Corporate Insolvency and Governance Bill—restructuring plan provisions

Corporate Insolvency and Governance Bill—restructuring plan provisions

On 20 May 2020, the Government released details of the Corporate Insolvency and Governance Bill. We look in particular at the provisions relating to the new restructuring plan, including which companies are eligible, cross-cram down and other voting provisions as well as the court’s involvement.

Spurred on by the coronavirus (COVID-19) pandemic, the government has released details of the Corporate Insolvency and Governance Bill. The government previously consulted on proposed changes to the UK’s insolvency regime and published its response on 26 August 2018. The current Bill is currently progressing through parliament and various provisions may be amended in that process. The Bill largely follows the conclusions set out in the government’s response and this News Analysis comments on the Bill as at 20 May 2020.

Among the proposed reforms, the Bill (at clause 7 and Sch 9) introduces a new Part 26A into the Companies Act 2006 (CA 2006)—Arrangements and Reconstructions for Companies in Financial Difficulty (a ’restructuring plan’).

 



What are the practical implications?


We have already seen several corporate failures around the world linked to coronavirus. Some of the reforms proposed by the Bill have been in the pipeline for several years, including the proposal to introduce a new tool for struggling companies—a restructuring plan. If enacted in its current form, the Bill should give many struggling companies which have viable underlying businesses the tools needed and necessary breathing space to secure a rescue.

The Bill contemplates a new restructuring procedure that would allow a company to bind all creditors, including junior classes of creditors even if they vote against the plan, through the use of a cross-class cram down provision. Such cram down could be imposed provided dissenting classes of creditors are no worse off than they would be in the relevant alternative. The classes of creditors would be proposed by the distressed company on a case by case basis. For a class to vote in favour, 75% of a class by value, and more than 50% by number, would have to agree to the plan.

The Bill’s separate moratorium proposals also mean that a statutory moratorium will be available, subject to eligibility, to protect a company while it prepares its proposal.

 


Eligibility criteria


The availability of a restructuring plan is not dependent on the company’s size or turnover; this is in line with the government’s response in August 2018 to the Insolvency and Corporate Governance consultation that the restructuring plan should be available to all companies as there may be circumstances where a smaller company may better effect a rescue via a restructuring plan than by using a CVA (ie despite the fact that some respondents had argued that in practice only larger more complex companies would be viable given the costs associated with two court hearings). However:

  • the Secretary of State may introduce regulations to exclude certain companies which are authorised persons (‘authorised person’ has the same meaning as in the Financial Services and Markets Act 2000—ie those involved in specific financial market transactions; this is to avoid interfering with the proper functioning and integrity of those markets);
  • creditors with aircraft-related interests cannot be bound (or crammed down) against their will (as the court may not sanction the compromise or arrangement under CA 2006, s 901F if it includes provision in respect of any relevant creditor who has not agreed to it); ‘aircraft-related interest’ means a registered interest within the meaning of the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015, SI 2015/ 912 (this is a new provision not previously mooted in the earlier consultation)


Conditions A and B must be met: Condition A is that the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. Condition B is that (a) a compromise or arrangement (arrangement includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods) is proposed between the company and (i) its creditors, or any class of them, or (ii) its members, or any class of them, and (b) the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties mentioned in subsection (2).

 

Solvent or insolvent: No financial conditions are set in order to qualify for a restructuring plan. This means both solvent and insolvent companies will be able to propose restructuring plans to their creditors.


Available to IPs: A company in an insolvency procedure, acting through the insolvency office-holder (eg an administrator or liquidator), may also propose a restructuring plan to creditors. While the Government does not think this would happen often, maximum flexibility is desirable to ensure viable businesses do not fail unnecessarily.


Application available to debtor or creditors or members: The debtor itself may apply (as will usually be the case) or the creditors (this is a change from the government’s response in August 2018 to the Insolvency and Corporate Governance consultation which envisaged that only the debtor could apply) or the members.

 

Jurisdiction: applies to companies liable to be wound up under the Insolvency Act 1986 (IA 1986)(new CA 2006, s 901 A(4)(b)); this is a similar definition to that used for schemes of arrangement, which use the broader test of whether or not a company has sufficient connection with the relevant court of the UK rather than centre of main interests (COMI) test. Therefore a company incorporated outside of the UK may be eligible if it has a sufficient connection with the UK.

 

Process


Consultation responses and discussions with stakeholders persuaded the government of the benefits of modelling the restructuring plan procedure on that of schemes of arrangements. As well as familiarity, this will have the advantage of providing a long-established and tested body of jurisprudence that courts will be able to draw upon when dealing with the new restructuring plan and considering matters such as class formation (ie relevant scheme case law should be applicable to relevant provisions of the new restructuring plan procedure).

The new process therefore largely mirrors that used in schemes:


  • a restructuring plan proposal will be sent to creditors or members and filed at court
  • at a first hearing, the court will examine the classes of creditors or members as defined by the company (this is akin to a scheme convening hearing). Creditors/members may challenge class formation if they think the company’s classes do not accurately reflect the rights and interests of different classes
  • if satisfied, the court will confirm that a vote on the proposal may be conducted on a specified date ahead of a second hearing if required
  • necessary information would be anything that creditors need in order to make a decision whether or not to support the proposal (ie similar to the explanatory statement used in schemes), with the government prescribing certain mandatory matters that must be covered in all cases (see further below)
  • vote of creditors (or members)—if no challenges are brought or no counter-proposals permitted by the court then creditors/members will vote on the proposal
  • court sanction hearing—subject to the requisite voting thresholds being met and the rules for imposing a cross-class cram down being complied with (discussed below), the court will then schedule a second hearing at which it will consider if the necessary requirements have been met and will make a decision whether or not to confirm the restructuring plan and make it binding on affected creditors/members.

 

Contents of the proposal


Certain mandatory matters must be covered in all cases:

  • explain the effect of the compromise or arrangement
  • state (i) any material interests of the directors of the company (whether as directors or as members or as creditors of the company or otherwise), and (ii) the effect on those interests of the compromise or arrangement, in so far as it is different from the effect on the like interests of other persons
  • where the compromise or arrangement affects the rights of debenture holders of the company, the statement must give the like explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company’s directors
  • where a notice given by advertisement states that copies of an explanatory statement can be obtained by creditors or members entitled to attend the meeting, every such creditor or member is entitled to a copy

Note that it is the duty of (a) any director of the company, and (b) any trustee for its debenture holders, to give notice to the company of such matters relating to that director or trustee as may be necessary for the purposes of the above.

 


Voting requirements 


The voting requirements are akin to those in schemes—If 75% or more in value of creditors (or class of creditors) or members (or class of members) present and voting either in person or by proxy at the meeting agree to a restructuring plan, then an application may be made to the court to sanction the plan (new CA 2006, s 901F).

 

Note there is no requirement for a majority in number (as is required with schemes) nor any requirement for a majority of unconnected creditors (contrary to the earlier proposals appearing in the government’s response in August 2018 to the Insolvency and Corporate Governance consultation).


Cross-class cram down


The requirements for cross class cram down (akin to that used in the US chapter 11) mean that restructurings should not be disrupted by hold-out creditors (certain creditors may seek to disrupt a restructuring process to improve their own treatment under the restructuring proposals. This is likely to come at the expense of other creditors). The restructuring plan will represent a streamlined procedure in which dissenting classes of creditors, most importantly those who are ‘out-of-the-money’ (ie those who, under the order of priority for creditor repayment in administration or liquidation, would not receive any dividend), may be bound to an arrangement that is in the best interests of all stakeholders.

As an additional safeguard to ensure creditors are adequately protected, at least one class of impaired creditors (that is, creditors who will not receive payment in full under the restructuring plan) must vote in favour of the restructuring plan in order for a cross-class cram down to be confirmed by the court (new CA 2006, s 901G—at least one class who would receive a payment or would have a genuine economic interest in the company in the event of the relevant alternative, must have voted in favour of the plan).

 


Role of the court

The court can safeguard the rights of creditors/members at various points:

  • examination of class formation after a restructuring plan has been filed at court, before permitting a debtor company to arrange a vote
  • confirmation of the restructuring plan, if creditors/members have approved the proposal including applying a cross-class cram down of dissenting classes; drawing on well-established principles in schemes of arrangement, the court has absolute discretion over whether to refuse to sanction a plan even though the necessary procedural requirements have been met. This may be, for example, because a plan is not just and equitable

 



Valuation—comparators

 

The valuation test is key for determining the fairness of a plan which is being crammed down onto dissenting classes and for restructuring plans is the relevant alternative for creditors if the restructuring plan was not agreed. In most cases this will be administration (as opposed to liquidation), but this wording (the relevant alternative) allows maximum flexibility as it will fit the circumstances of the particular case in question. Administration will often be the relevant alternative for creditors, but in some cases administration might not be a realistic option meaning liquidation is the only alternative that can be used. For the purposes of this section ‘the relevant alternative’ is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under new CA 2006, s 901F.


The government recognised that valuations are often a very contentious area in any restructuring. This approach is intended to achieve the best possible balance between protecting creditors’ interests and avoiding disputes. In practice, the government believes that in many cases the process of dialogue and negotiation between the company and its creditors will serve to narrow differences on the perceived value of the company to the point where such challenges can be avoided. The government’s objective is to minimise the likelihood of challenge so far as is possible, while providing the underlying protection to creditors that such a safeguard is meant to offer (see para 5.172 of the government’s response in August 2018 to the Insolvency and Corporate Governance consultation).

 


Terms and effect of the plan


The government thinks that to be an effective rescue tool, there should be a minimum of prescription as to what type of proposal may be made to creditors and members. It will be for the company to propose terms that it thinks will be agreeable to creditors and therefore capable of being confirmed by the court. This will allow a restructuring plan to address various aspects of a company’s difficulties including economic as well as financial ones. A restructuring plan may therefore provide for debt write-down or debt postponement as well as other matters such as a change in the management team or selling off loss-making parts of the company. This will allow maximum flexibility to support the best interests of both the company and its creditors.

 

No fixed duration: The government accepts that imposing a 12 month time period would unnecessarily restrict company rescue and will therefore leave it to the parties to a restructuring plan to determine what the appropriate time period should be. Creditor interests are safeguarded in other ways—if creditors think a proposed plan duration is too long, they need not vote in its favour (and may present a counter proposal of shorter duration). This fits in with the government’s intention to make the restructuring plan procedure as flexible as possible and mirrors the approach in CVAs and schemes, which do not have a fixed statutory length.

 

The court’s order has no effect until a copy of it has been: (a) in the case of an overseas company that is not required to register particulars under CA 2006, s 1046, published in the Gazette, or (b) in any other case, delivered to the Registrar of Companies.

 

Binding effect: A compromise or arrangement sanctioned by the court is binding (a) on all creditors or the class of creditors or on the members or class of members (as the case may be), and (b) on the company or, in the case of a company in the course of being wound up, the liquidator and contributories of the company. Parties’ rights following confirmation of a restructuring plan will be as provided for in the plan. Any previous rights will be extinguished by the plan being confirmed by the court. Were a company to enter an insolvency procedure following the failure of a restructuring plan, the rights and claims of any creditors bound by the failed plan would be as under the plan. For example, if a creditor was owed £1m before a plan was agreed and retained a debt of £500,000 under the agreed plan, in the event the debtor company subsequently failed and entered formal insolvency, the creditor would only be permitted to claim £500,000 in the insolvency proceedings (see the government’s response in August 2018 to the Insolvency and Corporate Governance consultation). 

 

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About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.