The Corporate and Insolvency Governance Act 2020 (CIGA) introduced a new mechanism for a “compromise or arrangement”, widely referred to as a ‘Restructuring Plan’. Cathryn Butler of Ashfords LLP explains what a Restructuring Plan is and who is eligible for one.

Restructuring Plan - Corporate Insolvency and Governance Act 2020

The Corporate and Insolvency Governance Act 2020 (CIGA) introduced a new mechanism for a “compromise or arrangement” to be put in place between a company and its creditors and/or shareholders, which is widely referred to as a ‘Restructuring Plan’.

The Restructuring Plan is modelled on Schemes of Arrangement under English law (Schemes) which are provided for in the Companies Act 2006. The Act provides that the Restructuring Plan is brought in under a new part of the Companies Act 2006. 

Although the Restructuring Plan is a standalone process, 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.

What is the new UK Restructuring Plan?

Like Schemes, the Restructuring Plan:

• is a ‘debtor in possession’ process – there is no insolvency practitioner required to be appointed to administer, supervise or monitor, albeit specialist restructuring advisors will be closely involved in its preparation and implementation
• is subject to court oversight and sanction 
• divides affected members and/or creditors into appropriate classes, depending on how their rights are to be affected
• is subject to creditor approval with voting thresholds of 75 per cent by value in each class (Schemes have an additional requirement of 75 per cent in number, which does not apply to the Plan)
• if sanctioned, binds both unsecured and secured creditors (unlike a company voluntary arrangement (CVA))

One of the drawbacks of Schemes is the ability for certain creditors to hold out and disrupt a proposal that would otherwise save a company. The Restructuring Plan imports a key feature of US Chapter 11 bankruptcies: a ‘cross-class cram down’. The court has the discretion to impose the Plan on dissenting classes if it considers it fair, and if satisfied that:

• none of the members of the dissenting class would be any worse off than they would be if the Plan were not sanctioned (comparing it with what is likely to happen to the company otherwise)
• the Plan has been approved by at least one class that would have a genuine economic interest if the Plan were not sanctioned

The cross-class cram down enables debt-for-equity swaps to be imposed without shareholder consent, which Schemes cannot achieve, and the potential for empowering junior creditors.

Who is eligible for the Restructuring Plan?

For a company to be eligible for a Restructuring Plan:

• it must have encountered, or be likely to encounter, financial difficulties that affect, or threaten to affect, its ability to carry on business as a going concern
• the purpose of the Plan must be to eliminate, reduce, prevent or mitigate those financial difficulties

There is no insolvency test, but there must be a degree of existing or forecast financial distress.

Under the Act, any company which could be wound up under the Insolvency Act 1986, including a foreign company, could be subject to a Restructuring Plan including financial services companies, albeit the Secretary of State has the discretion to disapply the provisions in that sector later.

What can a Restructuring Plan contain?

The Restructuring Plan is a flexible tool and as such, provided it offers a “compromise or arrangement” to deal with the debts of the company, it can contain any such proposals as the company sees fit to secure the long-term future of the company.

A Restructuring Plan can therefore contain a wide range of restructuring options, for example debt-for-debt or debt-for-equity swaps, refinancing, debt rescheduling or waivers, or a combination of these.

What is the Restructuring Plan process?

The process is largely the same as the process used in Schemes:

1. The proposal is prepared and sent to creditors/members and filed at court.
2. At a first hearing the court will consider the eligibility of the company, the proposed creditor classes, whether there are any creditors who should be excluded from voting and jurisdiction (particularly where the proposal is made in a foreign company), before fixing a date for a vote on the proposals.
3. Notices of meetings are circulated to creditors/members along with documentation outlining the proposed Restructuring Plan along with ‘necessary information’ (similar to the explanatory statement used in Schemes).
4. The meetings are held – if there are no challenges or counter-proposals permitted by the court, then the creditors/members vote on the proposal, with the relevant threshold for approval being 75 per cent in value of creditors in each class (subject to the cross class cram down feature set out above).
5. A second hearing takes place, at which the court considers whether to sanction the Restructuring Plan, provided the voting threshold has been met and the rules for imposing a cross class cram down are complied with – if the court approves the Plan (which it will do if it considers it is ‘just and equitable’ to do so) it will bind all affected creditors/members.

In reality, the complexity and expense of preparing any plan will mean it will be most useful in complex debt and/or cross-border restructurings. The existing success of Schemes, which are well-established in those fields, and the enviable international reputation of the English courts in considering restructuring issues will mean the Restructuring Plan is competitively positioned for the financial rebuilding needed as the world starts to emerge from the restrictions of the pandemic.

Given the increase in legal challenges to retail CVAs (particularly by Landlords, albeit the recent New Look High Court decision may slow those) and the ability to cram down dissenting classes, the Restructuring Plan may become favoured as an alternative solution for struggling retail businesses.

About the author

Cathryn Butler is a Solicitor in the Restructuring and Insolvency Team at Ashfords LLP, advising on all insolvency matters, including personal and corporate insolvency and contentious and non-contentious matters.

See also

What you need to know about Corporate Insolvency and Governance Act 2020

How do you know if your company is insolvent?

Find out more

Corporate Insolvency and Governance Act 2020 (Legislation)

Companies Act 2006 (Legislation)

Chapter 11 - Bankruptcy Basics (US Courts)

Insolvency Act 1986 (Legislation)

Image: Getty Images

Publication date: 19 May 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.