Restructuring plans: three years on…

The Corporate Insolvency and Governance Act 2020 (CIGA) was hurriedly brought into force on 26 June 2020 in response to challenges faced as part of the Covid-19 pandemic. CIGA contained some of the largest developments in insolvency law and practice seen in decades intended to place the UK at the forefront of international restructuring along with competitors like The Netherlands, Singapore and the USA.

CIGA introduced two new insolvency measures:

• Restructuring plan under Part 26A of the Companies Act 2006
• Company moratorium under Part A1 of the Insolvency Act 1986 – which provides a company with a short period of protection – initially 20 days – during which they can seek advice, negotiate with creditors and agree plans to enable the company to be rescued as a going concern.

Almost three years on, a government consultation has determined that both measures have been broadly welcomed by stakeholders and are being used successfully in a wide variety of situations. Guidance in support of the measures continues to increase as more and more cases reach court and receive judicial scrutiny.

Below, we consider two recent cases and the guidance they provide for small and medium sized businesses in particular.

What is the restructuring plan?

It is a court-sanctioned restructuring where creditors with similar characteristics are formed into voting classes for the purposes of approving the plan and ‘cross-class cram down’ is applied. This means that the court is able to approve the plan, even if various classes of creditor oppose it, if:

• None of the members of the dissenting class would be worse off under the plan than another alternative
• At least one class of creditors with a genuine economic interest has voted in favour.

Notable names making use of restructuring plans to date include:

• Virgin Active & Virgin Atlantic
• Pizza Express
• NCP
• Premier Oil.

Re. Houst Ltd [2022] EWHC 1941 (Ch)

Houst is a property management company which owed around £10m in liabilities to a combination of Clydesdale Bank, HMRC, trade creditors and loan note holders. The proposed restructuring plan involved:

• Key supplier debts being excluded from the scheme and paid in full, on the basis that these were critical to the company continuing to trade
• A debt-for-equity swap, whereby a certain number of the company’s existing creditors would receive preference shares in the company in consideration of the cancellation of their debt
• A shareholder loan of no less than £500,000, to be used to fund payments to HMRC – 20p in the pound – and other unsecured creditors – 5p in the pound.

All parties except for HMRC voted in favour of the plan. HMRC objected on the basis that the plan departed from the usual creditor order of priority, where HMRC held a preferential status.

The court considered the objections and ultimately approved the restructuring plan. The court found that the proposed plan was fair, reasonable, and in the interests of the company’s creditors as a whole. The court also noted that although HMRC had lost its preferential status under the plan, it would in fact receive a higher return under the plan than in a liquidation scenario.

NGI Systems & Solutions Ltd v The Good Box Co Labs Ltd [2023] EWHC 274 (Ch)

Good Box Co was a business which provided payment facilities to charities and fundraisers. It was placed into administration after experiencing financial difficulties as a result of the Covid-19 pandemic.

The restructuring plan involved new funding being provided by a consortium of rescue funders with:

• The consortium to receive 85% of new equity in the company
• Loan note holders to receive 14% of new equity
• Existing shareholders being diluted to 1% of the new equity
• A new board of directors being formed along with a new company constitution and shareholders’ agreement binding the shareholders
• Trade creditors being paid in full
• Some employees being made redundant.

Despite existing loan note holders noting against the plan, the court sanctioned the plan and applied ‘cross-class cram down’.

The case was unusual as the administrators of the company applied during the proceedings for directions from the court and permission to proceed with a sale of the business and assets as an alternative to the plan, primarily on the basis that the sale of the business would preserve all jobs.

The court held that although some employees would lose their jobs, overall, the restructuring plan would achieve a better outcome for creditors. There was also no guarantee that the purchaser in question would not make redundancies in due course.

Flexibility of restructuring plans

Restructuring plans are continuing to grow as an alternative to more traditional forms of insolvency as, applying the examples above, they provide welcome flexibility to companies seeking to restructure, incorporating a combination of:

• Debt compromises
• Debt for equity swaps and reorganisation of existing shareholder entitlements
• Resetting of loan covenants
• Rescheduling or delaying debt repayments.

The ability to ‘cram down’ dissenting creditors provides companies with an opportunity to present a plan which achieves a better outcome for creditors overall, even if some classes of creditors oppose the plan.