Aspiring commercial barrister and BPC graduate Radha Shivam explores the high-profile case involving Britain’s largest water company, Thames Water. This company, which serves nearly a quarter of the UK population in London and South-east England, has been teetering on the brink of collapse and potential temporary nationalization due to substantial debt.
What makes this case so significant is that it represents one of the most substantial corporate restructurings in UK history, with £19 billion of debt at stake.
This development is pivotal in the legal sphere, as it introduces unprecedented complexity and sets new precedents for future restructurings.In December 2024, Thames Water applied for a Part 26A restructuring plan, with a sanction hearing scheduled for February 2025. The company aims to secure £3 billion in debt funding to allow time for securing new equity investment worth £3.25 billion or more.
The plan includes a £3 billion loan facility from the company’s secured creditors at an annual interest rate of 9.75%, along with additional fees to lenders. This is to prevent potential special administration and opposition from lower-ranking creditors proposing an alternative with a lower rate. Thames Water also seeks access to cash reserves and debt extensions.
Thames Water’s CFO assured that the additional costs of the new loan would not be passed on to customers, stating that any costs exceeding those allowed by the water regulator Ofwat would be covered by creditors or new equity investors.
The situation is critical for Thames Water, as it has warned that it will collapse by the end of March without court approval for a deal with the holders of “class A” debt, which includes US hedge funds and British investors. Julian Gething, chief restructuring officer, stated, “We believe it is the only implementable solution to enable the equity investment required to provide stability and certainty in the longer term and will not impact customer bills”.
However, 84.5% of the lower-ranked “class B” creditors voted against the plan, filing an objection and proposing an alternative restructuring plan. They claim their plan would provide Thames with significantly more committed funding on cheaper and more flexible terms. The class B plan was filed by a Cayman Islands-registered fund controlled by a company specializing in investing in financially distressed companies.
Understanding Part 26A plans is crucial in this context. The recent case of Re AGPS Bondco plc [2024] EWCA Civ 24 is a complex and important case regarding restructuring plans, particularly concerning Part 26A of the Companies Act 2006. The Court of Appeal considered for the first time the test for exercising discretion to ‘cram down’ a dissenting class of creditors under a Part 26A restructuring plan, known as a “cross-class cramdown”, introduced by the Corporate Insolvency and Governance Act 2020.
Part 26A of the law allows companies facing financial challenges to negotiate a compromise or arrangement with creditors through a restructuring plan. This process includes a provision known as a “cross-class cramdown,” which is permissible when Conditions A and B are satisfied.
Condition A, the “no worse off” test, stipulates that if the plan is approved, no dissenting class member would be worse off than they would be in the event of the relevant alternative. Condition B requires that the compromise or arrangement has been approved by a class meeting of those who would receive payment or have a genuine economic interest in the company under the relevant alternative. The “relevant alternative” refers to what the court deems most likely to occur if the compromise or arrangement were not approved.
Initially, the judge found that these conditions were met and used his discretion to approve the plan and “cramdown” the dissenting class. However, the dissenting creditors appealed on eight grounds, focusing on how the court should exercise its discretion when considering sanctioning a plan with dissenting classes. The court ruled that both “vertical” and “horizontal” comparisons should be considered, and any unequal treatment of different classes must have a “good reason or proper basis” for departure from the principle of pari passu distribution, a fundamental aspect of corporate insolvency law. A critical issue in cross-class cramdowns is the distribution of post-restructuring value, especially when not all stakeholder classes approve the plan. The debate centers on the balance of “fairness” amidst necessary compromises. This complex area of law has significant implications, as evidenced by Thames Water’s legal expenses, reportedly £15 million per month, with a potential restructuring bill exceeding £20 million. The restructuring of Thames Water involves a diverse group of stakeholders, including government officials, regulatory bodies, and environmental groups representing 16 million bill payers. The plan is unique in its two-phase approach, which could lead to one of three outcomes, including the potential implementation of a special administration regime (SAR), designed for water companies but never before used.A Special Administration Regime (SAR) is a unique insolvency procedure that assigns specific objectives to an administrator. SARs are prevalent in industries that provide essential statutory or public services, such as water and energy, where maintaining the continuity of these services is vital for economic stability. This process enables the continuation of services while debts are frozen, facilitating business restructuring and sale or even full nationalisation.
As of February 2025, in a significant development, Thames Water received a financial lifeline with a £3 billion loan approved by the High Court. This loan provides Thames Water with the time needed to address its financial issues and potentially averts nationalisation. The company will initially receive £1.5 billion to sustain operations until September 2025, funded by Class A creditors who hold approximately £11 billion of Thames Water’s debt. The funding will be disbursed on a monthly or interim basis, contingent upon Thames Water meeting loan requirements, including securing new shareholder investments. Various potential investors have submitted bids to invest in Thames Water, and the company is currently conducting a thorough assessment of each proposal. Loan terms stipulate that it must be repaid first in the event of administration, with existing creditors’ repayment dates deferred by two years. The timeline for accessing loan funds is subject to the potential appeal process by Class B creditors, who hold around £750,000 of subordinate debt and oppose the loan as they risk losing their entire investment in a restructuring. For Thames Water’s future, the government has been prepared to place the company under special administration, while some advocates have called for nationalisation, a move the government currently opposes. Thames Water is pursuing a comprehensive restructuring that includes new shareholder investments and swapping debt for equity with existing creditors. The company is also seeking to increase bills by 53% from this year to 2030, challenging Ofwat’s permitted 35% increase. Alternatives to nationalisation have emerged, with companies like Octopus Energy, Infrastructure CK Infrastructure Holding, and Castle Water expressing interest in Thames Water’s technology arm and business functions. This historic restructuring marks a significant evolution in corporate financial management, particularly for regulated utilities. The outcome will set a precedent for how English law handles troubled utility restructurings, balancing financial stability with public interest in unprecedented ways. The ongoing developments, with new updates emerging daily, and the pending appeal outcome, make the future of Thames Water a subject of keen interest.No doubt, this restructuring will be referenced in future cases and will be a point of discussion in the legal landscape when it comes to high-stakes corporate restructurings.
Radha Shivam, an aspiring commercial barrister, is currently an unregistered barrister and mentor. She holds a degree in LLB from the University of Law and is a BPC graduate. The Legal Cheek Journal, which discusses such significant legal topics, is sponsored by LPC Law.
