[co-author: Hannah Langley]
The new UK Corporate Insolvency and Governance Act (CIGA), which took effect in June 2020, ushers in permanent changes to the English insolvency and restructuring landscape as well as temporary, and largely retrospective, measures to help mitigate the economic impact of the COVID-19 pandemic.
The three permanent additions are:
- The standalone moratorium, which affords companies some breathing space to restructure without having to resort to the administration process
- The abolition of ipso facto clauses in certain contracts for the supply of goods and services (clauses which purport to allow for contractual termination on the event of a counterparty’s insolvency)
- A restructuring plan procedure (“Restructuring Plan”)
Many consider the Restructuring Plan, which the restructuring community somewhat auspiciously refers to as the “super-scheme,” the most noteworthy and highly-anticipated measure. This addition to the restructuring practitioner’s toolbox has a number of features in common with the English scheme of arrangement but, in addition, provides greater flexibility by allowing for cross-class-cram-down, an approach borrowed from the US Chapter 11 bankruptcy process.
This article looks at some key features of the Restructuring Plan, explores when it might be used and whether it might one day replace the much-lauded scheme.
Restructuring plans: Schemes of arrangement 2.0?
The scheme of arrangement is a well-established and popular restructuring tool. It is flexible, predictable and comes with a comprehensive back catalogue of instructive case law. Following the English judiciary’s ever-expanding and, some might say, liberal approach to the thorny issue of jurisdiction, the scheme has, over the last 10-15 years, cemented its preeminence in complex cross-border restructurings.
The Restructuring Plan is an unashamedly souped-up version of the scheme—it has all the familiar features of a scheme with the following bells and whistles.
No numerosity test
In order for a scheme to be sanctioned it is necessary for at least 50% in number of each class of creditors to vote for the proposal. The Restructuring Plan has no such requirement—the voting thresholds are met as long as 75% by value of each class of creditors vote for the proposal, thereby relieving the Restructuring Plan of what can often be a challenging obstacle to the successful implementation of a scheme.
Ability to effect cross-class-cram-down
A Restructuring Plan can bind one or more dissenting classes of creditors provided it is fair and equitable to do so, and provided the court is satisfied:
- That none of the members of the dissenting class(es) would be any worse off than they would be in the event of the “relevant alternative” (in other words, what would happen if the plan were not sanctioned)
- The plan was approved by at least one class of “in the money” creditors or shareholders (those who would receive a payment in the relevant alternative)
As such, it is not required that every class must vote in favor of the proposal for it to be sanctioned as would be the case for a scheme. In addition, the new provisions can also theoretically provide for a “cram-up” (in other words, bind a class of senior-ranking creditors with the support of a junior class—as well as the more traditional scheme approach of simply “cramming-down” more junior creditors).
This new feature provides courts with the flexibility, in certain circumstances, to deviate from the established payment/distribution waterfall. Moreover, the threat of effecting a cross-class-cram-down will give companies some new (and unfamiliar) leverage in their restructuring discussions with creditors. It remains to be seen whether they will use it more as a carrot or a stick when bringing creditors to the table.
Valuation, valuation, valuation
The ability to effect a cross-class-cram-down therefore requires the court to determine not only the correct “relevant alternative” comparator but also what value should be placed on a creditor’s interest (and indeed whether it has an interest at all or whether it can be disenfranchised).
As such, valuation will be key in determining whether a Restructuring Plan should be sanctioned, particularly if it seeks to use cross-class-cram-down (and even more in a “cram-up” scenario). This ultimately places a significant amount of responsibility on the English judiciary and opens up a rich vein of potential litigation from disgruntled creditors with differing views as to how a business and their stake in it should be valued.
Virgin Atlantic takes off first
CIGA and its measures are only months old, so it may be some time before the full potential of the Restructuring Plan is appreciated. At the time of writing, Virgin Atlantic’s restructuring was the only deal we knew of where a Restructuring Plan was successfully promulgated.
In that restructuring, which received final court sanction on September 2, 2020, the court confirmed that, notwithstanding the differences between schemes and Restructuring Plans, scheme jurisprudence should be adopted when considering: whether the court has jurisdiction to approve a plan; the concept of compromise or arrangement; the application of the Recast Judgments Regulation; and, most significantly, the constitution of classes.
Unfortunately, the cross-class-cram-down tool was not used in the Virgin Atlantic restructuring (as each class approved the Restructuring Plan). So, the operation of this particular feature, and its value, remains untested. However, it is likely companies will soon take advantage of this option. Indeed, Pizza Express is launching a Restructuring Plan, which may provide an opportunity to witness the cross-class-cram-down tool in action.
Is there anything the Restructuring Plan can’t do?
CIGA provides no mechanism for formal post-petition financing (as is common in a US Chapter 11 bankruptcy). Whether new funding can be introduced to the group/structure will continue to be determined by the terms of the existing finance documents. Many in the industry see this as a missed opportunity.
Separately, there is no automatic moratorium available as part of the Restructuring Plan (unsurprising given it is a Companies Act creature). Instead, companies must avail themselves of the new standalone moratorium tool (if they can).
A bright future for the Restructuring Plan
We think the Restructuring Plan will only become more popular over time. It has all the attractions of the English scheme but with the added benefits of no numerosity test and the ability to effect a cross-class-cram-down of any (including, possibly, senior) recalcitrant and/or “out of the money” creditors.
In the Virgin Atlantic restructuring, the court’s conclusions about the applicability and relevance of historic scheme case law when considering and sanctioning a Restructuring Plan will almost certainly enhance its appeal.
It may take some time before the Restructuring Plan becomes the go-to tool. In the meantime, the Restructuring Plan and its novel features will almost certainly alter the negotiation dynamics during the early part of the restructuring process, even allowing companies to threaten their use as an effective bargaining tool in those discussions.