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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’).
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 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:
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.
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.
The new process therefore largely mirrors that used in schemes:
Certain mandatory matters must be covered in all cases:
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.
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).
The court can safeguard the rights of creditors/members at various points:
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 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.
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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.
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