Stronachs Logo

Our Restructuring and Insolvency Team are looking at the potential impact of the Corporate Insolvency and Governance Act 2020.  This article looks at the restructuring plan introduced by the Act.

As discussed in our previous article on the moratorium procedure, insolvency law in the UK is largely built on a system of creditor-led procedure with creditors having the power to instigate the insolvency process and to approve procedures proposed by the company or its directors. However, the Act seeks to introduce new measures that are driven by the debtor company rather than its creditors. In addition to the moratorium the Act introduces a new procedure for arrangements and the reconstruction of companies in financial difficulty. These measures are referred to as ‘Restructuring Plans’ and are akin to a Scheme of Arrangement under Part 26 of the Companies Act 2006.

The Scheme of Arrangement

In order to appreciate how the Restructuring Plan will differ from a Scheme of Arrangement it is useful for us to provide a summary explaining in brief terms how a Scheme operates.

Schemes are a court-approved agreement between the company and its shareholders or its creditors to restructure a company. A Scheme is not exclusively used in an insolvency situation and they can often be utilised as part of a solvent restructure.

A Scheme is initiated by making an application to the court seeking an order convening either a creditor or a members meeting, depending on the type of Scheme being sought.  Prior to the meeting the Scheme is sent to all of the relevant parties, advertised in the local newspaper (Financial Times for a PLC) and either the Edinburgh or London Gazette and placed on the company website.  This allows the affected parties to review the Scheme in advance of the court-ordered meeting.  At that meeting the parties must vote on the approval of the Scheme.

The attendees at the meeting are separated into classes, for instance the creditors will likely be split into secured and unsecured creditors and members can be split by share classification. Each class of attendee needs to vote in favour of the Scheme by 50% in number constituting 75% of the value of each class.  If any of the class of creditors/members do not vote in favour of the Scheme it can be blocked. The impact of this is that one class effectively has a collective veto.

How that might look in practice is that a company working to put a Scheme in place due to an insolvency will need to classify their creditors and this will often see a Landlord and perhaps other secured creditors being in one classification, essential trade suppliers in a separate classification and all others in a third class (they could of course be broken down further if appropriate).  For the Landlord it is in their long term, best interests to see the company continue to survive but in order for that to happen the company will need to secure their essential trade suppliers. Therefore, when the Scheme is published the Landlord might agree to surrender some value  in order to secure the vote of the essential trade supplier class. However, if the third class of creditors are unsatisfied by their deal they can block the Scheme. In that scenario the most likely outcome for the company will be liquidation or administration.   

Restructuring Plans

Section 7 and Schedule 9 of the Act introduces an amendment to Part 26 of the Companies Act 2006.  The amendment contains the new provisions for Restructuring Plans. Restructuring Plans, like a Scheme of Arrangement, are a court approved restructuring process. However, the main difference between a Scheme and the Restructuring Plan is the introduction of cross-class cram down (“CCCD”). 

CCCD prevents a single class of voter from vetoing the restructuring arrangements if the proposed restructuring is in the best interests of the company. If a class votes against the Restructuring Plan the court will need to determine whether or not sanction for the Plan should be granted.

In considering if sanction should be granted, despite a dissenting class of voter, the court must be satisfied that the dissenting class will not be any worse off than they would be in the relevant alternative. The relevant alternative is whatever the court considers would be most likely to occur if the sanction is not granted.  In an insolvency situation the relevant alternative is most likely to be liquidation of the company.

The court must also be satisfied that the plan has been agreed by a number representing 75% in value of the creditors who will receive a payment or at least have a genuine economic interest in the company in the event of the relevant alternative.

Therefore, in order to persuade the court that the Plan should be granted sanction the company will have to be well prepared with financial information in order to support the Plan as the best solution for the company but also for the creditors or members of the company.  This will inevitably involve working closely with the company’s financial advisors and it would be beneficial to consult with a licensed insolvency practitioner in order to establish what the relevant alternative is and the impact that scenario would have on creditors should it play out.

Summary

The introduction of the Restructuring Plan is a further option in the armoury of a company facing financial difficulty. However, it is not an easy solution for a company. In order to satisfy the requirements of a Restructuring Plan the company will need to engage with financial advisors in order to formulate the Plan, understand the impact that it might have on a particular class of creditors or members and identify what the relevant alternative will be and how that would affect creditors or members.  The company will also require to engage legal advisors in order to advise on the foregoing, make the application to the court, attend at the required court hearings and, if sanction is granted, to help implement the Plan.  For these reasons a Restructuring Plan is an expensive process to undertake and it will therefore not be suitable for many companies.  The company will need to have access to funds in order to pay professional advisors fees and if those funds are not available it is likely that a company will need to consider alternative routes such as moratorium, administration or liquidation.

The introduction of CCCD in Restructuring Plans will make this the favoured option for companies considering a reorganisation and we expect that we will see far fewer Schemes being presented to the court.

Follow/subscribe to Stronachs on social media to be kept up to date with our continuing analysis of the Act. 

 twitter contact  linkedin contact

Chambers Leading Firm 2020 bw

Contact Info

ABERDEEN OFFICE
28 Albyn Place, Aberdeen AB10 1YL
Tel: +44 1224 845845

 

INVERNESS OFFICE
Camas House, Fairways Business Park,
Inverness IV2 6AA
Tel: + 44 1463 713225

Legal 500uk leading firm 2020