On 15 April 2025, the Court of Appeal handed down its much anticipated judgement in a high stakes appeal against the vigorously contested Thames Water Utilities Holdings Limited (the "Company") restructuring plan.1 The proposed restructuring plan (the "Plan"), which sought to provide interim stability to the UK’s largest water utility while it negotiated a longer-term equity and balance sheet restructuring led solution, is, we believe, the UK's highest value restructuring plan to date.
The Plan is also the first such plan to be challenged on a public interest basis. Given the tight timetable arising from the Company's short, remaining, liquidity runway, the Court of Appeal gave its decision on 17 March 2025 with reasons to follow. The judgement follows a closely argued three-day appeal hearing. That was itself was preceded by a four-day sanction hearing in the High Court in February 2025.
The appeal was brought by (i) an ad hoc group of opposing creditors (the "Class B AHG"), (ii) the Company's shareholder, Thames Water Limited ("TWL") and (iii) the Liberal Democrat MP for Witney and successor to David Cameron, Charlie Maynard MP ("Mr Maynard"). The appeal was opposed by the Company and a group of supporting creditors (the "Class A Creditors"). The appellants sought to overturn the High Court's decision to sanction the Plan on various grounds, including treatment of out of the money creditors, the scope of judicial review in restructuring cases, public interest and the scope of releases in interim restructuring plans. We examine each of these points further below.
Treatment of Out of the Money Creditors
The Class B AHG's first ground of appeal was that the High Court had erred in deciding that the plan was "fair" given the substantial non-financial rights and benefits that the Class A Creditors obtained under the Plan. These includes the "June Release Condition", under which the Class A Creditors could refuse to release two tranches of funds in circumstances where a lock up agreement had not been entered into by June 2025. The Class B AHG also objected to what it saw as an unfair allocation of the restructuring surplus. TWL advanced similar grounds of appeal on the basis that the judge had mistakenly failed to consider whether the Plan was fair on dissenting, "out of the money" creditors.
In considering these submissions, the Court of Appeal ruled that, as a preliminary point, the concept of a "restructuring surplus" was too narrow and that a more appropriate term was "benefits preserved or generated by the restructuring". This was because the term "restructuring surplus" suggested something of quantifiable value. That can exist in a final restructuring plan but not necessarily in an interim arrangement proposed to allow more time for a full-blown restructuring to take place. In cases of an interim plan, such as the one in question, in which liquidity concerns are paramount, the "benefits preserved or generated" can only be determined and quantified in the context of the final restructuring plan. This is of course different to a restructuring plan that seeks to facilitate a formal distribution process or to restructure a balance sheet.
The Court of Appeal further rejected the "rigid approach" advanced by the Company, namely that there was a "hard-edged rule" that no account could be taken of the fact that out of the money creditors received nothing more than nominal consideration. It noted that there was nothing in Part 26A of the Companies Act 2006 ("CA") which suggested that Parliament intended to introduce a "new power of confiscation" when it created the cross-class cram down power.
While in some cases, the fact that dissenting creditors were out of the money would be "sufficient justification" to exclude them from the benefits of the plan, this would not always be the case. The starting point must be to identify what benefit the plan is seeking to confer. In this case, the plan was intended to provide a "bridge" to a final plan and that benefit would be lost if all creditors were allowed to exercise their rights (as the company would then be unable to pay its debts as they fell due and would be placed into a special administration – precisely what the Plan was trying to avoid). The Court of Appeal therefore held that the "benefits preserved or generated" were appropriate in the circumstances.
Exercise of Judicial Discretion
In coming to its judgement, the Court of Appeal was keen to emphasise that the development of law surrounding restructuring plans was, and would continue to be, an iterative process. This was because, when drafting Part 26A of the CA, Parliament failed to provide any guidance on how the exercise of discretion should operate. This means that the law would evolve on a case by case basis, albeit caution had to be exercised when relying on precedent, given (i) many sanction applications were unopposed and (ii) the findings were often very fact specific.
Unsurprisingly, the Court of Appeal was at pains to emphasise that in circumstances where an appeal stemmed from a judge's exercise of discretion, a higher court would be very reluctant to intervene unless it was satisfied that the judge "applied incorrect legal principles, took into account irrelevant factors or omitted to take into account relevant factors, or came to a conclusion on the facts that no reasonable judge could reach".
The Court of Appeal found that in the case of the Plan this bar – a high one - was not met. The Court of Appeal's reasoning on this point was to be expected - to have decided anything different would have undoubtedly departed from the fundamental principle that appeals must be based on points of law rather than points of fact.
Public Interest
Although not originally party to the proceedings, Mr Maynard was allowed by the High Court to make representations as an intervening party. His submissions in the High Court centred on the premise that the plan was not in the public interest as it imposed unwarranted further debt on the Company and special administration was thus preferable to the Plan. Mr Maynard’s appeal was based on an argument that the first instance judge did not take sufficient account of the public interest, both in respect of the customers of the Company and the wider public, including those impacted by the discharge of untreated sewerage.
The Court of Appeal was unconvinced by these submissions. The court's consideration of fairness in when assessing a restructuring plan was limited to issues of fairness between creditors. In fact, if all the creditors had agreed to the plan, the court would have had no role in considering fairness. It therefore followed that disagreement between creditors should not cause the court to expand its inquiry into wider issues of fairness to third parties. The issue of whether a special administration was more appropriate than the Plan was for Ofwat and the Secretary of State to determine in their role as designated guardians of the public interest, not the courts.
The Court of Appeal was equally unpersuaded by Mr Maynard's submissions that the costs associated with the plan constituted a blot such that the sanction of the Plan should be overturned. This was because (i) many of the costs referred to by Mr Maynard were not caused by the plan, e.g. the interest under the existing debt or the advisors’ fees, more than half of which had already been incurred and paid, (ii) the high interest rate reflected the commercial risks and (iii) many of the costs of the plan were associated with corresponding benefits – e.g. the early bird fees paid in return for early commitment to the Plan from creditors.
Releases
The Court of Appeal made some changes to the proposed director and advisor releases contemplated under the Plan, namely that the releases deprived the Company of a potentially valuable asset in the event that it went into special administration. The releases, which were also challenged by the Class B AHG, were upheld at first instance on the basis that they were necessary to prevent ricochet claims against the Company.
The Court of Appeal disagreed with this reasoning. While releases granted by creditors were necessary to prevent ricochet claims by directors and advisors against a company, this was inapplicable where releases were granted by that company (and there was therefore no risk of ricochet claims). On this basis, the Court of Appeal altered back the releases to include a carve out for any claims brought by a special administrator or insolvency holder. This aspect of the judgement provides sufficient certainty to allow the plan to proceed while ensuring that parties are not shielded from legitimate accountability.
Conclusions
As only the second restructuring plan case to go to the Court of Appeal, the Court of Appeal’s judgment in Thames Water provides helpful clarification in the approach the courts will take when deciding to sanction a restructuring plan. However, as the Court of Appeal was keen to emphasise throughout the judgement, each case will involve a detailed fact-based analysis and there are in consequence few principles of general application that can be extracted from this judgment. Those hoping that the judgement would provide a hard and fast blanket rule on the treatment of dissenting, out of the money creditors, will therefore be disappointed.
However, given the wide range of scenarios in which the restructuring plan can be used, it seems right that the Court of Appeal has affirmed that creditor treatment must be assessed on a case-by-case basis.
Time will tell what this means for the wider development of the restructuring plan jurisdiction. A fact-based approach certainly allows for flexibility. Flexibility, however, is a two-edged sword since there will always be a risk that flexibility encourages challenge. Challenge in turn costs money as has been illustrated both in Thames Water and in the numerous other recent first instance cases where restructuring plans have come before the courts. However, if the threat of a challenge in any given case leads to a consensual outcome, it can certainly be said that the restructuring plan process may, albeit perhaps indirectly, have achieved its objective of promoting the rescue culture.
(DAC Beachcroft has been advising the board of directors in the Thames Water restructuring, working with Linklaters and others advising the company)
[1] Kington S.A.R.L., Thames Water and another -v- Thames Water Utilities Holdings and others CA-2025-000371
