Whether dealing with failure of a major project, reacting to crises at counterparties or weighed down by oil price weakness, many companies in the oil sector will have to undertake financial restructuring in 2021.
This article considers the possible objectives of a restructuring, the key techniques in English law and key considerations for companies in restructuring.
Companies planning a restructuring should identify their objectives clearly. These may change during the restructuring, but will inform the selection of the restructuring technique to be used. Some level of consensual negotiation will always be involved, particularly where new money is required. This may influence the objectives of the restructuring.
Whilst, for example, a creditors voluntary arrangement (CVA) may be appropriate if a compromise of unsecured claims is required, rescheduling of maturities and/or amendment of key finance terms may require a scheme of arrangement or restructuring plan. Other objectives might include the compromise or avoidance of capital obligations (such as onerous leases or charterparties) or operational or corporate restructuring to rationalise costs or facilitate disposals
While English law provides several options for companies to implement a restructuring, consensual agreement is usually the most cost and time efficient option. Where agreement cannot be reached either because of commercial disagreement or practical constraints, the processes provided for by law can facilitate a solution. All are likely to require some creditor support. The key processes are:
1. CVA: a procedure for the compromise of unsecured claims. Under the supervision of an insolvency practitioner, company may make a proposal for dealing with unsecured claims. The proposal must be reported on as appropriate by the insolvency practitioner and supported by the required majority of relevant creditors;
2. Scheme of arrangement: a statutory process, overseen by the court, for the implementation of transactions not always involving financial distress. Affected stakeholders vote in classes and all classes must approve the scheme;
3. Restructuring plan: procedurally similar to a scheme, but only available in financial distress. Critically, if certain conditions are met, a dissenting class of stakeholder can be bound by the consent of other classes;
4. Pre-packaged administration: a formal insolvency process used to transfer specific assets or businesses into new ownership, often including the migration of certain agreed liabilities to the new structure.
These processes facilitate a restructuring. Key considerations arise in all cases: The terms of all relevant agreements will need early scrutiny, particularly where transfer of an entity or asset is proposed. Contractual restrictions can usually be managed by appropriate structuring. The tax position of entities being restructured needs care, e.g. so that accrued tax losses remain usable. The attitude of relevant regulators must be considered. Regulators concerned with the continuity of orderly production are unlikely to oppose well planned restructurings. Finally, any restructuring will need to ensure that the continued safety of all employees is safeguarded. This imposes limits on the rationalisation of some costs.
English law has several options for executing a restructuring in the oil sector. Which is appropriate will depend on the intended outcome and the support available from creditors.
Trevor Borthwick, Bob Palmer and Devi Shah
Partners in the London office of Mayer Brown, an international law firm