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Among the raft of measures it proposes, the Corporate Insolvency and Governance Bill seeks to introduce a new mechanism for a “compromise or arrangement” to be put in place between a company and its creditors and/or shareholders, which is widely referred to as a ‘Restructuring Plan’.
While the Bill makes its way through the legislative process (which can be tracked on the Parliament.uk site), we think the following points are essential reading:
1. It’s been some time coming
The Government undertook a review of the UK’s corporate restructuring and insolvency framework in 2016, and further consulted on new means to strengthen it in 2018. The pace of change then slowed, no doubt in no small part because (in those relatively halcyon days) political bandwidth was largely taken up by Brexit discussions. COVID-19 has of course changed all that, necessitating some drastic and immediate changes to our insolvency regime. Alongside the temporary measures introduced in response to the pandemic, the Government has taken the opportunity to fast-track some key new alternative procedures to support business rescue, anticipating that they will be more important than ever in the months and years ahead.
2. It has ‘financial difficulty’ preconditions
For a company to be eligible for a Restructuring Plan:
- it must have encountered, or be likely to encounter, financial difficulties that affect, or threaten to affect, its ability to carry on business as a going concern.
- the purpose of the Plan must be to eliminate, reduce, prevent or mitigate those financial difficulties.
There is no insolvency test – but there must be a degree of existing or forecast financial distress.
3. It’s modelled on the Scheme of Arrangement…
Schemes of arrangement under English law (Schemes) are provided for in Part 26 of the Companies Act 2006. The Bill proposes the Restructuring Plan be brought in under a new Part 26A of that Act, inserting new sections 901A to 901L.
Like Schemes, the Restructuring Plan:
- is a ‘debtor in possession’ process – there is no insolvency practitioner appointed to administer, supervise or monitor, albeit specialist restructuring advisors will be closely involved in its preparation and implementation
- would be subject to Court oversight and sanction
- divides affected members and/or creditors into appropriate classes, depending on how their rights are to be affected
- is subject to creditor approval with voting thresholds of 75% by value in each class (Schemes have an additional requirement of 75% in number, which does not apply to the Plan)
- if sanctioned, would bind both unsecured and secured creditors (unlike a CVA)
4. …with a significant new feature
One of the drawbacks of Schemes is the ability for certain creditors to hold out and disrupt a proposal that would otherwise save a company, or otherwise achieve the Scheme’s aim, potentially for its own commercial reasons. The Restructuring Plan imports a key feature of US Chapter 11 bankruptcies: a ‘cross class cram down’. The Court has the discretion to impose the Plan on dissenting classes if it considers it is fair and equitable, and if satisfied that:
- none of the members of the dissenting class would be any worse off than they would be if the Plan were not sanctioned (comparing it with what is likely to happen to the Company otherwise).
- the Plan has been approved by at least one class that would have a genuine economic interest if the Plan were not sanctioned.
Both criteria require consideration of the most likely alternative to understand where the value will break. That may or may not be an insolvency procedure, and identifying the most appropriate comparator could lead to considerable argument. The views of creditors who would likely be wholly paid, or wholly unpaid, in that scenario will not be relevant.
The cross class cram down would enable debt-for-equity swaps to be imposed without shareholder consent, which Schemes cannot achieve, and the potential for empowering junior creditors.
5. It’s not for everyone
Under the Bill, any company which could be wound up under the Insolvency Act 1986, including a foreign company, could be subject to a Restructuring Plan. This would include financial services companies, albeit the Secretary of State would have the discretion to disapply the provisions in that sector later.
In reality, the complexity and expense of preparing any Plan will mean it will be most useful complex debt restructuring and/or cross-border restructurings. The existing success of Schemes which are well-established in those fields, and the enviable international reputation of the English courts in considering restructuring issues, will mean the Restructuring Plan would be competitively positioned for the financial rebuilding needed as the world starts to emerge from the restrictions of the pandemic.