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To scheme or to plan?

The Corporate Insolvency and Governance Act 2020 (“CIGA”) introduced a series of temporary and permanent measures to the armoury of rescue and restructuring mechanisms in the wake of the COVID-19 pandemic and the ensuing financial upheaval.

Pursuant to the provisions of section 7 and Schedule 9 of the CIGA, Part 26A (Arrangements and Reconstructions: Companies in Financial Difficulty) of the Companies Act 2006 (“Act”) introduced a new restructuring process now widely referred to as the “restructuring plan”. At its core, the restructuring plan is a court sanctioned compromise or arrangement between a company and its creditors and/or shareholders.

Based on the pre-existing scheme of arrangement (“Scheme”), the mechanics of the new restructuring plan bear many similarities with those of a Scheme, albeit with a few notable exceptions (see below at “Comparison with Schemes of Arrangement”).

It is important to remember that, as with Schemes, the sanctioning of a restructuring plan is a not simply a “rubber-stamping” exercise by the court. Therefore, the fulfilment of applicable statutory formalities and attainment of the relevant voting majorities are no guarantee the court will necessarily approve a particular restructuring plan, if it regards the restructuring plan in question not “just and equitable”. Given its proximity to the Scheme, it is likely that the court will draw on established jurisprudence relating to Schemes when considering whether to refuse approval of a restructuring plan on just and equitable grounds.

Availability of the Restructuring Plan

Unlike a Scheme, the restructuring plan is only available to companies that have encountered, or are likely to encounter “financial difficulties” that are affecting, or will or may affect, their ability to carry on business as a going concern (section 901A(2) of Part 26A of the Act).

To qualify as a restructuring plan, the purpose of the restructuring plan proposed must be to “eliminate reduce or prevent, or mitigate the effect of,” any of the company’s financial difficulties (section 901A(3)(b) of the Act).

There is presently no statutory guidance regarding the scope of “financial difficulties” save that they will need to be such so as to affect or likely to affect the company’s ability to carry on business as a going concern.  Interestingly, there is also no requirement that the restructuring plan should look to actually preserve the company’s business as a going concern.

Who Can Apply?

Like a Scheme, the restructuring plan requires the sanction of the court to fall within the scope of the new Part 26A Act provisions.  An application may be made by any of the following persons:

(a)  the company

(b)  any creditor or member of the company

(c)  if the company is being wound up, the liquidator of the company; or

(d)  if the company is in administration, the administrator of the company.

Summary of Process

The implementation of a legally binding restructuring plan involves a two-part court approval process.  The process is summarised as follows.

Stage 1: Application.  Any of the persons referred to in the preceding section may apply to the court for directions to call a meeting of creditors or members (or any class of such persons) in order to consider the proposed restructuring plan.

Stage 2: Initial Hearing. An initial court hearing is held to consider the various proposed voting classes of creditors and members and whether to convene the meetings at which each such class will vote.

The court will use the initial hearing to establish whether:

  • the company meets the qualification criteria referred to above (see above at “Availability of the Restructuring Plan”)
  • the classes of creditors and/or members of the company have been correctly composed
  • (on application) to remove a particular class or classes of creditors and/or members who do not have a “genuine economic interest” in the company (and hence being “out of the money”); and
  • the court has any jurisdictional issues.

Ultimate responsibility for determining whether more than one meeting of the creditors and/or members is required and if so, responsibility for ensuring that such meetings are properly constituted resides with the applicant.

Stage 3: Formalities. If the court orders the meeting(s) to be convened, the company must send notice of each meeting to the creditors and members together with a statement explaining the effect of the proposed restructuring plan, identifying any material interests of the directors of the company and explaining how such interests are affected by the restructuring plan (section 901D of the Act).  The form of statement is similar to the explanatory statement circulated for a Scheme. Subject to limited exception, failure to comply with such requirements is a criminal offence (sections 901D(5) and 901E of the Act).

Stage 4: Meetings Held. The restructuring plan is put to each class meeting for approval. Unlike a Scheme, a restructuring plan requires approval from those holding 75% majority in value of the members or creditors (or of each class of the members or creditors, as the case may be) (section 901F(1) of the Act).

Stage 5: Sanction Hearing. After the meetings have been properly convened and held, an application is made for a second court hearing to determine whether the court is to exercise its discretion to sanction the restructuring plan.

Points to Note:

Cross-Class Cram Down. If the restructuring plan is not approved by the requisite majority of a class of creditors or (as the case may be) of the members of the company, the court may still sanction the restructuring plan under section 901G of the Act if the following conditions are met:

Condition A: the members of the dissenting class would not be any worse off under the restructuring plan than they would be in the event of a “relevant alternative” (being whatever the court considers would be most likely to occur in relation to the company if the restructuring plan were not sanctioned); and

Condition B: the restructuring plan has been agreed by the requisite majority (see Stage 4 above), who would receive a payment, or have a genuine economic interest in the company in the event of the relevant alternative.

The cross-class cram down provisions take no account of the rank of the dissenting class.  Therefore, if the court sanctions the restructuring plan, the dissenting class would be bound by the terms of the restructuring plan regardless of where it ranks to the approving class.  That said, the degree of persuasion a dissenting class may have in trying to influence a court to not grant sanction on the basis that it would not be just and equitable for the court to do so, is yet to be tested in this new arena.  It is likely the courts will draw upon the law relating to Schemes as a starting point.

Relevant Creditor Approval. When assessing potential creditor support of a restructuring plan, applicants will need to be particularly mindful if there is a pre-existing moratorium in place. If there is a moratorium in progress in the 12 weeks prior to the court application for an initial hearing for a restructuring plan and the restructuring plan includes provisions affecting creditors with “moratorium debt” or “priority pre-moratorium debt”, the court may not approve such restructuring plan at the sanctions hearing if the relevant creditor in respect of such debt has not agreed to such provisions (section 901H(5) of the Act). It is noted that such creditors are not eligible to participate in the initial court sanctioned meeting, which is perhaps why they have been afforded a measure of protection within the provisions of section 901H(5) of the Act.

Stage 6: Restructuring Plan Becomes Binding.  Once sanctioned, the restructuring plan is legally binding on all affected creditors and shareholders once a copy of the court’s order (in the case of English companies) has been delivered to Companies House (section 901F(6)(b) of the Act).

Timing Issues

Timetabling is likely to be key. Notwithstanding the similarities between the process and procedural formalities relating to a Scheme, given the infancy of the new restructuring plan, it is difficult to predict with any certainty how long a restructuring plan would take to complete following the date of first application. This is likely to depend on the terms of the restructuring plan in question and the timetabling issues of the court. However, it is anticipated that timing would broadly follow that of a Scheme.

Comparison with Schemes of Arrangement

Restructuring Method Qualification Voting Threshold Cross-Class Cram Down Ability Ability to Disenfranchise Members Bind Creditors
Scheme of Arrangement No financial distress qualification. 75% by value and a majority in number (head count) NO YES YES
Restructuring Plan Company must be in financial distress.

 

The purpose of the plan must be to eliminate reduce or prevent, or mitigate the effect of financial difficulties.

75% by value YES YES YES

The Restructuring Plan in the SME Market

It will be interesting to see the degree of take up of the restructuring plan within the SME market. The restructuring plan may well complement the pre-existing suite of restructuring measures, but bearing in mind the proximity of its mechanics to those of a Scheme, the commercial viability of the restructuring plan for smaller businesses is questionable. At first blush the restructuring plan appears better suited to more complex debt restructuring.

The lower voting threshold and the potential for the court to apply the new cross-class cram down will inevitably draw certain appeal, especially if there is uncertainty of creditor support. However, this is not without complexity; particularly in the context of valuation and comparison issues between the estimated outcome of the restructuring plan in question and the “relevant alternative”. Timing and cost are also likely to feature prominently in the overall decision of whether to pursue a new restructuring plan.

Additionally, the use of the cross-class cram down in the context of compromising Crown preference (See our briefing – Changes to The Return of Crown Preference – RadcliffesLeBrasseur LLP for further information) is also worth keeping an eye on. That said, we anticipate the court will look to Scheme jurisprudence in this regard, which does not look favourably upon Schemes with the sole purpose of avoiding tax.

Contact: Sumaira Choudary, Partner and Solicitor

 


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.

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