Among its other innovations, the Corporate Insolvency & Governance Act 2020 (CIGA) introduced the restructuring plan into the Companies Act 2006. As a “debtor in possession” process it is likely to have less stigma and will have obvious attractions to effect a restructuring without a formal insolvency process.
The process is modelled largely on schemes of arrangement, though crucially it can only be used, unlike schemes, in circumstances where the company is or will be effected by financial circumstances that will affect the ability to continue to trade as a going concern.
As with schemes, creditors are divided into classes who each vote on the restructuring plan. The restructuring plan’s distinct advantage is the court’s ability to approve and impose it on dissenting classes (the so-called ‘Cross Class Cramdown’ – which we discussed in our article).
The key to any restructuring is to understand where the value breaks. Armed with a valuation it is possible to compare it against the amounts owed to creditors in the statutory waterfall of payments. This will show which creditors have the most interest in a restructuring and importantly those with no economic interest. This will lead to the court scrutinising restricting plans more closely, particularly if there is to be a Cross Class Cramdown. A detailed financial analysis prepared by either accountants or experienced restructuring professionals will be essential to the plan’s success.
Is the restructuring plan a standalone procedure?
In theory yes, but if there is pressure from creditors and no standstill has been agreed with them, it may be used in conjunction with the moratorium procedure introduced by CIGA into Part A1 of the Insolvency Act 1986.
The moratorium should not be confused with the small companies moratorium for CVAs which has not been widely used and has been repealed by CIGA. It is an entirely more flexible procedure that can provide valuable breathing space to effect a restructuring while management stay in control but subject to the scrutiny of a monitor who must be a licensed insolvency practitioner. We have outlined how a moratorium is obtained, extended and exited elsewhere in this series.
As we outlined at the outset of this series, entry into the moratorium will also trigger the protection of supplies provisions which will have the advantage of “parking” historic liabilities, payment for which suppliers may have been pressing for, whilst protecting ongoing supplies, which will have to be paid as part of the process.
When will the restructuring plan be used?
A more flexible version of a scheme of arrangement sounds like the Holy Grail that restructuring professionals have longed for but will it be used in the mid-market?
Virgin Atlantic was quick to utilise the process to attempt to deal with its much publicised difficulties but if the new restructuring plan had not been available, would it have opted for an insolvency process or a scheme of arrangement?
Schemes of arrangement are invariably complex and expensive and have historically been utilised by large international companies in cross border restructurings. The mid-market typically utilise the CVA process, possibly now in conjunction with the moratorium, as it is a significantly cheaper and more familiar process.
For the restructuring plan to be effective and capable of being used by the mid-market the complexity and cost will need to significantly reduce compared with a scheme of arrangement. An encouraging sign is at the first hearing of Virgin Atlantic restructuring plan, the court confirmed that it is likely to follow scheme of arrangement precedents when it comes to the plan’s interpretation which is a crucial first step in reducing the likely cost and complexity involved.
In short, a well thought-out restructuring plan is another process to add to our restructuring toolbox that should not be immediately considered the preserve of the large international companies: watch this space…