The Corporate Insolvency and Governance Act’s new restructuring plan is a court regulated process which allows a company to restructure its debts and deal with different classes of stakeholders in different ways.
It is similar to existing restructuring schemes, but in novel twist, a court may now sanction a restructuring plan even if certain classes of creditors vote against it – otherwise known as ‘cross class cramming down’.
Restructuring plan explained
In the restructuring plan procedure, creditors will be formed into classes approved by the court and will vote on the proposed plan. At least 75% of creditors, by value, within a class must vote in favour of the plan, in order for that class to have approved it.
Where a class does not vote in favour, the court will now still be able to sanction the plan providing:
A) the class or classes that voted against it are no worse off than they would be in the next most likely outcome – e.g. administration; and
B) at least 75% of creditors, by value, within at least one class of creditors who would receive something in the next most likely outcome vote in favour of the plan.
The new procedure, with these ‘cross class cramdown’ mechanics, aims to prevent “hold-out” or ransom creditors from blocking a viable restructuring proposal, which has the overwhelming support of those creditors who retain an economic interest in the business.
Applying the new plan
Most UK companies can make use of the new plan if they have encountered, or are likely to encounter, financial difficulties that affect their ability to carry on business as a going concern.
They can deploy the plan if a compromise or arrangement is proposed between the company and its creditors (or any class of them) to prevent, mitigate or eliminate the effect of any of those financial difficulties.
How it works
- The company (or its administrator or liquidator), a creditor or member wishing to propose the plan must apply to court for an order for a meeting to vote on the proposed scheme.
- A statement setting out the key features of the scheme must be sent to all parties required to attend the meeting(s).
- Every creditor or member affected by the scheme must be allowed to participate in the meeting unless the court is satisfied that none the class of members/creditors have a genuine economic interest.
- Attendees are required to vote on the proposed scheme. At least 75% (by value) of each relevant class of creditors must vote in favour of the scheme for it to proceed to court sanction, subject to the cross class cram down (see above).
- Classes are divided into groups with similar rights and who can therefore consult on their common interest.
- An application is made to court to seek an order to sanction the scheme and the scheme will become effective upon delivery of the sanction order to the Registrar of Companies.
- Once effective, the scheme will bind all creditors of each relevant class.
- If a scheme is applied for within 12 weeks from the end of a new moratorium, debts created during the moratorium cannot be compromised in the scheme (unless the relevant creditor agrees).
Secured creditors should consider whether they could potentially be ‘crammed down’ and have a plan imposed on them, or whether Condition A (above) protects them from that when compared with, for example, administration.
If dissenting secured creditors cannot be crammed down, the plan may be of little use to distressed companies.
And although the new moratorium and restructuring plan are not mutually exclusive (in fact, a moratorium may well be necessary to provide breathing space whilst the plan is implemented), the two processes do not entirely sit comfortably with each other.
If a company has implemented a moratorium, that is likely to amount to an event of default under its lending and security arrangements. If that leads to an acceleration of repayment of the debt causing it to fall due during the moratorium, such debt cannot be compromised by the new plan.
Insolvency expert view
Kelly Jordan, partner and head of restructuring & insolvency, says: “Similarly to the new moratorium, the aim of this new procedure is to aid the rescue of viable companies facing cashflow difficulties. Whilst the intent is there, it does give rise to some issues which have been highlighted above.
“One of the biggest challenges for distressed companies is likely to be the cost of implementing the plan which, as noted above, requires two applications to court.
“There are challenges around how it will sit with the new moratorium and the inability to compromise moratorium creditors in the plan without their consent. It will also be interesting to see what take up there is particularly amongst SMEs.”