Welcome to the 148th Pari Passu Newsletter, 

Cross-Class Cram-Down (CCCD) has become something we take for granted in restructuring law. By allowing a single class of creditors to impose a restructuring plan on dissenting creditor classes, CCCD overturns the conventional logic of unanimous creditor consent and reshapes the dynamics of distressed debt negotiations. 

In the United States, CCCD has long been a cornerstone of Chapter 11 of the Bankruptcy Code, introduced in 1978. Chapter 11 is a full-scale business rescue regime, equipped with an automatic stay, debtor-in-possession powers, and judicial oversight that governs everything from voting thresholds to asset sales and valuation fights. Within this machinery, CCCD serves as a last-resort mechanism when consensus fails, allowing viable reorganizations to proceed despite dissent.

The UK’s approach, by contrast, is a recent transplant. In 2020, under the pressure of the COVID-19 crisis, the government enacted Part 26A of the Companies Act 2006, introducing CCCD into English law for the first time. The legislation was passed through Parliament in just six weeks, leaving little time for detailed drafting or statutory guidance [23]. The result? An immensely flexible restructuring tool, but one whose boundaries and safeguards have been largely left to the courts to define.

In this article, we unpack the mechanics of CCCD through a side-by-side comparison of Chapter 11 and Part 26A. We’ll walk through key legal concepts such as class formation, voting thresholds, minimum protections, and distribution rules. While this newsletter is by no means a textbook, we hope to provide a very comprehensive introduction to two of the world's most important corporate rescue tools!

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Overview of Class Voting and Cross-Class Cram-Down

A good place to start before we examine the legal restructuring tools is to actually answer the question: What is CCCD? First, let’s recap what a ‘corporate rescue tool’ is, as discussed in our CVA Primer. A corporate rescue tool is a legal mechanism that lowers the level of consent needed from creditors to change a company’s debt obligations. 

Without such a tool, renegotiating debt can be extremely difficult. Contracts usually require unanimous consent from all creditors to make changes. This creates a ‘holdout’ risk. A minority of creditors can refuse to agree to the restructuring plan, hoping to extract better terms for themselves, since their consent is necessary for the deal to go ahead.

Jurisdictions around the world have developed corporate rescue tools to lower this consent threshold. Some are stronger than others, as they allow companies to get a deal through with even less creditor support. Rather than just define CCCD, let’s walk through a few scenarios to properly understand what CCCD does and how significant it is.

Single Class Voting

Let’s suppose Company ABC is financially distressed. Company ABC decides it wants to conduct a debt-for-equity swap for most of its debt to delever its balance sheet. However, a minority of creditors making up 25% of claims against Company ABC do not agree to the deal. This is because the minority creditors do not like the valuation of the equity swap, believing they deserve a better deal. As it stands, any amendment to the existing credit documents (to conduct the debt-for-equity swap) would require unanimous (100%) agreement of all of Company ABC’s creditors. As Company ABC is unable to meet the minority creditors’ demands, no restructuring deal can be put in place. 

Luckily enough, Company ABC can use ‘Corporate Rescue Tool I’ (CRT I)  to ‘cram down’ the minority’s dissent. In CRT I, all creditors are pooled together to vote on a restructuring deal, regardless of the rights or priorities of the creditors. Their vote is measured by the face value of their claim against the company, e.g., Company ABC owes a bondholder $500, then that bondholder votes for $500. Critically, the approval threshold for CRT I is 75% of the value of all existing creditor claims against Company ABC. Therefore, as the minority creditors only make up 25% of the value of claims, Company ABC is able to push the debt-for-equity swap through with the support of 75% of its creditors. The red line in Figure 1 marks the 75% approval threshold, and the black shaded area is the vote in favour of the proposed plan. The 75% threshold here is met, and the proposed restructuring deal is passed and implemented despite the minority creditors’ dissent. 

While this restructuring process is faster and simpler, it can lead to unfair outcomes. Creditors who are less affected by the plan can outvote those who suffer more under the plan, purely because the less affected creditors have larger claims against the company. For example, secured creditors could make up 80% of total claims against Company ABC, and they are receiving equity for writing of their debt, but the unsecured creditors receive nothing for writing-off their debt because their claims only amount to 20% against Company ABC. Hence, a plan can pass even if the most affected parties strongly object, raising concerns about fairness and misuse of the process. Indeed, this risk of vote swamping is why the US does not have any single class voting corporate rescue tools. It is also partly why the CVA is restricted to just unsecured debt and why dissenting creditors have an opportunity to challenge a CVA in court for unfair prejudice. 

Class Voting: Consensual 

In an alternative set of facts, Company ABC decides to use ‘Corporate Rescue Tool II’ (CRT II) to push its restructuring deal through. CRT II requires that creditors be separated into separate classes according to the nature of their claims. For example, secured and unsecured creditors would be placed into separate classes for voting. In CRT II, creditors are separated into classes considering both (a) their existing rights against the company and (b) their rights under the proposed plan. 

Company ABC decides to use CRT II and it proposes three classes of creditors: A, B, and C. For the restructuring deal to pass when using CRT II,  75% by value must vote in favour of the restructuring deal in each class. 

Therefore, unlike in CRT I where only 75% by value of total claims is needed, Company ABC would not be able to get away with giving a class of creditors nothing, as they would almost certainly object to the restructuring deal. In CRT I, Company ABC could rely on offering generous terms to select creditors to make up the 75% threshold of total claims. In CRT II this is not possible as the Company needs to secure 75% in all classes (No CCCD), and where a class believes they are being treated unfairly, they will not vote in favour of the plan and the restructuring deal fails. Here, Company ABC decides to offer generous terms to all classes of creditors to achieve the 75% threshold in each class.

This sort of corporate rescue tool resembles the Part 26 Scheme of Arrangement in the UK and the Consensual Chapter 11 in the US. Part 26 Schemes should not be confused with Part 26A Restructuring Plans, as the former is a much older corporate rescue tool that does not have CCCD, and the latter is a much newer tool that does have CCCD. The Consensual Chapter 11 (when all classes vote in favour of the plan) and Part 26 Scheme are similar in that they both separate creditors into different classes for voting on proposed deals, but they do not involve CCCD.

The advantage of this structure is that it ensures fairness for creditors by requiring broad-based creditor approval. By giving each class a separate vote, it protects creditors from being overridden by others with different interests or lesser exposure. Further, it makes the court’s job much easier as the supermajority voting in favour indicates that the plan is commercially reasonable to creditors with similar rights. However, it is significantly harder for debtors to push through a deal, as the company must secure support within every distinct group of creditors, all with their own interests, priorities, and exposure to losses. Even if most creditors support the deal, a single dissenting class can block it entirely, giving small groups substantial leverage and increasing the risk of deadlock. Thus, companies may be forced to water down or over-compromise their plans to appease many classes, which can make otherwise efficient or commercially viable restructurings much more difficult to achieve. 

Class Voting: Cross-Class Cram-Down

In our final scenario, Company ABC decides to utilise ‘Corporate Rescue Tool III (CRT III)’ to push a restructuring deal through. Here, Company ABC offers the following terms to its creditors:

• Class A: 25% equity in the reorganised company in exchange for a 15% write-down of its existing debt

• Class B: 10% equity in the reorganised company in exchange for a 40% write-down of its existing debt

• Class C: Nothing in exchange for a 90% write-down of its existing debt

Figure 3 depicts the voting results. Class A approves the proposed restructuring with 75% in value voting in favour. Only 50% of Class B creditors approve the proposed restructuring, which means it is a dissenting class. No Class C creditors approve the deal, also making it a dissenting class. In CRT II, we can see that this deal would immediately fail as the 75% consent thresholds are not met in Classes B and C. 

However, CRT III allows the company to use CCCD, which means a restructuring plan can still be approved even if one or more classes vote against it, subject to more strenuous legal conditions that the company must satisfy.

In our scenario, Company ABC was able to implement its restructuring deal. Since Class A approved the plan by the required majority, and the court was satisfied that Company ABC has complied with the legal conditions required to use CCCD (such as there needing to be a good justification for the treatment of Class B and C compared to Class A), the plan was imposed on Class B and C despite their objections. This flexibility allows viable restructurings to proceed even in the face of minority holdout or class-level opposition, which would have otherwise blocked the deal under CRT II. Equally, unlike in CRT I, the more strenuous legal conditions and enhanced court supervision provide safeguards for dissenting creditors. The Company will need to pass a series of legal tests (which we will cover in detail) to cram down dissenting creditors, which are generally not as rigorous as in single class voting tools. CRT III more closely resembles Chapter 11 and Part 26A as corporate rescue tools, demonstrating the force behind CCCD. Ultimately, CCCD is a powerful tool that can impair entire classes of creditors against their will. This is why courts are so involved in Chapter 11s and Part 26A Plans, as they provide a check on companies to ensure that debtors cannot abuse CCCD against their creditors. 

Let's bring all of this together so that you can see the differences between these corporate rescue tools side by side:

• CRT I, which is similar to the UK’s CVA, is quick and low-cost. It is mainly used for simple restructurings, involving unsecured creditors like landlords. But it gives less protection to minority creditors and can lead to unfair results if relatively large and unaffected creditors dominate the vote.

• CRT II resembles the Part 26 Scheme or a consensual Chapter 11 plan, and it focuses more on fairness. It gives each class of creditors a separate vote. This protects smaller or more affected groups of creditors, but it also gives each class a veto. If one class disagrees, the whole deal can fail, where impairing that dissenting class is key to the success of the restructuring. This makes it harder to get a deal done in complex cases.

• CRT III, which is like Part 26A and Chapter 11 with cram down, is designed for more difficult restructurings. It allows companies to go ahead even if some classes vote against the plan. But they must pass tough legal tests, and the court is closely involved. This gives companies more power to break deadlock, but it also means higher costs and more court time.

We should also take a step back from all the detail to understand the significance of cram down. In effect, corporate rescue tools empower companies to unilaterally rewrite the terms of legally binding contracts, including repayment terms, security rights, and covenants, without the full consent of affected creditors. This is an extraordinary departure from the ordinary principles of contract law, which generally require mutual consent for any amendment to a contract. So, if we are to depart from these contract law principles, we really need a good reason to forgo these principles and justify imposing the restructuring deal. This reason needs to be even stronger, where less creditor consent is required to get a deal through. As such, the role of court supervision is crucial where CCCD is engaged. The court acts as a safeguard to ensure that the proposed restructuring deal is substantively fair to all affected parties where entire classes of creditors are being bound against their will. The role of law in CCCD is the main subject of this week’s newsletter, and we will explore how the legislation and the courts in the US and UK aim to balance between promoting business turnaround and protecting the rights of existing creditors.

Company & Plan Eligibility

Let’s start with Chapter 11. According to §109(d) of the Bankruptcy Code, effectively almost any US company is entitled to file for Chapter 11, and there is no statutory test that requires the company to have financially deteriorated to file for Chapter 11 [1] [2]. However, this does not mean that the use of Chapter 11 goes completely unchecked. Courts in the US have developed a “good faith” principle, whereby they can dismiss a Chapter 11 finding where they find that the proceeding was filed in bad faith and was an abuse of the bankruptcy process. For example, as recently as 2024, US courts have defined bad faith as there being no “financial distress” or where “reorganization would be objectively futile”; though what is meant by these terms has not been fully explained, and courts do disagree on what makes up this good faith principle [5].

As for Part 26A, according to s901A of the Companies Act 2006, there are two conditions the company must meet:

• Condition A: The company has encountered, or is likely to encounter, financial difficulties that will or may affect its ability to carry on business as a going concern

• Condition B: a ‘compromise or arrangement’ is proposed between the company and its creditors, and this ‘compromise or arrangement’ is to address the financial difficulties

A little bit more is going on here, so let’s explain it. Firstly, the definition of financial difficulties in Condition A is very broad to encourage early intervention and maximise the chances of the company’s survival [8]. It is simply a light check to ensure that otherwise perfectly healthy companies cannot use Part 26A to shed their liabilities. For Condition B, the term ‘compromise or arrangement’ is basically asking for there to be some element of ‘give and take’ with creditors [3] [4]. The idea is that the company cannot propose a restructuring deal that impairs a creditor without giving them some benefit in return. This benefit can be minimal, such as the chance of being repaid something in the restructuring deal as opposed to nothing if the deal didn’t go ahead. Eligibility for Part 26A requires the impaired creditor to enjoy at least some benefits of the restructuring deal. Whether or not this ‘benefit’ is enough or fair value for their impairment will be discussed in the Distribution of Value section.

Which Creditors Must Participate in the Vote

This is fairly straightforward in Chapter 11. Creditors primarily fall into one of three categories, per §1126 [2]:

• If a class of creditors is unimpaired under the plan and recovers in full, that class is presumed to have accepted the plan. This vote does not count towards a class voting in favour of the plan for CCCD because they are unimpaired.

• If a class of creditors is fully impaired under the plan, such that they recover nothing, they are presumed to have rejected the plan. However, unlike the class of creditors who are unimpaired, this vote counts as a dissenting class against the plan, which needs to be crammed down if the debtor wishes to push their deal through

• If a class of creditors is partially impaired, such that they recover something under the plan (more than zero), then they are to vote on the plan. This vote does count towards a class voting in favour of the plan for CCCD because they are impaired. 

Therefore, every creditor gets to vote on the plan. No creditors are excluded from the vote, but rather, there are presumptions on how some creditors will vote for purely procedural reasons. As we will cover later, the vote of creditors who make full recoveries does not count towards the consent thresholds required to exercise CCCD.

In Part 26A, there is once again a bit more going on here. To paraphrase s901C (3) and (4):

Every creditor whose rights are affected by the proposed deal must be permitted to participate in the vote 

Note that ‘affected’ here has a wide meaning and is not limited to ‘impairment’ [3]. For example, creditors whose legal rights have changed (legally or economically) under the plan must be included in the vote, even if they still recover 100%. The vote of the purely ‘affected’ class of creditors can count towards the threshold for CCCD in Part 26A.

However, where a class of creditors does not have a “genuine economic interest in the company”, they can be excluded from the vote

The statute does not clarify what a “genuine economic interest in the company” actually is, so the UK courts had to step in and define this. In short, this second bullet point means that if a class of creditors is out-of-the-money in the relevant alternative, they can be excluded from the vote [6]. 

Let’s break this down starting with the relevant alternative. Recall from our CVA post that the relevant alternative is what is most likely to happen if the proposed restructuring deal were not to be sanctioned and implemented. Most often this will be a liquidation scenario, but we will address this further in the ‘Chapter 11’s Best Interests v UK’s No Worse Off’ section. 

As for ‘out-of-the-money’, it refers to classes of creditors that would receive no recoveries in the relevant alternative. For example, if the relevant alternative was a liquidation and in this liquidation the unsecured bondholders would receive no recoveries, they are out-of-the-money and therefore are not entitled to vote on the restructuring plan. 

The market view on this is that if a creditor does not have a genuine economic interest in the company, that creditor can be excluded from the vote, and a plan can be proposed to impair their claims. So far, in cases like Smile Telecoms it has been possible to exclude impaired creditors from voting in this way. However, whether this is actually correct has not been seriously tested and is beyond the scope of this week’s newsletter [7]. But if this continues to be the case, the scope of eligible creditors appears to be in stark contrast with Chapter 11.

• In Chapter 11, we are concerned with the position of creditors under the proposed plan. From here, a class of creditors who would have no economic interest (defined as being fully impaired / making no recoveries) is still considered as a dissenting class for the purposes of voting and therefore need to be crammed down. 

• In Part 26A, we are concerned with the position of creditors in the hypothetical relevant alternative (their position if the plan were not sanctioned; the ‘counterfactual’). From here, a class of creditors who would have no economic interests (defined as being out-of-the-money) can be excluded from voting and therefore may not need to be crammed down.

The extent to which the UK courts will protect excluded, out-of-the-money creditors from an unfair deal that they did not get to vote on is yet to be seen. However, after the Petrofac decision, we may have reason to believe the court will take steps to protect excluded creditors from an unfair restructuring deal. We will cover Petrofac in the ‘Distribution of Value’ section.

Classification of Creditors

How are creditors organized into classes for voting on the proposed restructuring deal? The US Bankruptcy Code, per §1122(a), states that ‘claims’ can be placed into a particular class only if they are substantially similar to the other claims in such a class. Just to be 100% sure what is meant by ‘claim’ in this context: a claim refers to the legal rights the creditor has against the company; basically, what the credit documents say the creditor is entitled to. For example, terms on repayment, interest, maturity, priority, and collateral are all examples of a creditor’s legal rights. As for what “substantially similar” means, the Bankruptcy Code does not provide a definition. It is left to companies to classify their creditors, and even where creditors do have substantially similar legal rights, they may be placed into different classes, provided the company has good business justification for doing so [9]. 

Hence, it appears the company has real flexibility when classifying creditors for voting. To those interested in politics, the risk of gerrymandering here should be very apparent [1]. Gerrymandering in the context of restructuring refers to deliberately classifying creditors in such a manner to manipulate voting outcomes. For example, in the context of CCCD, the company may be incentivised to artificially create a class of creditors that votes in favour of the plan, such that it could reach the required voting threshold to cram down other dissenting classes (for more on this, check out our post on Class Gerrymandering). However, the US courts are alert to this, and there is a strong precedent of plans being rejected due to improper classification [9].

Part 26A is very similar to the US in this regard, and there are no meaningful differences to discuss. A good summary of the principles relating to class composition can be found in the convening judgement in Sino Ocean [10]. 

In short, rights should not be so different that it would make it impossible for the group of creditors to form a common interest. Pay attention to 27iii) for the court’s concerns for gerrymandering. 

The Vote 

Starting with the voting threshold across classes, in both Chapter 11 and Part 26A, only one impaired class must vote in favour of the plan as a condition for CCCD. In Chapter 11, it is stated in §1129(a)(10) of the US Bankruptcy Code: “at least one class of claims that is impaired under the plan has accepted the plan”. In Part 26A, per s901G, this same requirement is formulated as having at least one class that would have a ‘genuine economic interest in the company’ (be in-the-money in the relevant alternative) voting in favour of the plan. Remember that the proposed plan must be a ‘compromise or arrangement’ (see ‘Company & Plan Eligibility’ section earlier), which means all voting creditors must be ‘giving’ something up to receive benefits of the restructuring. So, the important takeaway here is that at least one class of creditors that is both (a) in-the-money in the relevant alternative and (b) impaired, must vote in favour of the plan to allow the company to use CCCD.

So technically, in both Chapter 11 and Part 26A, it is possible to have 10 classes of creditors and only one class approves the plan. The company can cram down the other nine dissenting classes, subject to the court’s approval. 

As for the voting thresholds within classes:

• Chapter 11: At least two-thirds (66%) in value of a class and more than half ( > 50%) in number of claims in that class, per §1126(c)

• Part 26A: At least 75% in value of a class of creditors present and voting, per s901G(5)

So, the value threshold is lower in Chapter 11, hence making it easier and more attractive for debtors to push their plan through. As for why Part 26A is set at 75%, it appears to be pulled directly from the Part 26 Scheme of Arrangement. In the Scheme context as well, there is very little to suggest that there was a strong rationale why this number is set at 75% [11]. But the effect is that this 75% in value threshold offers a bit more protection for creditors. We will explain the influence of Part 26 Scheme law on Part 26A Plans later in the ‘Distribution of Value’ section.

There is also a difference in the numerosity thresholds between Chapter 11 and Part 26A. Under Chapter 11, more than half of the claims in a class must vote in favour of the plan. In contrast, Part 26A imposes no such numerosity requirement. Why is there such a big difference?  This reflects the UK legal treatment of bonds: bonds are typically held on trust by a corporate trustee, meaning that the legal holder of the debt is the trustee, not the thousands of underlying investors [3]. As a result, only the trustee counts as a single creditor for voting purposes, regardless of how many individual bondholders are economically interested. Dispensing with the numerosity requirement under Part 26A avoids the risk of bondholders being swamped by several, smaller investors.  

Chapter 11’s Best Interests v UK’s No Worse Off

We are now moving on to some of the most important issues when it comes to obtaining a court’s permission for sanctioning a restructuring deal. Both Chapter 11 and Part 26A require courts to conduct a Vertical Comparison to ensure a minimum level of protection for dissenting creditors. A vertical comparison is an assessment of ‘absolute’ treatment: how do the creditors fare under the plan compared to what their position would be in an alternative scenario to the plan? In Chapter 11, this is known as the ‘Best Interests’ test, and in Part 26A, this is known as the ‘No Worse Off’ test [3].

Best Interests

This is a test that can be found in §1129(a)(7) of the Bankruptcy Code. Pay particular attention to (ii) below.

In Chapter 11, the vertical comparison is against a Chapter 7 Liquidation. Thus, if each dissenting member of an impaired class will receive at least as much under the proposed plan as it would receive in liquidation, then the plan satisfies the best interests test [3]. The burden will be on the company proposing the plan to demonstrate and submit valuation evidence to show (a) what creditors would receive in a liquidation scenario and (b) that the plan provides creditors with at least the recoveries that they would receive in the liquidation [16]. Creditors can challenge this liquidation analysis with their own evidence, which leads to valuation fights between the company and the creditors. This, of course, does not mean the court will sanction the plan, but this test provides a minimum level of protection such that a court cannot sanction a plan unless the best interests test is satisfied.

No Worse Off

The English test has one major difference from Chapter 11, which can be found in s901G. 

As opposed to a liquidation, the vertical comparison in a Part 26A is against the relevant alternative, which is whatever is most likely to occur in relation to the company if the plan were not sanctioned. Note that it is not what will happen or what would probably (over 50% likelihood) happen if the plan isn’t sanctioned, just what is most likely to happen. Once again, the burden will be on the company proposing the plan to show (a) what is most likely to happen if the proposed deal is not sanctioned, (b) what creditors would be entitled to this hypothetical scenario, which is mostly limited to the financial value creditors would be entitled to and (c) that the proposed plan provides creditors with at least what they would have in the hypothetical, hence they are ‘no worse off’ than they would be in the relevant alternative. 

While the relevant alternative can be and often is a liquidation, this is not always the case. For example, in Prezzo, the relevant alternative was a pre-packaged sale of the business and assets to a connected party [13]. In Hurricane Energy, the company argued that in the relevant alternative, it would have traded profitably in the short-to-medium term before commencing a liquidation process [12]. However, in Hurricane Energy, the court was not convinced, finding that the company would have been able to discharge its obligations to its bondholders. Therefore, the relevant alternative was that the company would continue trading on as there was a realistic prospect of the company being able to raise new money due to its profitability, in which case the shareholders were certainly worse off under the plan [3] [12]. In Thames Water, a class of creditors even argued (albeit unsuccessfully) that the relevant alternative would have been another Part 26A plan that would have been cheaper for the company and had better terms for the dissenting class [15]. You can imagine how complex the valuation fighting can be where the company’s distributable value in the relevant alternative cannot be assessed with a liquidation analysis [3]. 

Earlier, we discussed how the relevant alternative under Part 26A is often an insolvency process such as liquidation or administration. The case of Hurricane Energy illustrates why. The earlier a company invokes Part 26A, that is, the stronger its financial position, the less likely the court is to accept an insolvency process as the relevant alternative. This has significant implications: if the company is relatively healthy, more creditors are likely to be in-the-money and therefore harder to impair under the plan, as they reasonably expect a higher recovery in the alternative scenario. As a result, companies are incentivised to delay filing until their financial condition deteriorates further, making it easier to justify an insolvency process as the relevant alternative and cram down dissenting classes. This tendency persists despite judicial warnings against such strategic timing [7] [14]. 

All in all, both the Best Interests test under Chapter 11 and the No Worse Off test under Part 26A aim to ensure that dissenting creditors receive at least as much under a restructuring plan as they would in an alternative scenario. The key difference lies in what that alternative is: Chapter 11 uses a fixed benchmark of liquidation, which offers clarity and predictability but sometimes fails to reflect the commercial realities beyond liquidation value. Part 26A, by contrast, adopts a flexible standard, which allows courts to tailor the comparison to the company and creditors’ actual circumstances. This flexibility can be advantageous when it comes to more accurately defining what creditors are entitled to, as a liquidation analysis may be too pessimistic to capture the company’s true value for distribution. However, the test comes with considerable uncertainty, which leads to lengthy disputes over what the relevant alternative is and creates a wider scope for valuation disputes. 

Distribution of Value

Some of the complex points and literature on restructuring law are concerned with questions of Horizontal Fairness. The horizontal comparison asks how the dissenting creditor fares against other creditors and classes of creditors in the proposed restructuring deal, and what would be an acceptable distribution in light of this. In simpler terms, it is about ensuring that (a) creditors of similar rank or economic interest are treated equally unless there is a good reason for differential treatment and (b) that no class, even if their rights are very different, receives disproportionately better terms without a good reason. A major difference between the US and the UK on this point is the amount of guidance provided by statute on how this assessment is to be conducted. §1129(b) of the Bankruptcy Code provides clear guidance on the horizontal comparison and hence is far more predictable. By contrast, the Companies Act is silent on this point, with explanatory notes stating the court has an ‘absolute discretion’ to sanction the plan once all other legal requirements of CCCD are met. We will provide a simplified, yet comprehensive breakdown of how horizontal fairness is governed in Chapter 11 and Part 26A.

Chapter 11 Distribution Overview

For Chapter 11, we’re going to work through §1129(b) of the bankruptcy code. There are a few key issues we need to address:

1. Unfair Discrimination

2. Fair and Equitable

   1. Secured Creditors → Lien Retention

   2. Unsecured Creditors →  Absolute Priority Rule (APR)

3. The ‘New Money’ Exception to APR

Unfair Discrimination 

Unfair discrimination is first mentioned in §1129(b)(1), and there is no further description as to what ‘unfair discrimination’ is supposed to mean in the Bankruptcy Code. It is generally understood to mean that similar classes of creditors should be treated similarly, and where treatment of similar classes is different, this differential treatment should be justified as being necessary for the successful reorganisation of the debtor [3]. For example, if we have two classes of unsecured creditors, ranking equally in terms of priority, they should recover a similar amount. If not, there should be a reasonable basis for treating the classes of unsecured creditors differently. A reasonable justification could be that one unsecured class is made up of trade creditors, and they are getting a higher recovery because their future supply will be necessary for a successful reorganisation. 

However, do note that it is not permissible to treat a class of junior unsecured creditors (lower-priority creditors) in a liquidation analysis more favourably than a class of senior unsecured creditors, even where there might be a good commercial reason for doing so. In other words, while differential treatment between classes of creditors with similar priority can be justified, treating lower priority creditors better than higher priority creditors can never be justified. This is because of the Absolute Priority Rule, which we will cover shortly.

Fair and Equitable 

The plan having to be ‘fair and equitable’ is also first mentioned in §1129(b)(1). What ‘fair and equitable’ means depends on whether we are focusing on the treatment of secured or unsecured creditors. Let’s discuss both groups below.

Secured Creditors

When a company wishes to impose a deal on a dissenting class of secured creditors, it has three options:

1. Let Creditor Keep Lien: the company can let the creditors keep their rights over the property (their lien) and promise to pay them back over time in cash. The total amount paid must be at least equal to what the property is worth to the creditor.

2. Attach Lien to Sale Proceeds: the company can sell the property via §363 (we cover court-supervised sales in depth here!). The creditor’s lien then moves to the money from the sale, and the creditor must be paid using these proceeds.

3. ‘Indubitable Equivalent’: the company can give the creditor something else that’s clearly worth the same as what they’re owed. For example, this could be a different property or payment that fully replaces the value of their claim.

All the options ensure that the secured creditor receives compensation that is not less than the value of their collateral.  Note as well, where the value of the creditor’s collateral exceeds the value of their claims against the company, e.g., a secured creditor is owed $100 but the value of their collateral is $110, the secured creditor is only paid what they are actually owed (so $100 and not $110). 

Unsecured Creditors (Absolute Priority Rule)

When a company wishes to impose a deal on a dissenting class of unsecured creditors, it has to meet one of two conditions:

1. Pay Them Full: Each unsecured creditor in that class must receive something (like money or property) that, as of the date the plan takes effect, is worth the full amount they’re owed. This will be the option the company is less likely to pursue unless there is strategic value in paying such creditors in full, like the trade creditor example we gave earlier. Accordingly, there is a risk of ‘unfairly discriminating’ between similar classes of creditors.

2. Absolute Priority Rule (APR): If unsecured creditors are not being paid in full, then no one who is below them in priority (like shareholders or subordinated creditors) can receive anything at all under the plan. In other words, claims of a higher priority must be paid in full before lower priority claims can receive any recovery [17].

Absolute Priority Rule and the New Money Exception 

We should spend some time discussing the APR, given how fundamental it is in US bankruptcy law. Below the exact phrasing of the APR rule in §1129(b)(2)(B)(ii)

As the APR says that higher-ranking creditors must be paid in full before lower-ranking parties get anything, it gives unsecured creditors a lot of power in negotiations. If a company tries to put forward a plan that doesn’t fully repay its unsecured creditors, and those creditors vote against the plan, the shareholders cannot keep their shares. This is because shareholders are always ranked below unsecured creditors in bankruptcy. If shareholders want to stay in control after the reorganization, they’ll likely need the support of unsecured creditors [18]. Otherwise, they must either give up their equity to comply with the APR.

To illustrate this, imagine a company files for Chapter 11 and owes $2mm to a class of unsecured creditors. The proposed plan offers to pay them only $800k, meaning they would recover just 40% of what they are owed. If the company were liquidated today, those creditors would receive only $300k, which is just a 15% recovery. Despite this, the unsecured creditors vote against the plan, which means the shareholders cannot keep their equity unless they find a way to win creditor support.

To do so, the shareholders improve the offer. They agree to pay the $800k over five years, give the unsecured creditors 20% of the company's shares, and allow them to appoint a representative to the board. With these added terms, the unsecured creditors approve the plan. Even though the unsecured creditors are not being paid in full, the shareholders are allowed to retain most of their equity in the business because they obtained the support of the impaired class.

New Money Exception

There is another way shareholders can keep their shares in the business, and that is the ‘New Money Exception’ to the APR. Pay attention to Figure x, and in particular: “[…] nor receive or retain under the plan on account of such junior claim or interest […]” (emphasis added). The words “on account of” are crucial: they only block junior parties from receiving value ahead of senior creditors because of their existing position or status [1] [3]. In other words, if the reason the junior creditor or shareholder receives value ahead of the senior creditor is due to their existing debt alone, it breaches APR. Therefore, if these junior parties were to provide new value to the business in reorganization, they may be permitted to participate in the reorganization (e.g., shareholder providing new capital may be allowed to retain their shares). 

Key though is that the New Money Exception will not apply if the new value was provided because of the junior party’s existing position in the company. So if the new value was provided only because of the junior creditor or shareholder's existing rights (for example, the company only wants to accept new money from junior creditors or only shareholders were offered the opportunity to provide new money, and no one else), then this breaches the APR. 

The best example of where the New Money Exception did not apply for this reason is in 203 North LaSalle. Here, the US Supreme Court ruled out a New Money Exception applying where shareholders provided new capital to the business in a closed-door process, as this capital was provided “on account of” their existing shares in the company [3]. In other words, it was only because the investors had existing shares in the company that they could provide new capital, which means the new money was provided “on account of” their shares. If new money was raised in a competitive, open market process and it turned out that the company chose the shareholders’ new money because it was on the best terms for the company, then this new money was not provided “on account of” their existing shares and would be far more likely not to breach the APR. We only say far more likely, as the scope of the New Money Exception is still unsettled law in the US and is too complex to cover further here. Overall, the key takeaway is that the APR is at the centre of US Bankruptcy Law, and exceptions to the rule are limited.

Part 26A Distribution Overview

As we have mentioned before, the statute provides no guidance on how courts are to assess the horizontal fairness of a proposed plan in Part 26A. All s901F suggests is that the court may sanction a plan once all other conditions for CCCD are met [19]. The guidance that the lawmakers did provide was limited to the explanatory notes that came with the legislation in 2020. Below is a key passage from the explanatory notes for us to focus on [19]:

The UK legislature expected the courts to draw on existing case law from Part 26 Schemes of Arrangement when deciding whether to approve a restructuring plan under Part 26A. Recall that in a traditional Part 26 Scheme, creditors vote in classes, but there is no power to impose the plan on an entire class that votes against it. Instead, it is the minority within a class (the 25% or less within a class voting against a plan) who can be bound if the required majority approves the plan.

This is important because it makes the court’s job much simpler. The creditors who are being bound by the vote have broadly the same rights and interests as those who supported the plan. If a large majority of creditors in a class believe the plan is a good one, it is probably reasonable to apply that plan to the whole class. Unless there is something clearly unfair (e.g., the majority being influenced by interests that have nothing to do with the plan), the court will usually not interfere with the commercial judgment of the approving creditors [3].

However, the court’s job is completely different when CCCD is involved. It cannot be assumed that, because secured creditors think the plan is a good idea, it would also be a reasonable deal to impose on unsecured creditors who have rights and will receive much different treatment under the proposed plan. Therefore, in Adler, Judge Lord Justice Snowden in the Court of Appeal (England’s second highest court) had laid out some considerations that should be taken into account for CCCD in Part 26A, albeit these are non-exhaustive as discretion allows the court to consider all the facts and the circumstances of the plan. We will cover two key points from Adler and discuss out-of-the-money creditor treatment after Thames Water and Petrofac.

1. Pari Passu Principle

2. No APR and Retention of Equity

3. Out-of-the-Money Creditors

Pari Passu Principle 

In Adler, the court confirmed that when the relevant alternative is a liquidation, creditors with similar rights must usually be treated equally. This reflects the pari passu principle, which means that creditors of the same rank should share equally unless there is a good reason to treat them differently [4]. This is very similar to Chapter 11’s rule against unfair discrimination, which allows different treatment only if there is a clear commercial justification.

The UK courts have shown strong support for this principle. For example, in Cineworld, some landlords had negotiated side letters that aimed to exclude their leases from being affected by any future restructuring plan under Part 26A. However, the court found that this was not a good enough reason to treat them differently from other landlords of the same ranking. The pari passu principle still applied. That said, there are some cases where the court has accepted that unequal treatment of creditors with the same legal ranking is justified by commercial reasons [7].

No APR and the Retention of Equity

One of the key differences with Chapter 11 is that Part 26A has no APR. Unlike Chapter 11, where unsecured creditors can block a plan and force shareholders to give up ownership unless they are paid in full, Part 26A imposes no such requirement. It doesn’t even adopt the European-style Relative Priority Rule (RPR), which at least requires that higher-ranking classes are treated better than lower-ranking ones, even if not paid in full. As a result, Part 26A is extremely flexible as there is no requirement that a strict insolvency priority must be preserved within a restructuring plan. This theoretically allows the court to sanction plans where junior parties, such as unsecured creditors or even shareholders, receive value or retain interests despite senior creditors not being paid in full, so long as the plan satisfies the statutory conditions.

This has important practical consequences. Under Chapter 11, the APR gives unsecured creditors significant negotiating leverage: if they are not paid in full, they can stop junior parties from receiving anything. Given that equity will always be junior to the unsecured creditors, it will be in the shareholders' best interest to reach a compromise or a deal that the unsecured creditors will accept. In contrast, under Part 26A, the balance of power is shifted towards the debtor, making it easier for debtors to push through creative or debtor-friendly plans without needing full creditor support. 

However, you can imagine the risks if there is no respect at all for a priority order. It would go against the basic idea that in bankruptcy, those higher up the capital structure should be paid first, and that more junior parties should only recover after senior classes are paid. If left unchecked, a company’s shareholders use the process to protect their own interests at the expense of senior creditors. Therefore, judges still want to see a commercial justification from the company (much like when deviating from the pari passu principle)  when shareholders retain their equity in the business. Let’s look at a couple of instances where shareholders retained their equity [20]:

• Ambatovy: the shareholders were the only parties willing to provide the new funding needed for the restructuring. The court held that if an outside investor had done the same and taken 100% of the equity, there would be no issue

• Sino-Ocean: the court accepted evidence that if the company’s two state-backed shareholders lost a minimum equity holding, the company would no longer qualify as a state-owned entity. This would have led to higher borrowing costs and worse outcomes for all creditors.

It is still early days, but whether the courts are going far enough in their search for a justification for equity retaining value in a Part 26A is a different question [7]. Ultimately, the crucial point to learn here is that Part 26A is extremely flexible in terms of how value can be distributed to stakeholders up and down the capital structure when compared with Chapter 11. Though this places a burden on the judges to interrogate whether there are valid justifications for distributing value away from more senior classes

Out-of-the-Money Creditor Treatment (Virgin Active to Petrofac)

Finally, while not addressed directly in Adler (dissenting creditors were in-the-money), the issue of how out-of-the-money creditors are to be treated in a Part 26A plan is at the centre stage of UK restructuring recently, so we ought to cover it. Remember that a class of creditors being out-of-the-money meant that the court is convinced that the class would recover nothing in the relevant alternative. 

Previously, out-of-the-money creditors were treated harshly in Part 26A plans. The UK courts used to just require that out-of-the-money creditors be offered something, as minimal as it could be, in order to satisfy the ‘compromise or arrangement’ requirement [7]. A creditor’s rights cannot be impaired in the UK without providing the company with something in return. However, as to whether the out-of-the-money creditors should be entitled to more than something minimal was still contentious. 

This issue was first addressed in Virgin Active. For context, there were several classes of landlords who were out-of-the-money and had voted against the plan; these out-of-the-money landlords challenged the plan. However, the court held that the views of out-of-the-money creditors should not weigh heavily or at all in the distribution of the benefits of the restructuring. There were two reasons the court put forward:

1. The statute allowed for out-of-the-money creditors to be bound to a plan that impairs their claims without being given the opportunity to vote at a class meeting (once again, whether this is correct is still a hot topic [7]). So, the fact that they were included in the vote does not suddenly give them an important say in how value is distributed under the plan [21]. 

2. An out-of-the-money creditor is not an economic owner of the business and, for that reason, is not entitled to any share of the benefits created by the plan. An economic owner here refers to someone who has a real financial interest in the company, such that they stand to lose in the relevant alternative (hence lose if the restructuring plan does not go ahead) [22]. 

Following the decisions in Thames Water and especially Petrofac, it is now clear that the approach taken in Virgin Active, where creditors who are out of the money under the relevant alternative received nothing, cannot always be justified. In Thames Water, the court clarified that it is not a strict rule that only in-the-money creditors are entitled to value under a restructuring plan. Instead, the court rejected the idea that value must always be confined to in-the-money creditors as a matter of principle [22].

The judgment in Thames Water suggested that even if a creditor is out-of-the-money in the relevant alternative, this does not automatically mean they are entitled to effectively nothing under the plan. The court must consider all the circumstances of the case, including the economic impact of the restructuring and the contributions made by dissenting creditors. The fairness of the proposed distribution must be assessed in light of the plan as a whole.

This principle was applied in Petrofac, where the court ultimately rejected the proposed plan. Although the dissenting creditors were out-of-the-money, they were still contributing to the restructuring deal by giving up legal claims. The plan would help the company survive and bring in new money, but the court found it unfair that the dissenting creditors were receiving almost nothing in return. Their impairment played a role in enabling the restructuring’s success. Meanwhile, the new investors were set to make a significant profit, and the court held that since those profits came from the benefits created by the restructuring, a fair portion should be shared with all affected creditors, not just the ones providing new capital. Otherwise, the plan would not fairly divide the value it generated [22]. What this practically means is that courts want to see if the company tried to reach a genuine compromise with its junior creditors which was not necessary in the old out-of-the-money approach. Hence, companies ideally should provide substantial evidence that they engaged with junior creditor and considered the role of the out-of-the-money creditor’s impairment in enabling the restructuring’s success [24].

Conclusion

In conclusion, while both Chapter 11 and Part 26A aim to facilitate the rescue of financially distressed companies, they reflect fundamentally different philosophies when it comes to the distribution of value. Chapter 11 operates within a mechanical and rule-bound framework, most notably through the APR, which strictly enforces creditor hierarchy and gives unsecured creditors a powerful ability to block any plan that seeks to benefit junior stakeholders. In contrast, Part 26A adopts a far more flexible, discretionary approach, allowing courts to depart from strict insolvency priority where there is a commercially justified reason to do so. However, this flexibility carries risks, particularly where junior parties might retain value unjustifiably at the expense of more senior creditors. Ultimately, the UK’s principles-based model places a heavy burden on judges to interrogate the economic substance of the deal, while the US’s rule-based system offers predictability, incentivising negotiated distributions with creditors not receiving full recovery, albeit with more rigidity in court.

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