Leapfrogging the Strait of Messina: Lessons from Waldorf’s failed restructuring plan

Summary

The Waldorf ¹ plan was proposed prior to the Court of Appeal decisions in Thames ² and Petrofac ³ and ultimately appears to have suffered from their subsequent elaboration, if not an evolution, of the law in relation to considering the “fairness” of a plan and the Court’s discretion to sanction.

Courts typically exercised that discretion to sanction schemes of arrangement (in a restructuring context at least) once the statutory requirements were met – there are few if any examples of such schemes rejected purely on the grounds of fairness. The same was true of the early phase of restructuring plans, and a trend seemed to be building in plan negotiations for plan companies to conflate the “no creditor worse off” assessment with the quite separate consideration of fairness – wrongly assuming that the latter test would necessarily follow if the former were satisfied. The HMRC challenges on Nasmyth ⁴ and GAS ⁵were the first to arrest that misconception, and Thames and Petrofac both elaborated and reinforced this at Court of Appeal level. Specifically, the Waldorf decision highlights that:

• it is an overly simplistic approach that “out of the money“ creditors are never entitled to any of the rights and benefits deriving from the restructuring. There are references in the leading Virgin Active ⁶decision which many construe to have supported such approach, but it is wrong as an absolute rule applicable to all fact patterns; and
• plan companies must be seen to have engaged with dissenting creditors and attempted to negotiate reasonably with a view to achievable transaction. The cross-class cram down is a final resort to deal with unreasonable hold out creditors, not an automatic path to squash any creditor that does not promptly accept an outcome that is only marginally no worse off than the relevant alternative. The Waldorf decision paints the plan company in a poor light in regard to its approach to engagement, and highlights a series of uncomfortable facts that lead up to the plan being proposed, both of which seem to have been an influence in the decision.

Background

Waldorf is part of an oil and gas group engaged in exploration and production operations on the UK Continental Shelf. It has encountered substantial financial difficulties as a result of various factors, including the increase and extension of the Energy Profits Levy (EPL) introduced by the UK Government in 2022  and currently set at 38% until 2030,  the withdrawal of external funding arrangements, and reduced production volumes as Waldorf has sought to limit investment to preserve liquidity and comply with its bond covenants. Although “airbrushed” out of the company’s own description of the cause of its financial difficulties, the court referred to the “disturbing conduct” of Waldorf’s directors declaring and paying a US$76m dividend paid to shareholders in 2022 as well as an increase in Waldorf’s secured indebtedness following a refinancing in July 2024 and the making of a US$15m loan to sister companies as being events which “must have materially impacted the ability of the Plan Company and the Group to meet its liabilities”.

Waldorf launched its restructuring plan, intended as a bridge to a sale of its shares, in February 2025. Broadly, the plan sought to extend the maturity of Waldorf’s 2025 bonds by two years and extinguish c.US$105m of liabilities owed to the dissenting unsecured creditors, Capricorn (whose claims arose from the settlement of amounts due under an earlier SPA relating to assets now held by Waldorf) and HMRC (whose claims arose largely from amounts unpaid under the EPL), in return for a 5% cash recovery and a contingent upside-sharing payment. Supporting the plan was a steering committee of bondholders, representing 84.8% of the interests in the bonds. 

The Capricorn and HRMC opposition boiled down to two points:

1. the relevant alternative was not a formal insolvency process, but an alternative plan reflecting proper negotiation and a fairer outcome for Capricorn and HRMC; and
2. the 5% (plus a contingent upside) allocation of the benefits generated by the restructuring to Capricorn and HRMC was “essentially arbitrary” and did not represent a fair allocation of the benefits preserved or generated by the restructuring. 

The Issues and the decision

Relevant alternative

Waldorf argued that the relevant alternative to the plan was a formal insolvency process and that in any such process Capricorn and HMRC would receive no return on their claims.  They were therefore no worse off under the plan than in the relevant alternative. Ultimately the “no worse off” on insolvency was not challenged by Capricorn and HRMC.

However, no attempt was made by the company to engage with HMRC or Capricorn before the Practice Statement Letter was issued in February 2025 (with the court commenting that “none of the explanations offered… [by Waldorf as to why it had failed to engage with Capricorn or HMRC prior to issuing the PSL] carry conviction”.

Following the PSL, Capricorn and HMRC made two alternative offers to Waldorf: the first being an immediate cash payment of 20% (later reduced to 15%) of the claims, the second being 5% and an additional share in any upside once bondholders had recovered a certain amount.  Both offers were rejected by Waldorf and the Steerco without any real attempt to negotiate, with the Steerco holding that as a matter of principle, it would not be “held hostage” to “ransom behaviour” by junior creditors.

Given the lack of meaningful engagement by Waldorf, the judge considered that Capricorn and HRMC were left in the difficult position of “sail[ing] between Scylla and Charybdis”, in attempting to balance their alternative proposal between certainty (whilst avoiding intransigence) and flexibility (whilst avoiding a lack of sufficient definition). They certainly argued that the relevant alternative was not in fact an insolvency, but that the plan company and other creditors would allow period of time to negotiate properly a fairer plan.

Ultimately, the court, “with some reluctance” agreed with Waldorf that the relevant alternative was a formal insolvency process, and that Capricorn and Waldorf would be no worse off under the plan than in the relevant alternative. Sino Ocean ⁷ was followed by the court in holding that the alternative proposals put forward by Capricorn and HMRC, despite being theoretically realistic, were not sufficiently clear, certain and defined for the purposes of the statutory regime. There was clear witness evidence from a member of the bondholder steering group to this effect, and there had been cross examination of that individual in the hearing to test resolve on this point.

In Petrofac, Thames, and every other case where dissenting creditors have argued that the relevant alternative was a different restructuring the courts have consistently rejected any proposed different relevant alternative. It remains to be seen exactly what is required to successfully navigate Scylla and Charybdis and convince a court that something other than the relevant alternative put forward by the plan company is in fact the correct relevant alternative, once the plan company has put in clear evidence from supporting creditors that no deal more favourable to dissenting creditors shall be accepted.

Allocation of restructuring benefits

Although the jurisdictional requirements for the exercise of a cross-class cram down had been satisfied, the court still had to decide whether it was appropriate for it to exercise its discretion to do so.  Was the plan “fair” and was there a proper distribution of the benefits generated by the restructuring?

This was an unusual case, the court noted, in that the restructuring benefits were easy to articulate. Before implementation of the plan, Waldorf had a negative valuation of US$83.3m and after sanction it would have a positive valuation of US$18.3m; the difference between these valuations was the exact value of the liabilities owed to Capricorn and HRMC.  Should a solvent sale of the shares in Waldorf take place, bondholders were projected to receive an uplift of between US$10.5m and US$43.8m (being the difference between the projected return in the relevant alternative and the return in a high and low case should the plan be successful).  However, such a solvent sale was unlikely without a compromise in full of the unsecured creditor claims.  Capricorn and HRMC, on the other hand, despite being the main contributors to the success of the plan, were to share in a 5% recovery and a contingent upside.

It appeared that Waldorf had approached its plan according to the “position pre-Thames”, on the basis that negotiations with dissenting out-of-the-money creditors were unnecessary as their views carried little or no weight; all that would be required were de minimis payments in excess of the amount receivable in the relevant alternative. This interpretation of Virgin Active was rejected in both Thames and Petrofac and now in Waldorf, with the court finding that this view “is not (or is no longer) correct”.

The correct position in assessing the fairness of the plan, as identified by the court, was whether it would achieve a fair and reasonable allocation of the benefits of the restructuring having regard to the amounts contributed by each creditors class, including any dissenting class.  Following the trilogy of Court of Appeal decisions in Adler⁸, Thames and Petrofac, it was clear that in this case, a comparison with the returns in the relevant alternative “should not be the predominant comparator in assessing fairness”.   Instead, the touchstone should be what Capricorn and HMRC “might fairly and reasonably have negotiated for their support in circumstances where it has already been demonstrated that any sale process is likely to fail whilst their debts remain in place”.

The court concluded that Petrofac had not made negotiations with dissenting creditors a “jurisdictional precondition” to sanction. However, the failure of Waldorf to negotiate created a lacuna in the evidence as to whether Capricorn and HRMC were acting reasonably in demanding a greater return than the one offered by the company. The court acknowledged that the lack of such evidence invited the “obvious implication” that Capricorn and HRMC were being treated in line with the pre-Thames view that out-of-the-money creditors need only be offered a de minimis amount.

Ultimately, the court agreed with Capricorn and HMRC. The purpose of the plan was to make a solvent sale of Waldorf achievable (against the background that the bondholders would in practice not be able to achieve a sale through enforcement of security because of the complex regulatory environment in which Waldorf operates). That sale would not happen without the compromise of Capricorn and HMRC’s claims and so they were contributing to the success of the plan.  However, there had been no attempt to consider what a fair allocation of the benefits expected to be generated by the restructuring should be. Had Waldorf entered into negotiations with Capricorn and HMRC, there would be figures before the court to assist an assessment of what a fair allocation might be. Fatal to the Petrofac restructuring plan was a failure to discharge the burden of proof in relation to fairness, as the lack of evidence adduced by the plan company meant the Court of Appeal could “only speculate”.

Here, the court concluded Waldorf had failed to show the plan was fair due to: (1) the absence of negotiation evidence, which could have provided a reference point for fairness; (2) the lack of any liquidity or cashflow evidence to substantiate Waldorf’s argument that it could not afford to pay more than the 5% offered; and (3) the 5% figure appeared to be “essentially arbitrary”.  

Throughout 2025, the courts have repeatedly stressed the importance of proper engagement by plan companies with dissenting creditors. Notably, in the Speciality Steel UK restructuring plan convening hearing of 25 March 2025, the court observed the plan as having a history “characterised by inadequate efforts” to engage with creditors. Instructively, this plan was discontinued before a sanction hearing.

What’s next

Waldorf is now expected to appeal directly to the Supreme Court bypassing the Court of Appeal, following its successful application for a “leapfrog” certificate. This follows Petrofac’s application to the Supreme Court for permission to appeal on 6 August 2025, which has not yet been ruled on. 

The Supreme Court will only hear an appeal where there is a novel issue or a legal point of general public importance. Were the Supreme Court to hear an appeal, this would be a first for restructuring plans, just over five years after their introduction, and could flip the newly formed status-quo on its head. 

Conclusion

Waldorf confirms a number of the points coming out from the pivotal Court of Appeal decisions in Adler, Thames and Petrofac in the evolution of the Part 26A regime. The decision emphasises the importance of genuine engagement with all creditor classes, including (crucially) those deemed out-of-the-money. Disastrous to the Waldorf plan was its failure to meaningfully negotiate with Capricorn and HRMC, coupled with its arbitrary allocation of restructuring benefits in accordance with the now firmly rejected interpretation of Virgin Active.

The court’s ruling reinforces the principle that restructuring plans must reflect a balanced and reasoned distribution of value, not merely the will of plan company and any creditors seeking the exercise of the court’s cram-down power. The attitude of the courts on this point have been reflected in the proposed new Practice Statement for the Part 26 and Part 26A regime, which is expected to be issued in early September. This expressly requires plan companies to file evidence explaining the extent of engagement with creditors along with reasons for any discrepancy in the level of engagement.

All eyes are now on the Supreme Court.  Will it grant permission to appeal and if so will its decision provide much needed clarity on the treatment of out of the money creditors and fairness more generally? And what impact will the mere existence of the application for permission have on restructuring plans which are currently in the planning stages?  Watch this space. 

Authored by Tom Astle, James Maltby, Margaret Kemp, and Mo Davis.