) If the issue cannot be resolved by agreement between the parties, then it will be determined by the German Court. If the issue is resolved in favour of the Plan Company, the Plan will take effect as anticipated and intended by the Plan Company in the Explanatory Statement.
(3) If the Court decides against the Plan Company, then a number of further issues may arise. The Plan does not amend Clauses 10(1) and 10(2) and at first blush the Proposed Amendments ought not to have any effect on the notices themselves. The Court may also decide that given that they were served before the Plan took effect, it is not open to a majority of the Plan Creditors in each series of SUNs to instruct the Notes Representative to waive the Events of Default or to rescind the notices or to use its exclusive enforcement powers.
(4) But even if the relevant members of the AHG are successful in persuading the German Court that they are entitled to enforce their SUNs and they are not prepared to extend time for payment, Mr Bayfield submitted (and I accept) that it will be open to the Plan Company simply to pay off the individual Plan Creditors. Mr Smith and Al-Attar did not suggest that this would be impermissible or unlawful under the SUNs (as amended) or under the Intercreditor Agreement.
XI. The Explanatory Statement
XII. Conclusion