Petrofac — a restructuring saga with consequences for the wider energy sector

The Petrofac administration offers an insight into how Scottish courts balance commercial reality and creditor fairness in high-stakes restructurings where compromise gives better outcomes than insolvency, writes Pamela Muir.

Background

Petrofac Limited’s administration in October 2025 stands as one of the most notable corporate failures in the UK energy services market in recent years. A former FTSE 100 business and long-established contractor to the international oil and gas industry, the company’s collapse was the end point of a prolonged decline rather than a sudden shock. Debt pressures, restructuring efforts and investor concern had been building for years, making the insolvency significant not only for Petrofac itself but for the wider supply chain and sector confidence.

The company’s final attempt at recovery centred on a group-wide restructuring plan under Part 26A of the Companies Act 2006. Although that plan was initially sanctioned, the Court of Appeal overturned the decision on 1 July 2025, leaving Petrofac without a viable route to stabilise its balance sheet. Matters then deteriorated further when TenneT terminated Petrofac’s role in a major 2GW Dutch grid connection programme, a contract said to account for more than 80% of revenue in its engineering and construction division. At that stage, administration became less a strategic option than an inevitability, and joint administrators were appointed on 28 October 2025.

Once in office, the joint administrators concluded that Petrofac Limited, as the group’s ultimate holding company, had little value beyond its shareholdings in operating subsidiaries. With those interests heavily dependent on contracts already under threat, and liabilities remaining substantial, a rescue of the company as a going concern was no longer viewed as achievable under the statutory purpose of administration.

A sale built around business continuity

The administrators then pursued a structured sale of the group’s Asset Solutions division, ultimately selecting US-based Chicago Bridge & Iron Co (CB&I) as the preferred bidder. That transaction was not a straightforward asset disposal. Its completion depended on a Company Voluntary Arrangement (CVA) proposed for Petrofac Facilities Management Limited (PFML), a key subsidiary within the division. In practical terms, the CVA was central to preserving value, securing the sale and protecting a substantial operating business.

Creditors met on 30 January 2026 to vote on the PFML proposal. The commercial case put to them was direct: approval of the CVA would allow the CB&I deal to complete and would help safeguard around 3,000 jobs across the Asset Solutions division. For creditors, the decision was therefore not only about legal rights, but also about whether a viable part of the business could still be carried forward.

The proposal was approved by an emphatic majority, winning support from 99% of voting creditors by number and 86% by value of claims. HMRC, however, was among the dissenters, asserting unsecured claims of about £151m against PFML. That opposition set the stage for a more important legal question: when does a commercially necessary compromise become unfair prejudice?

That question gives the case significance well beyond Petrofac. It goes to the heart of how Scottish courts may assess CVAs in large, operationally sensitive restructurings, particularly where a sale process depends on differential treatment between creditor groups.

Why HMRC challenged the deal

HMRC’s claims arose from National Insurance contributions said to be due in relation to PFML’s offshore workforce between 6 October 1999 and 5 April 2014. Unhappy with the treatment of those unsecured claims under the CVA, HMRC exercised its right under section 6 of the Insolvency Act 1986 to challenge the arrangement in court.

Section 6 allows a creditor to challenge a CVA on two grounds: unfair prejudice or material irregularity in the decision-making process. HMRC relied on unfair prejudice, arguing that the arrangement treated it in a way that was commercially and legally unjustified.

Before the Court of Session, HMRC drew on two established English-law lenses for testing unfair prejudice. The first was the vertical comparison: whether a creditor does better under the CVA than it would in the realistic alternative, usually liquidation. The second was the horizontal comparison: whether the creditor is being treated less favourably than others without proper justification.

On the vertical test, HMRC did not say it would recover less under the CVA than in an alternative insolvency. Instead, it argued that the improvement was too slight to amount to fair treatment. In other words, it accepted that the deal may clear the minimum threshold, but said that was not enough under the circumstances.

On the horizontal test, HMRC argued that other creditor groups were given a materially better outcome, either because their debts were left untouched or because they benefitted from the broader sale structure. It also said the voting process allowed commercially interested creditors to overwhelm its objection, effectively subordinating its position to the interests of those invested in the transaction succeeding.

PFML’s answer: the alternative was worse

PFML’s response was commercially straightforward. If the CVA failed, it said, PFML and other companies in the Asset Solutions division would likely fall into administration or liquidation. In that scenario, secured creditors would recover around £27m, while unsecured creditors, including HMRC, would share no more than £800,000 through the prescribed part. That equated to roughly 0.12% of unsecured claims. Under the CVA, by contrast, HMRC’s minimum return was estimated at 0.45% and potentially 2.23%. The company’s case was therefore that the arrangement plainly delivered a better economic result than the realistic alternative.

PFML also said the different treatment of certain creditor groups was justified by business necessity. Critical trade suppliers, for example, were left uncompromised because their continued support was essential to keeping the Asset Solutions business intact and making the CB&I transaction viable. The same commercial logic, PFML argued, applied to the wider creditor structure supporting the sale.

PFML further pointed out that support for the CVA was not limited to creditors whose claims were unaffected. Creditors in a position closer to HMRC, including HSBC and Moelis, also backed the proposal. Among creditors whose claims were actually compromised, only HMRC and one smaller creditor voted against it. That made it harder, PFML argued, to say the arrangement had been engineered to produce unfair prejudice.

What the court made of it

In his opinion, Lord Sandison cut through the competing arguments and focused on the central issue: had the CVA unfairly prejudiced HMRC’s interests? He framed the question as a two-stage inquiry. First, was there prejudice at all? Second, if so, was that prejudice unfair?

Importantly, Lord Sandison did not treat the English vertical and horizontal comparison frameworks as rigid rules. While acknowledging their usefulness, he indicated a preference for a broader and more open-textured assessment of fairness. For business audiences, that is a notable point: the Scottish court was less interested in formula and more interested in substance.

On the numbers, the court accepted that HMRC would receive a better return under the CVA than in a formal insolvency. The gap between a minimum CVA return of 0.45% and an estimated insolvency return of 0.12% was not, in Lord Sandison’s view, trivial. On that basis, the court found no prejudice arising from the comparison.

The court also accepted that differential treatment between creditor groups could be objectively justified. Secured creditors, Lord Sandison noted, were not true comparators because their position was dealt with through the wider sale transaction rather than by the CVA itself. As for critical suppliers and other excluded groups, their treatment was justified by the commercial need to preserve the transaction and the underlying business.

He also regarded support from creditors such as HSBC and Moelis as strong evidence that those in a comparable position did not see the arrangement as unfair.

Why this matters

For restructuring professionals, lenders and boards, the case is a useful indication of how the Court of Session may approach CVA challenges in large and complex corporate situations. Rather than applying English authorities mechanistically, the Scottish court signalled a willingness to look at fairness in the round, with close attention to commercial context and practical outcomes.

The broader lesson is clear. In Scottish restructurings, a creditor who has been outvoted or treated differently will not necessarily establish unfair prejudice. Where a compromise delivers a better outcome than insolvency and the distinctions between creditor groups can be commercially justified, the court is unlikely to intervene. For the energy sector and other industries facing stressed balance sheets, that is a message worth noting.

By Pamela Muir, insolvency partner, Thorntons