The High Court sanctioned Madagascar Oil Limited’s restructuring plan, exercising cross class cram down. The judgment deals with a few now familiar points: what is the relevant alternative? Can it be a different deal? As well as touching on a few novel ones in an unusual two class only plan: was there in fact an in the money class enabling cross class cram down? Almost a third of the judgment is devoted to international recognition and effectiveness of the plan in Madagascar and Mauritius, an unusually detailed analysis, but required here given the specific facts of the case. However, a striking feature of this case is that the pari claims of two creditors were given different treatment under the plan and one of those creditor’s claims (actually, the shareholder) were used to cram the other creditor’s claims.
Background: two creditors and one oilfield
Madagascar Oil Limited (MOL) is a Mauritian-registered intermediate holding company for a mothballed oilfield in Madagascar, beset by technical challenges, a chequered history of failed capital-raising and mounting debt. Madagascar Oil S.A. (MOSA) is the main trading company within the group and is registered and headquartered in Madagascar. MOSA is the operating oil company holding the group’s core asset—the production sharing agreement with the Madagascan government for the large onshore oilfield.
MOL has two main creditors: BMK Resources Ltd (the 100% shareholder and sponsor, and now principal funder) and Outrider Master Fund LP (holding much of the external debt, and in voluntary liquidation in the Cayman Islands) (Outrider).
The restructuring plan
The plan sought to restructure MOL’s indebtedness (and MOSA’s related guarantee) and included the injection of additional shareholder equity to be used to restart production at the mothballed Madagascan oilfield.
The plan proposed two creditor classes only: (i) BMK (in support of the plan) and (ii) Outrider (challenging the plan). BMK would write off or subordinate substantial claims and inject US$7.5m (with a further uncommitted US$12.5m) of new money to fund the business (at 20% interest rate, with mandatory prepayment from excess cashflows and quarterly capitalisation of interest). Outrider could take either:
- an upfront US$200,000 cash payment, or
- a time-limited (12-year, US$1.45m aggregate cap) 1.25% revenue share in MOSA’s net sales, plus an “anti-embarrassment” provision: 19% of exit proceeds on any change of control within three years.
In exchange for the above consideration offered to Outrider, its debt (circa USD 71m against each of MOL and MOSA) would be wiped out entirely, while BMK would retain its sole shareholding and a USD 600m intercompany claim against MOSA]. The differential between treatment of the two classes was described by the judge as “stark”.
The two creditor classes argued extensively as to what the correct relevant alternative should be. The only common ground was that absent the plan sanction, MOL would enter into liquidation. The issue in question was what would then happen.
The plan company argued that BMK would likely purchase the MOSA shares from the liquidators, yielding only minimal recoveries for Outrider. Outrider on the other hand argued multiple and shifting alternatives, including that it could itself purchase the shares, or alternatively force MOSA into liquidation, potentially leading to a fundamentally different result. In support of its contention, Outrider made an offer to purchase MOL’s shares in MOSA for US$700,000, the offer being made on an open basis to demonstrate its fixed and settled intention to acquire MOSA. If the offer was not accepted, it was intended to make “the same or substantially the same offer to the joint liquidators of [MOL] if [MOL] enters liquidation”.
Cross class cram down: Condition A (“No Worse Off”)
Outrider vigorously challenged the proposed plan – arguing that Condition A (the “no worse off test”) for cross class cram down was not met. The court ultimately sided with the plan company, subjecting the different relevant alternatives put forward by Outrider to rigours scrutiny and concluding that none of its alternatives were viable. The court emphasised that, on the evidence, Outrider’s alternatives remained vague, lacked credible funding assurances and were not the “most likely” outcomes: “Accordingly, the scenarios posited by Outrider at the Sanction Hearing appear to reflect either an aspirational investment, or a high stakes, but self-harming, strategy. Neither is, in my view, a likely RA, let alone the most likely.” The court highlighted Outrider’s inability to settle on a single relevant alternative and stick to it damaged the credibility of its challenge.
The Court therefore concluded that the plan company’s relevant alternative, a BKM purchase of the MOSA shares was the most likely. Outrider would receive only de minimis recoveries (sub-$5k liquidation dividend). The plan, by contrast, guaranteed Outrider a better outcome, whether by upfront payment or capped revenue share.
Cross class cram down: Condition B (Approval by in the money class)
Condition B requires that the plan has been agreed in the required majority of 75% by at least one class who has a genuine economic interest in the company, in the event of the relevant alternative. BKM was the only assenting class. The question was therefore whether BKM had a genuine economic interest in MOL.
Outrider argued that this was not the case because in its proposed relevant alternative (namely, a MOSA liquidation), BMK would not be in the money because the MOSA shares would have lost their value and as a result, BMK would be left with no recoverable value for its claims and would not receive any payment, therefore not be “in the money”.
Given that the court sided with the company’s relevant alternative (over the one put forward by Outrider) it did not need to address this challenge, and made clear that BMK would be “in the money” in the proper relevant alternative.
Cross class cram down: discretion
Having failed to challenge the statutory entry conditions, this meant that Outrider was left to argue that the court ought not exercise its discretion to sanction the plan. It advanced several arguments focusing particularly on the alleged unfairness of the plan, as well as “new money” terms and allocation of the benefits of the restructuring:
- Allocation of the benefits of the restructuring. Outrider argued that the plan was unfair because it allocated too much of the benefits of the restructuring to BMK at the expense of Outrider: it would be forced to give up claims of over US$71m against both MOL and MOSA for either a US$200,000 cash payment or a capped revenue share, while BMK retained a US$600m intercompany loan and retained 100% equity in the group.
- No evidence of market terms for new money. Outrider acknowledged that differential treatment may be justified if new money is at market rate—but MOL had produced no evidence showing that BMK’s new loan (at 20% interest) was at market equivalent terms. Outrider, relying on the Court of Appeal judgment in Petrofac, argued it was for the plan company to prove, with market evidence, that the new money was necessary and appropriately priced, but MOL had not done so.
- Anti-embarrassment clause. Outrider contended that an “anti-embarrassment” clause (entitling Outrider to share 19% of sale proceeds should a change of control, such as sale occur within three years) did not truly protect Outrider—because BMK could simply “sit out” the three-year period, after which all value would revert to them.
- International effectiveness. Outrider argued that the plan would not be recognised in Mauritius or Madagascar – the two key jurisdictions that mattered here.
The court disagreed with all of Outrider’s arguments.
- Allocation of the benefits of the restructuring: BMK would enjoy a larger share of the future upside but only because its commitment of new money, expertise and risk were unique and essential. The court also found that BMK was “substantially impaired”, and should not be treated as an unjustified gainer.
- New money. The court refused to be drawn here, simply noting that Outrider had not included a direct challenge to the terms of the new BMK loan in its approved grounds of objection or addressed them in cross examination. As a result, those arguments could not be advanced at the sanction hearing: “…MOL cannot be criticised for not adducing expert evidence as to what lending might have been available in the market and on what terms. The court’s permission would have been required for that purpose and MOL could not have known that it might be. (…) To pray in aid unfairness of the Plan on account of matters not raised as a ground of objection or in cross-examination of the obvious witness with whom they should have been traversed, would itself be unfair in a different sense.” There was also no suggestion that Outrider had made its own funding proposal (only an acquisition proposal for the shares that the court found vague and did not have confidence in being deliverable)..
- Anti–embarrassment. The court accepted that the prospect of the trigger event occurring in the three year period were slim, it nonetheless considered that the provision afforded “an effective protection against MOL (and therefore BMK) obtaining ‘too good a deal’. The court was not persuaded by the suggestion that BMK or MOL might ‘sit out’ the chance of such a deal for three years so that it could keep all the ‘spoils’ for itself if a willing purchaser of the Oilfield business could be identified. Neither was the court persuaded that the provision should be longer than three years. BKM may well be required to invest further into the oilfield and there would be a point at which would not be just for Outrider to continue to share the benefits.
International recognition of the plan
Where a plan has an international element, the plan company must satisfy the court that there is a reasonable prospect that the plan will be recognised internationally so as to bind creditors in relevant jurisdictions to give it full effect. About a third of the judgment is devoted to whether the plan would be recognised in Madagascar (where MOSA, the group’s operating company was registered) and Mauritius (where the plan company was registered).
Both the plan company and Outrider submitted detailed evidence from local experts in both jurisdictions evidencing that the plan would likely be recognised / would not be recognised.
This case is unusual because the court had before it evidence that an application for recognition of the plan’s convening order in Mauritius was declined. The plan company therefore had an uphill battle to overcome.
In the end, the court accepted the plan company’s evidence in relation to Mauritius:
- Model Law, COMI and exequatur: despite Outrider’s arguments, the court found both the UNCITRAL Model Law on Cross-Border Insolvency (as enacted in Mauritius) and the domestic “exequatur” procedure provided credible avenues for plan recognition. The Court found that there was at least a reasonable prospect that the plan company had moved its centre of main interest (COMI) and that this was in England as at the date that the restructuring plan proceedings had commenced. This would enable the Mauritian courts to recognise the plan as foreign main proceedings under the UNCITRAL Model law on Cross-Border Insolvency (as enacted in Mauritius).
- Effect of declined convening recognition: the refusal to recognise the convening order was a process issue, not a judgment on the merits. The experts agreed that a future application for recognition of the English sanction order would be a different proceeding and not precluded by the earlier refusal.
- Public policy and the injunction: the court was satisfied that neither a pending Mauritian injunction (obtained by Outrider to prevent MOL from dealing with its assets) nor ongoing proceedings would make recognition “manifestly contrary to public policy,” especially given the narrow construction of the public policy exception in cross-border contexts.
The court remained satisfied that there is a reasonable prospect of any sanction order being recognised in Mauritius. As regards Madagascar, both experts agreed the exequatur procedure applied, that the plan could be recognised unless major public policy obstacles were present, and (given no local opposition was likely) effectiveness was reasonably likely.
Comment
Like restructuring plans before it, including high profile Thames and Petrofac, and a failed plan in Waldorf almost contemporaneously, this judgment highlights once again that arguments based on “a different deal” are a real uphill battle. Here, the court was simply not prepared to believe Outrider’s offer to purchase the shares or other alternatives put forward.
The judgment confirms that differential treatment of pari creditors can still be seen as fair.
Additionally, following Petrofac, there has been much discussion in the market around the Company having the burden of showing that any new money is on market terms. Here, the court did not insistthat the plan company evidence this because the challenging creditor had failed to raise the point until a very late stage. The court’s approach may in part reflect its clear dissatisfaction with Outrider’s litigation strategy, for example, Outrider’s inability to settle on a single relevant alternative from the outset and moving between different pleaded (and not pleaded) versions.
The fact that almost a third of the judgment is devoted to a detailed examination of foreign law – via foreign law experts in cross examination is interesting and unusual. Also interesting is that this is already the second restructuring plan concerning Madagascar (alongside Ambatovy) and the second or third for Mauritius (along with Smile times two).
The odds were certainly stacked against the company (it is not in every plan that the company would need to overcome an active refusal to recognise a convening order). However, given that the relevant jurisdictional test is not whether the plan would be recognised, but whether there is a “reasonable prospect” of this being so: a much lower bar, the company succeeded in its arguments.