What is a restructuring plan ?
It is a compromise or arrangement entered into by a company and its creditors. They were introduced into law at the height of the Covid-19 pandemic within the Corporate Insolvency and Governance Act 2020.
Whilst it is very early days and there is as yet little case law on the new procedure, many of us in the insolvency profession see them potentially being a better alternative to a company voluntary arrangement or scheme.
They are designed to be used to rescue potential viable companies just like company voluntary arrangements but the key difference is if creditor support is not there for the rescue plan, the court can impose its views on the plan and override the wishes of the creditors and if approved by the court are legally binding on all creditors.
Whilst they have been used already for a few large companies, we think that they could be used equally effectively in the SME marketplace in appropriate cases, despite the at present higher costs of implementing them. Some of the key aspects of them are:-
- the company does not have to be technically insolvent for the restructuring plan to be an option. The directors can consider using them in situations where they can see the writing on the wall at some point in time in the relatively near future.
- All the different types of debt (secured, unsecured and preferential) can be restructured in a myriad of possible ways including treating different types of creditors (eg landlords) in a different way to other types of creditors.
- New working capital can be injected into a company subject to a restructuring plan to enable it to use that capital to improve the fortunes of the company without importantly having to use it to repay existing debt.
- Creditors are put into different types of class of creditors and if 75% of that class votes for the restructuring plan, that class is deemed to have approved the plan to bind the whole of the class.
- However, if one or more classes do not approve the plan, the court can intercede and “cram down” and in effect force that class to accept the plan. However, the court will only impose its views if the class opposing the plan would be in no better position under any other realistically viable scenario.
As we say, we think that potentially, restructuring plans could be very useful for appropriate cases in the SME marketplace. A business might have a huge debt following it losing a court case which it has no realistic prospect of repaying. The prospects of a dividend to unsecured creditors if the business ceased trading and entered a liquidation process would be under any realistic scenario NIL. However, an investor would be prepared to fund the company if it was not saddled with this huge historic debt, thereby saving jobs and keeping the economic unit trading into the future because the business is, at its core, a very good business.
A CVA may not be approved as the casting vote would vest with the court case creditor. But if a restructuring plan was implemented and the court presented with facts that showed that the plan was in all the circumstances realistic, fair and reasonable to all classes of creditors including the court case creditor and that court case creditor was in no worse position under the plan than under any realistic alternative scenario, the court would have the power to force the court case creditor to accept and be bound by the restructuring plan.
The final thing to say about restructuring plans is that they will take time to formulate and implement. Each plan will be unique and have to be adapted to the specific case. Thus a company facing huge creditor pressure or the imminent threat of a winding up petition is unlikely to be able to take advantage of the procedure because there will be insufficient time to implement it. Courts expect directors to act responsibly and if the directors go to court and ask it to sanction a deal with in effect restricts the ability of creditors to enforce their strict legal rights, the court is not going to be too keen to do so, if the directors come to seek its assistance at the 11th hour.