The Corporate Insolvency & Governance Act (“CIGA”) has introduced another mechanism for company rescue in the form of The Restructuring Plan.
The restructuring plan process derives from the Scheme of Arrangement, whereby a company seeks the approval of all classes of creditor, however, the difference with this process is that there is an introduction of the cross-class cram-down, which serves to bind all creditors to the plan - whether they agree or not - with the Court’s approval. The Scheme of Arrangement is a useful tool where there are complex capital structures in place (such as with the restructuring of financial institutions) but it is not used as widely as it could be due to the difficulties in achieving agreement of all parties and the costs surrounding its implementation. However, it is hoped that this helpful addition will facilitate a restructure at the same time as compromising debts as required.
Whilst the Scheme of Arrangement is extremely flexible, it can be difficult to approve as each class of creditor has to vote in favour, the majority being 75% for each class. This can mean that certain classes of creditors may “hold out” for better terms, often to the detriment of the other classes, making it difficult to achieve the requisite majority (more than 75%) voting in favour. The cross-class cram-down is a mechanism often found in Chapter 11 proceedings in the US, whereby dissenting creditors are overruled by the Court. This has been introduced into UK law through the CIGA and means that, where their proposal has not been able to achieve agreement due to certain creditors dissenting, the Court can impose the cross-class cram-down to facilitate the restructure.
The restructuring plan can only be used where the company is in financial distress (to the point where it may no longer be a going concern) and that the company proposes to compromise its debts (either with creditors or members) to reduce the effects of the financial difficulties. The aim is to facilitate the survival of the company whilst also ensuring that no creditors receive unfair treatment and the plan must ensure that the creditors are no worse off than they would have been had the plan not been sanctioned. The plan is extremely flexible in its form and so as long as it deals with the above, then there are no stipulations around what is required, other than the Court must sanction the proposal.
The restructuring plan will rely on valuations to illustrate the impact of the plan on the different classes of creditor, especially in the event of the cross-class cram-down to identify that the dissenting creditors are no worse off and also to identify where certain creditors can be excluded from the plan. The estimated outcome statement is likely to play a vital role in identifying this position, especially around the argument that the dissenting creditors would not be worse off in a formal insolvency. In addition, it is noted that a company would use the restructuring plan to compromise its debts - where there is significant creditor pressure the company can apply for a moratorium alongside the restructuring plan, to give it breathing space whilst it formulates its proposals.