Petrofac tests cross-class cram downs

December 2025 | SPOTLIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

December 2025 Issue

As the latest development in a trilogy of Court of Appeal rulings on restructuring plans under part 26A of the Companies Act 2006 – the first two being Strategic Value Capital Solutions Master Fund LP v AGPS Bondco plc (2024) and Kingston S.A.R.L. & Another v Thames Water Utilities Holdings & Ors (2025) – the Court of Appeal in Saipem S.P.A. and Ors v Petrofac Limited & Ors (2025) swings the pendulum of fairness in favour of out of the money creditors.

But in doing so the justices leave considerable ambiguity as to the practical impact on the conduct of restructurings of multi-tiered capital structures.

This article explores Petrofac’s impact: first, how it reinforces the importance of the horizontal fairness test, demanding robust evidence for allocations to out of the money creditors; and second, how it heightens evidential burdens for companies proposing a part 26A restructuring plan.

While some companies have successfully adapted to the Petrofac judgement, securing court sanction through enhanced creditor engagement and robust valuations, the ruling introduces significant uncertainty and complexity for companies and stakeholders navigating the path to court sanction.

The Petrofac judgment: cram-down crack-down

Having endured over half a decade of governance and financial difficulties, including a failed joint venture with Saipem and Samsung described by the Court of Appeal as “disastrous”, as well as protracted efforts to refinance its debts, Petrofac proposed twin restructuring plans under part 26A.

The twin plans comprised $350m of new money, including $187.5m from existing secured creditors, equitisation of $772m in secured debt, and compromise of approximately $3bn in unsecured claims, including those held by Saipem and Samsung.

In sanctioning the twin plans in May 2025, the High Court held that the plans satisfied the section 901G(3) “no worse off” test for in the money creditors in the relevant alternative (insolvency). Secured creditors received 17.5 percent of post-restructuring equity, while out of the money unsecured creditors received warrants and a share of a £1m fund.

Saipem and Samsung, joint venture partners of Petrofac, appealed the decision on two grounds.

Ground one challenged the “no worse off” test, with Saipem and Samsung claiming they stood to gain a competitive advantage from Petrofac’s liquidation. The Court of Appeal rejected this argument, ruling consistently with established authorities that the test covers only rights against the company or third parties, not interests in the form of collateral benefits like competitive advantage.

Ground two, on which the appellants succeeded, criticised the plans’ allocation of 67.7 percent equity to new money providers (yielding approximately 267 percent returns) based on a pre-restructuring valuation of $350m, later revised to $1.5-1.85bn post-restructuring. The Court of Appeal held this to be unfair in view of Petrofac’s failure to adduce evidence that the return on the new money was either the product of a market-testing process to establish that the clearing price or that its terms were otherwise supported by expert evidence of their being consistent with terms obtainable in the financial markets. In the absence of such evidence, the court found the new money terms were a benefit of the restructuring, and so their allocation to the new money providers needed to be justified.

In handing down its decision, the Court of Appeal reinforced the narrow scope of the “no worse off” test while emphasising the need for robust evidential justification of fair allocation under section 901F’s horizontal fairness test.

Fairly relevant: a better-off test on the horizon

Since the introduction of part 26A in 2020, a number of judgments (notably DeepOcean (2021) and

Thames Water (2025)) and practitioners have speculated as to the correct way to approach what commentators have described as the “restructuring surplus” – the additional value created by the preservation of the debtor’s goodwill through the means of the restructuring relative to the “relevant alternative” (restructuring speak for whatever is most likely to occur if the restructuring is not implemented – which is often a value-destructive insolvency proceeding). In particular, the question has arisen as to the appropriate allocation of that surplus among the company’s stakeholders.

This issue of allocation goes to questions of fairness which are considered at the sanction hearing – the final hearing in a part 26A application that usually takes place against a backdrop of positive creditor votes from in the money creditors and opposition from out of the money creditors.

The company is the applicant for the order, and as such is under the evidential burden of demonstrating that the restructuring plan should be sanctioned. Before that can happen, the court must consider whether dissenting classes would be “no worse off” than in the relevant alternative.

In Petrofac, the relevant alternative was a groupwide insolvency. However, being “no worse off” is just the “starting point” and a precondition to the determination of whether the court ought to exercise its discretion to sanction a plan. Whether it is fair is a question of fact which the company in Petrofac was not able to prove for lack of evidence.

The new money

The central issue for the Court of Appeal appears to have been the company’s inability to evidence that the pricing of the new money (to which the lion’s share of the economics were allocated, including a percentage of the new equity in the restructured Petrofac) was in line with what could have been obtained in the market.

That evidence could have taken the form of a market testing process involving soliciting bids for the new financing or it could have been provided by expert evidence as to the terms available. It also seems to have weighed on the justice’s mind that the restructuring consideration was publicly listed equity and debt for which there was a liquid market and which would allow the new money providers to make an immediate cash profit.

What is the verdict?

Petrofac states that out of the money creditors are entitled to a fair share of restructuring surplus, reversing the more traditional approach employed in Re Virgin Active Holdings Ltd & Ors (2021). Creditor contributions such as debt compromises must be recognised in allocations of the surplus. Unfortunately, there is no formula for what amounts to a ‘fair share’. The extent of negotiation required with out of the money creditors is also unclear, with the 2025 Practice Statement – ‘Companies: Schemes of Arrangement under Part 26 and Part 26A’ – emphasising transparency but not specifying whether exhaustive discussions or good-faith efforts suffice.

Also worth noting is that under section 901C(4), creditors lacking economic interest may be excluded from voting. However, Petrofac’s section 901F fairness test demands their equitable treatment, and the 2025 Practice Statement requires engagement, leaving uncertainty on reconciling exclusion with transparent engagement absent manifestly unreasonable creditor conduct.

Navigating crude waters

Companies should consider undertaking independent valuations to substantiate how benefits are distributed across stakeholders. It is also important to document the contributions of all creditor classes, including those that preserve value indirectly. Early engagement with out of the money creditors can demonstrate transparency and good faith, helping to build trust and reduce the risk of disputes. Additionally, offering modest recoveries or upside participation to these creditors may help avoid potential challenges to the restructuring process.

Evidential standards and market testing for new money. Post-Petrofac, new money terms must reflect post-restructuring risk profiles. Excessive returns will be treated as restructuring benefits requiring ‘equitable’ distribution. Failure to benchmark may result in plan failure.

Companies should undertake formal market testing to substantiate the pricing of new money. They should also rely on independent expert valuations to assess whether the proposed terms align with prevailing market conditions. Additionally, it is important to clearly articulate how the returns on new money are proportionate to the associated risk.

Work fees under scrutiny. Post-Petrofac, work fees paid in equity to facilitate restructurings will be closely scrutinised for fairness.

Companies should justify work fees in a transparent manner and ensure they align with the horizontal fairness test. They must also provide adequate disclosure and maintain proportionality to prevent equity allocations from being perceived as unfair benefit transfers.

Engagement and procedural rigour. Petrofac elevates engagement and evidential burdens, making procedural transparency central to sanctioning.

Companies should fully comply with the requirements of the 2025 Practice Statement. They must also provide clear evidence of negotiations, valuation methodologies, and benefit allocations within explanatory statements. Additionally, engaging with stakeholders prior to hearings can help mitigate potential fairness objections.

Upside-sharing and structuring innovation. Post-Petrofac, courts are more receptive where out of the money creditors share in future upside (for example, in the recent River Island and Poundland plans).

Companies should incorporate performance-linked upside mechanisms that are triggered by earnings before interest, taxes, depreciation and amortisation or profit thresholds. They should also structure distributions either post-restructuring or in trust to demonstrate equitable treatment.

Watching the trilogy play out

The High Court’s decision in Re Waldorf Production UK plc (2025) exemplifies the impact of Petrofac. Waldorf proposed a part 26A plan to compromise secured bonds while extinguishing unsecured claims in exchange for 5 percent cash and contingent profit-sharing rights, leaving equity intact. Minimal engagement with unsecured creditors led to refusal of sanction.

Applying the trilogy of appellate rulings – Adler as a qualified departure from Virgin Active, Thames Water as a more definitive shift, and Petrofac as the unequivocal rejection of de minimis treatment for out of the money creditors – the High Court refused sanction, criticising Waldorf’s limited engagement with out of the money creditors.

Permission has been granted for Waldorf’s Supreme Court appeal (9 September 2025), the first time the Supreme Court of the UK will rule on a part 26A plan. The Supreme Court has fast-tracked the appeal, setting shortened timelines for all interim stages, targeting a hearing in January or February 2026.

It is hoped that the judgment will clarify fairness principles, particularly for complex structures and provide important guidance to this fast-evolving area.

Rise of the alternatives?

Post-Petrofac, companies will face heightened evidential and procedural burdens. While some have successfully adapted by implementing robust valuations, thorough testing and proactive stakeholder engagement, market participants are increasingly turning their attention to alternative implementation routes which might offer greater certainty.

One such option is pre-pack administration, which enables the transfer of assets while preserving going-concern value. This approach circumvents the fairness complexities associated with part 26A schemes, although it remains subject to regulatory scrutiny under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021. Historically, pre-packs have been used alongside part 26 schemes to facilitate restructurings by swiftly moving assets to a new entity, with the schemes binding creditors to debt compromises and thereby reducing litigation risks.

Another route involves distressed disposals under intercreditor agreements, which allow asset transfers within the framework of existing financing arrangements. Additionally, some companies are turning to foreign restructuring regimes, such as Irish Examinership or the Dutch Court Approval of a Private Composition (Prevention of Insolvency) Act, which provide flexible cram-down mechanisms and lower litigation risk – albeit without the rigorous testing standards found in English jurisprudence.

Conclusion

Petrofac marks a decisive shift in the judicial interpretation of fairness under part 26A. It introduces an undefined fairness test to the allocation of the restructuring surplus and demands clear evidence of transparent valuations, and meaningful engagement with out of the money creditors.

For companies, this means higher procedural and evidential thresholds and more litigation risk. For creditors, especially those out of the money in relevant alternative, it signals increased leverage and potential recoveries. While some debtors will rise to meet these challenges through structured engagement and creative upside participation, others may turn to alternative restructuring routes promising greater certainty.

The pendulum has swung, and navigating its arc will define the next chapter of court sanctioned restructuring. All eyes will now turn to the Supreme Court and the guidance it is hoped it can provide in Waldorf.

Bevis Metcalfe is a partner, John Lambillion is an associate and Priyam Sharma is a paralegal at Cadwalader, Wickersham & Taft LLP. Mr Metcalfe can be contacted on +44 (0)20 7170 8695 or by email: bevis.metcalfe@cwt.com. Mr Lambillion can be contacted on +44 (0)20 7170 8729 or by email: john.lambillion@cwt.com. Ms Sharma can be contacted on +44 (0)20 7170 8724 or by email: priyam.sharma@cwt.com.

Bevis Metcalfe, John Lambillion and Priyam Sharma

Cadwalader, Wickersham & Taft LLP