Insights 15/06/2020
The highly anticipated Corporate Insolvency and Governance Bill 2020 (the “Bill”) has now been laid before Parliament. One of the key proposed changes relates to the new restructuring plan for businesses.
What is the new restructuring plan?
Clause 7 and Schedule 9 of the Bill insert a new Part 26A into the Companies Act 2006, for "arrangements and reconstructions for companies in financial difficulty" with their creditors. The new restructuring plan permits a reorganisation of the company's share capital and is dependent on two preconditions:
1. The company must have encountered, or be likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and
2. The proposed arrangement between the company and its creditors and/or its members, must be for the purpose of eliminating, reducing, preventing or mitigating those financial difficulties.
What is its purpose?
The Department for Business, Energy & Industrial Strategy consulted on new proposals aimed at improving the UK’s corporate governance and insolvency framework, publishing its response on 26 August 2018.
Setting out proposals for a new restructuring plan, now introduced by the Bill, the response highlighted that "the Government believes allowing solvent companies to address emerging financial difficulties will reduce stigma and encourage earlier action on the part of directors, thereby avoiding value-destructive action and lead to better outcomes on the whole for creditors and other stakeholders in a company".
The plan may be in the form of a compromise or arrangement proposed between the company and:
•its creditors, or any class of them; and/or
•its members, or any class of them.
The purpose of the arrangement or compromise is to “eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties”.
So it's like a CVA/ Scheme of Arrangement?
It has similarities to a CVA but the plan will be able to bind secured and preferential creditors, without their consent.
It has perhaps more similarity to the existing Companies Act scheme of arrangement (i.e. approval by creditors/classes of creditors and then sanction by the court). A notable difference in the new plan process is that there is no requirement for a majority in number of creditors in any given class to vote in favour. The required majority is simply “a number representing 75% in value of the creditors or class of creditors”.
The restructuring plan also introduces the provision for a “cross-class cram down” that will allow dissenting classes of creditors or members to be bound, and which may encourage debt/equity swaps to achieve the required threshold.
In respect of a Scheme of Arrangement, in addition to the requirement to meet the conditions above, there is also no requirement that a majority in number of creditors/members voting in a given class must approve it. Instead the requirement is that creditors/members representing 75% in value vote to approve the scheme. A further innovation is the aforementioned 'cross-class cram down' to bind dissenting classes of creditors/members.
What if creditors vote against it?
As above, where a class of creditors/members votes against the plan, the court can still sanction it.
However this will only be the case where the following conditions are met:
1. if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative; and
2. that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
The ‘relevant alternative’ (the comparator, e.g. liquidation) is defined as “whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned".
Will the restructuring plan save businesses in trouble?
The existence of the plan may well encourage more consensual restructurings, and the flexibility should maintain the position of the UK as a global restructuring hub. In turn, however, the current lack of protection for existing senior dissenting creditors, or protective provisions for incoming rescue lenders, may disincentivise some institutions from offering troubled companies a financial lifeboat. Like much of the Bill, accompanying rules and regulations will be required to flesh out how this will work in practice.
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