By

What happened?

In a landmark decision, the English High Court has, for the first time, ordered security for costs in a challenge to a proposed restructuring plan. This precedent sets a critical consideration for potential backers in contested restructuring proceedings, who might now need to provide security for costs to ensure plans proceed without delays. This judgment highlights the importance of securing funds or exploring insurance options to mitigate risks and support restructuring efforts effectively.

Project Green: Case Overview

Consort Healthcare (Tameside) PLC (Consort) proposed a restructuring plan involving three creditor classes:

  • The Tameside and Glossop Integrated Care NHS Foundation Trust (the Trust)
  • The guarantor/insurer of Consort’s GBP93m secured bonds
  • A minority shareholder of Consort holding loan stock

The restructuring plan aimed to amend the Trust contract to settle outstanding claims, modify future obligations, remove the Trust’s step-in rights, and replace the Trust’s management consultants.

The Trust challenged the plan and requested security for costs, arguing that it was unfair for the Trust to risk being unable to recover its costs from Consort, which was expected to be cash flow insolvent without the restructuring plan, while other plan creditors had their costs funded by Consort’s sponsors, Infra Red Capital Partners (the Sponsors).

The High Court convened meetings of the plan creditors on May 20, 2024. However, the process has been stayed due to the security for costs order, with Consort indicating it cannot provide the required security.

The Court’s Rationale

Distinction Between Restructuring Plans and Regular Litigation

The court recognised its jurisdiction to grant the request for security for costs under the Civil Procedure Rules (CPR 25.13(2)(c)), which allows for security for costs when there is reason to believe the company will be unable to pay the defendant’s costs. While Consort argued that restructuring plans differ fundamentally from ordinary litigation because they address financial distress, Mr. Justice Richards noted that in this case, the distinctions were minimal. The restructuring plan originated from an adversarial dispute, and the court saw it as an attempt by other creditors to secure a more favourable outcome than an adjudication could provide.

Assessing Financial Distress and Security for Costs

Although Consort’s financial difficulties met the criteria under Part 26A of the Companies Act 2006, the judge examined the availability of funds from Consort’s backers. Courts critically evaluate claims that backers are unwilling or unable to provide necessary funds. The Sponsors, with significant assets and a history of funding the restructuring process, could reasonably be expected to provide security for Consort’s costs.

Avoiding the “Stifling” of Restructuring Plans

The judge weighed the risk of the security for costs order potentially stifling the restructuring plan against the need for fairness in the proceedings. A “tipping point” exists where funders might prefer to cut their losses rather than provide further funding, but this risk was balanced with the overall equity of the case.

“The Company no longer puts its ‘stifling’ argument in that undiluted form. Instead, it argues that there is a risk that the Plan would be stifled with that risk operating, not as an absolute bar, but as an element in the court’s discretion.”

Determining the Amount of Security for Costs

To prevent a disproportionate outcome, Mr Justice Richards awarded security for costs of £463,280.13, 50% of the amount requested by the Trust. He reasoned that the Trust had a limited risk of non-payment of costs if the plan was not sanctioned, due to set-off rights under its contract with Consort. The reduced amount struck a balance between the interests and potential prejudice of both parties.

 Commentary: Potential ways to meet security for costs in these circumstances

Leveraging ATE Insurance and Deeds of Indemnity

For those looking to provide security for costs, After-the-Event (ATE) insurance which can include robust anti-avoidance mechanisms or a deed of indemnity can be invaluable tools. ATE insurance is taken out after a legal dispute has arisen, providing coverage for legal costs and potential liabilities. In the context of restructuring plans, ATE insurance can help cover the cost risks associated with legal challenges, mitigating the financial risk for companies and their backers. Having the appropriate cover can strengthen a company’s position in court, demonstrating the commitment and ability to meeting financial obligations and supporting the restructuring plan, as well as encouraging investor confidence.

Conclusion: What’s the Broader Impact?

This historic judgment sets a significant precedent by awarding security for costs in the context of a restructuring plan challenge. While this ruling may inspire more dissenting creditors to seek security for costs, each application will be judged based on its specific circumstances. The court’s detailed consideration underscores that restructuring plans, though designed to resolve financial distress, must still adhere to principles of fairness and equity as in adversarial litigation. By leveraging ATE insurance and deeds of indemnity, companies and their backers can navigate these challenges more effectively, ensuring that restructuring plans can proceed smoothly and with reduced financial risk.

To read the full judgment in this matter click here.

 

CONTACT 

Emily Thomas, Director TheJudge 

emily.thomas@thejudgeglobal.com

+44(0) 203 882 7405