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Development finance facilities: Prospects for APAC
Sponsors and project developers across the renewables and energy transition space are currently facing a challenging macroeconomic environment.
In November 2022 the High Court in London awarded the liquidators of British electronics retailer, Comet Group Ltd (Comet), approximately £90 million following a successful preference claim.1 This is understood to be the largest preference award in English legal history. The claim was vigorously contested, and the judgment contains a detailed analysis of the law relating to preferences in the context of a complex distressed M&A transaction.
Comet was founded in 1993 and by 2011 it operated 249 stores and was one of the UK's largest electrical retailers. Comet was owned by the Kesa group (Kesa) and the members of Comet's board were senior Kesa executives, including Kesa's CEO, CFO and Group General Counsel.
Comet began experiencing financial difficulties in 2010, when it reported a loss of £3.8 million. The following year, the loss had increased to £31.8 million. Kesa sought to exit its investment in Comet and invited interested parties to submit bids. OpCapita, a private equity fund specialising in distressed retailers, agreed to buy Comet as a going concern through a share sale. Kesa was keen to sell Comet as a going concern for wider, reputational reasons and wanted a deal that involved a "clean break" to cap its downside risk. One of the pre-requisites for the deal was that Kesa required repayment by Comet of a £115 million intercompany unsecured revolving credit facility granted by Kesa International Limited (Kesa's group treasury company) (KIL) (the KIL RCF). The funds to repay KIL were to come from a new loan made by Hailey Acquisitions Limited (HAL) (the HAL RCF), which was to be the buyer of the Comet shares. The HAL RCF was to be fully secured against Comet's assets. These terms were documented in a SPA (to which Comet was not a party), which was entered into in November 2011.
The SPA provided that Comet was to enter into a completion agreement, prior to which all but one of Comet's directors would resign and be replaced by new board members made up of the purchaser's nominees (the New Board).
In February 2012, following a review of Comet's financial position, the New Board approved entry into the Completion Agreement and the HAL RCF and repayment of the KIL RCF.
Following the transfer, Comet continued to trade until November 2012, at which point it went into administration.
Under English law, a company gives an unlawful preference where it does something (or suffers something to be done) which has the effect of putting a creditor in a position which, in the event of the company's subsequent insolvency, will be better than the position it would have been in had the thing not been done. Typically, a preference involves paying a particular creditor whilst others are left unpaid.
Once the basic premise of a preference has been established, further criteria must be satisfied.
First, the preference must have been given within six months of the commencement of administration or liquidation. However, this is extended to two years if the parties are connected (as was found to be the case with KIL and Comet in a preliminary hearing).
Secondly, at the time of the alleged preference, the company must have been insolvent or it must have become insolvent as a result of the preference.
Thirdly, and crucially, the company must have been influenced by a desire to put the recipient of the preference in a better position than would otherwise have been the case in the company's liquidation. Where the parties are connected (as was the case with Kesa and Comet), the desire to prefer is presumed, but this presumption may be rebutted by evidence to the contrary. Existing case law has clarified that a desire to prefer is subjective and need not be the dominant purpose of the transaction.
Timing is also important: the presence or otherwise of a desire to prefer must be assessed at the time of the decision to enter into the relevant transaction. This will not be necessarily when the transaction actually occurred.
The repayment of the RCF was not initially challenged by Comet's administrators but in 2018 (by which time the administration had been converted into a liquidation) an independent conflict liquidator was appointed to investigate the transaction.
Proceedings were commenced in October 2018 against the French electricals company, Darty Holdings (Kesa's successor) (Darty). Darty submitted (amongst other things) that:
Addressing each of these arguments in turn, the High Court (Mrs. Justice Falk) held that:-
Although concerned specifically with English law on unlawful preferences, this case is of broader import insofar as it provides a reminder that the interests of an insolvent company (and by extension its creditors) must be considered separately and independently from its wider group or the larger transaction when structuring any distressed M&A transaction or debt restructuring. Failure to do so will heighten the risk of challenge if the company were subsequently to fail. The High Court's focus on the underlying substance to determine when, and by whom, relevant decisions were made further illustrates that courts will be prepared to look through the form and any perceived corporate "choreography" when considering claw back claims.
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Sponsors and project developers across the renewables and energy transition space are currently facing a challenging macroeconomic environment.
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