McDermott’s parallel restructuring proceedings: UK restructuring plan meets the Dutch WHOA

In March 2024, McDermott successfully completed a first-ever restructuring implemented by combining the UK Restructuring Plan under Part 26A of the Companies Act 2006 (CA) and the Dutch WHOA (the acronym for the Wet Homologatie Onderhands Akkoord). The McDermott restructuring builds upon the previously successful use of parallel restructuring proceedings in the Netherlands and the UK: the restructuring of the Vroon group where the Dutch WHOA was used in parallel with the UK Scheme of Arrangement, which we covered in the Q4 2023 Newswire at Vroon restructuring: A lesson in adapting to and overcoming challenges.¹

In this article, we discuss the key issues in McDermott, which could be relevant for future restructurings involving parallel proceedings.

Background

McDermott is a Houston, US based contracting and energy sector engineering conglomerate with operations in more than 54 countries. As a result of financial setbacks, McDermott filed a chapter 11 case in the US in 2020. This restructuring did not prove to be a long-term solution and the McDermott group entered into another round of restructuring negotiations with its creditors in 2023.

The McDermott group has several group companies in various jurisdictions, including the Netherlands and the UK. Lealand Finance Company B.V. (Lealand), a legal entity incorporated in the Netherlands, acted as a financing vehicle and is a wholly owned subsidiary of Dutch holding company McDermott International Holdings B.V. (MIH). Several entities within the McDermott Group, including MIH and UK based CB&I UK Limited (CB&I), issued guarantees in respect of Lealand’s obligations.

McDermott faced looming and significant liquidity issues in 2024. Certain letter of credit facilities were required to be cash collateralised by 24 March 2024 and certain term loan facilities were to mature on 30 June 2024. Whilst the maturity dates were known upfront, an arbitration award in July 2023 formed the trigger for financial distress. CB&I and MIH were found liable to Refinería de Cartagena S.A.S. (Reficar) for an amount of approximately US$1.3 billion as a result of an arbitral award that was issued in 2023 after seven years of arbitration.

The impending requirement to provide cash collateral and the term loan maturity date prompted McDermott to enter into negotiations with its lenders in 2023 regarding a financial restructuring. McDermott reached an agreement with its lenders whereby the maturity date of the letter of credit facilities and the term loan facilities would be extended to 2027. The extension of the maturity date of the letter of credit facilities meant that they did not need to be cash collateralised until 2027. McDermott and its lenders then filed parallel Dutch WHOA and UK Restructuring Plans to implement the restructuring and cram down Reficar.

This resulted in a vociferous objection from Reficar. Following difficult and prolonged negotiations and restructuring litigation, McDermott managed to reach a settlement with Reficar in the proceedings under which Reficar obtained significant equity in exchange for the claims reflected in arbitral award. In the process, the UK and Dutch courts were required to address several key issues.

WHOA proceeding

Under the Dutch Bankruptcy Act, a debtor may offer its creditors and shareholders a restructuring plan to amend their rights when the debtor finds itself in the vicinity of insolvency. Such plan may be offered through a private or a public procedure. Dutch courts have jurisdiction in private procedures if there is sufficient connection with the Netherlands (e.g., if the debtor has assets in the Netherlands). The public procedure is listed on Annex A of the EU Insolvency Regulation (Recast) (EIR).[2] Dutch courts have jurisdiction to open a ‘main insolvency proceeding’ under the EIR only if the debtor has its centre of main interest (COMI) in the Netherlands.

COMI: The Netherlands or elsewhere?

MIH commenced a public WHOA procedure and, therefore, was required to have its COMI in the Netherlands. Article 3(1) of the EIR states that the jurisdiction in which the debtor has its registered office is presumed to be the place of its COMI in the absence of proof to the contrary. MIH has its registered office in the Netherlands, therefore the opponents of the restructuring plan had to prove that the COMI of MIH was actually located elsewhere. Pursuant to the EIR, the presumption that the COMI of an entity is located in the jurisdiction of its registered office may be rebutted with objective indications, which are verifiable for third parties, that show that the COMI is located elsewhere. In a WHOA procedure, international jurisdiction is determined during the first hearing by the court. At that hearing, Reficar argued that MIH’s COMI was not located in the Netherlands by stating that: (i) MIH and the McDermott group present itself to the outside world as a consolidated, Houston, US, based group, (ii) MIH’s lacked nexus with the Netherlands and it provided insignificant management services, and (iii) MIH never presented itself as having nexus with the Netherlands in the arbitral proceeding against Reficar. The Amsterdam District Court rejected Reficar’s arguments and, inter alia, ruled that (i) MIH and MIH’s subsidiaries employ a large number of employees in the Netherlands, (ii) MIH has large headquarters in the Netherlands from which it manages Dutch and foreign subsidiaries, and (iii) MIH is addressed in the Netherlands in several instances, even by Reficar. Hence, the Amsterdam District Court ruled that the presumption that MIH’s COMI was located in the Netherlands had not been rebutted by Reficar.

Reficar appealed the judgment regarding MIH’s COMI. The appeal was based on the right that article 5(1) EIR provides to all creditors (and debtors) to challenge a decision to open main insolvency proceedings on grounds of international jurisdiction. Under Dutch law, such right to challenge is only available to creditors and debtors if such party has not been provided the opportunity to present their views regarding international jurisdiction. In the Netherlands, the EIR has immediate legal effect over and above Dutch national law. Reficar argued that it was unlawful that Dutch law provides tighter margins for challenging a court’s decision than the EIR does by only allowing certain parties rather than all creditors and debtors the right to appeal. An appeal is not possible under the WHOA and the Amsterdam Court of Appeal noted that Reficar failed to provide reasons to overturn this principle. The Amsterdam Court of Appeal further ruled that the rationale behind article 5(1) EIR is to provide creditors and debtors with an ‘effective remedy’ against a decision by a national court regarding international jurisdiction. According to the Amsterdam Court of Appeal, Reficar was provided such effective remedy, as it had (and utilised) the ability to present its arguments against the international jurisdiction of the Dutch courts before the Amsterdam District Court.

Restructuring expert vs. observer

Both Reficar and a dissenting group of lenders under the letter of credit facilities (the LC Group) petitioned the court to appoint a restructuring expert, while McDermott petitioned the court to appoint an observer. Under Dutch law a restructuring expert plays an important role in the restructuring process. The restructuring expert is responsible for the preparation of the WHOA restructuring plan. The restructuring expert is required to act in the interests of the joint creditors and conduct tasks neutrally and independently. An observer, however, has a more passive role and will observe the restructuring process, whilst taking into account the interests of the creditors.

Given their role and tasks, a restructuring expert will require some time to get fully up to speed in a restructuring process that is nearing completion, as was (at least initially) the case in the McDermott restructuring. Dutch courts are reluctant to appoint a restructuring expert in such instances, given that an appointment might delay the process and the threat of delay can be used strategically by opposing creditors as leverage. Delays are less of an issue in considerations to appoint an observer due to the observer’s more passive and, hence, less disruptive role.

In the McDermott case, the court recognized that the restructuring was nearing completion but appointed a restructuring expert nonetheless to safeguard the interest of the creditors. The court did so because (i) it had serious doubts regarding the independence of the McDermott board of directors (noting that lenders had taken control over McDermott as part of the previous chapter 11 restructuring and the debtors and lenders were more interconnected than is usually the case); (ii) it had doubts whether the draft restructuring plan would adhere to the ‘absolute priority rule’, rules for class composition and rules for new financing under the WHOA; and (iii) the valuation reports raised potential concerns. According to the court, the involvement of an independent party (rather than the board whose independence was at stake) would increase the parties’ confidence in the process and thereby the chances of success. As a result, the court appointed a restructuring expert who eventually amended and filed the final WHOA restructuring plans with the Amsterdam District Court.

Was McDermott nearing insolvency?

Under Dutch law, a debtor commencing a WHOA must be in the vicinity of insolvency, i.e. the debtor must show that it is reasonably likely that it will not be able to pay its debts in the foreseeable future (e.g. Dutch courts generally look one year ahead) (the Pre-Insolvency State).

Reficar argued that McDermott was not in the Pre-Insolvency State because, along with the other creditors, Reficar intended to reach a resolution of the financial issues without the McDermott group tumbling into a free-fall insolvency process. Reficar further argued that the letter of credit issuers would never take enforcement measure against McDermott. These parties had issued these letters to McDermott’s project counterparties to cover, inter alia, project delays. According to Reficar, enforcement measures by the letter of credit issuers would lead to project delays and in turn to mass demands by the project counterparties under the letters of credit, which would lead to actual and (partially) unrecoverable exposure for the letter of credit issuers. It was, therefore, deemed highly unlikely by Reficar that such issuers would actually take enforcement measures if McDermott failed to provide cash collateral by 24 March 2024. Reficar also indicated that the cash-flow analysis provided by McDermott was lacking and that it did not substantiate McDermott being in the Pre-Insolvency State.

The court rejected Reficar’s arguments and noted that the letter of credit banks alleged reluctance to enforce security – even if true – did not mean that McDermott would be able to pay the debt (i.e. the key focus of the Pre-Insolvency State). Similarly, the court considered that Reficar’s intent to reach a solution was not evidence that McDermott was able to pay the US$1.3 billion debt owed to Reficar, which again is the key point.

UK Restructuring Plan

Under Part 26A CA a distressed company may offer its creditors a restructuring plan, whereby dissenting creditors can be crammed down upon judicial sanctioning. CB&I offered such plan, which Reficar opposed until a settlement was reached. In its judgment, the English court reflected on Reficar’s arguments against its possible cram-down, before sanctioning CB&I’s restructuring plan under Part 26A CA.

Compromise or arrangement?

A restructuring plan can only be proposed if that plan qualifies as a compromise or arrangement. This requires an element of “give and take”, as per LJ Snowden’s judgment in NFU Development Trust Limited in 1972. Reficar argued that its claims were simply extinguished under the proposed plan and, therefore, the plan could not qualify as a compromise or arrangement.

At the outset of McDermott’s restructuring very marginal consideration was offered to Reficar for the extinguishment of its approximately US$1.3 billion claim. The consideration offered was a participation instrument through which Reficar could recover a maximum of 0.2% of its claim. As the negotiations progressed, Reficar’s proposed consideration increased significantly, ending with Reficar being offered an equity instrument valued at approximately US$900 million, which was also offered under the restructuring plan presented to the English court. The amount of this consideration rendered it impossible for Reficar to argue that its claim was extinguished for no consideration and that no compromise or arrangement was presented. Notwithstanding the significant amount of consideration, the English court took the liberty to reflect on the contours of the “compromise or arrangement” requirement. LJ Green maintained that, as per established case law, even an out-of-the-money creditor is entitled to some form of compensation for the extinguishment of its claim as part of the “give and take”. Such compensation, however, may be a very small fraction of the creditor’s affected claim. In this case, the threshold was met, even if Reficar was allocated the original participation instrument through which Reficar could recover a maximum of 0.2% of its claim.

What is the relevant alternative?

Unlike the class of secured creditors, Reficar voted against the restructuring plan that was presented to the court. As the secured creditors voted in favour, LJ Green had to consider whether a cross-class cram down of Reficar was allowed under Part 26A CA. Part 26A CA allows for this if certain conditions are met. One of which is that Reficar cannot be worse off under the proposed plan compared to the relevant alternative. The relevant alternative was the heavily debated core issue during the trial. As per Part 26A CA, the relevant alternative is whatever the court considers to be the most likely to occur to the distressed company if the plan is not sanctioned. As per established case law, this does not imply that, for a scenario to qualify as ‘relevant alternative’, it has to be proven that a scenario would definitely or, paradoxically, even likely develop (Virgin Active) if the plan is not sanctioned. A party has to prove that the proposed alternative is more realistic than the other and sometimes multiple scenarios presented to the court. Hence, the relevant alternative is determined pursuant to a relative criterion, rather than an absolute criterion, whereby the other scenarios brought forward serve as competitors.

McDermott presented a relevant alternative in which McDermott’s value breaks in the secured debt, where Reficar, as unsecured creditor, would undoubtedly be worse off than under the proposed plan. This scenario assumed a collapse into a form of insolvency, whereby most parts of McDermott were to be sold piece-meal. Reficar argued that the relevant alternative to the proposed plan was more value preserving, as Reficar wanted to raise the aforementioned ‘no-worse-off’ threshold. The scenario it presented was that upon failure of the proposed plan, a re-launch of the negotiations between Reficar, McDermott and its key stakeholders would take place resulting in a deal between the parties and a fairer distribution of the restructuring surplus.

The English court dismissed Reficar’s scenario as a likely alternative by noting that Reficar’s behaviour rendered their scenario unrealistic. Reficar, as unsecured creditor, did not accept an offer including equity valuing at roughly US$900 million as consideration for the extinguishment of its approximately US$1.3 billion claim. Moreover, Reficar retained the right to draw under a US$95 million letter of credit after the plan was sanctioned and would be transferred insurance coverage with a remaining cover limit of US$213 million. LJ Green deemed this offer “very generous” and noted that it had the explicit support of the Dutch restructuring expert. According to LJ Green, the non-acceptance of this generous offer rendered Reficar’s relevant alternative – a deal whereby the insolvency of McDermott was avoided – highly unlikely.

LJ Green finally concluded that a formal liquidation was the most likely alternative scenario and, therefore, was the relevant alternative to the sanctioning of the plan. Thus, Reficar’s position on insolvency was to be benchmarked against Reficar’s position under the proposed plan. As mentioned, Reficar would be out-of-the-money in the former scenario, so it was better off under the latter in which it would be distributed value.

Unfairness to an out of the money creditor

Even if all conditions for sanctioning of a restructuring plan under Part 26A CA are met, the court has discretion on whether or not to sanction the plan. One of the factors that may direct its discretion—is the fairness of the plan.

Reficar argued that the proposed plan could not be considered fair, as the equity of the McDermott group was largely held by certain of the secured creditors, whose equity position remain unaffected. LJ Green paraphrased Reficar’s position as the equity sharing in the restructuring surplus, while the unsecured creditor’s claims were released for next to nothing. Considering these words, LJ Green seemed to have considerable sympathy for Reficar’s argument. He also noted, however, that from Virgin Active it follows that such treatment of out-of-the-money creditors is allowed. LJ Green concluded the matter with the rather nuanced remark that, notwithstanding the foregoing, he could see the force in Reficar’s argument that in testing the fairness of the plan, there should be some scope for comparison of the distribution of the restructuring surplus under the plan between out-of-the-money creditors and shareholders.

The abovementioned arguments regarding fairness of the distribution, eventually, were only interesting in the context of points that may be raised in future cases. The sanctioned plan did not contain the release of Reficar’s claims for next to nothing, but rather provided them with equity instruments with very significant value, thereby also impairing the equity holders. LJ Green concluded that Reficar had clearly secured for itself a fair distribution.

Conclusion

McDermott’s 2024 restructuring procedure proved to be a landmark case from both a Dutch and an English perspective, with important lessons learned regarding these restructuring procedures. The Dutch courts rendered important decisions regarding the Pre-Insolvency State and the possibility to appeal a COMI decision in the light of the EIR. Further, the Dutch courts stressed the importance of introducing an independent party in a WHOA restructuring process by appointing the restructuring expert. Interestingly, the English court explicitly utilised the restructuring expert’s opinion in considering the relevant alternative, thereby leveraging the dual nature of the parallel restructuring proceedings. From an English perspective, LJ Green provided a valuable nuance regarding the fairness of the distribution of the restructuring surplus to out-of-the-money creditors, which might mark a first step towards re-considering the rights of out-of-the-money creditors in an English Restructuring Plan. LJ Green further confirmed the status quo of perspectives on what constitutes a ‘compromise or arrangement’ under the Companies Act 2006 and what determines the relevant alternative as a no-worse-off benchmark.

1 Norton Rose Fulbright has been advising on both parallel restructuring proceedings. We acted as counsel to the secured creditors committee in the restructuring of Vroon, including the Dutch WHOA proceeding and the UK Scheme of Arrangement. We acted as counsel to a lender in the restructuring of McDermott in the parallel Dutch WHOA and UK Restructuring Plan in 2023 and in the earlier restructuring through the US chapter 11 case in 2020.

2 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).