The restructuring plan is the latest insolvency option available to limited company directors in the UK and is one of two new insolvency processes introduced as part of the Corporate Insolvency and Governance Act 2020 (CIGA).
This article will explain what restructuring plans are, how they are used, and how they differ from CVAs.
This article has been co-produced with Jon Munnery, an insolvency company restructuring expert at UK Liquidators. Jon is an insolvency practitioner who regularly provides advice to company directors who are approaching insolvency, as well as those who already find themselves in an insolvent position.
What are restructuring plans?
In their simplest form, restructuring plans operate as debt compromise arrangements entered into by an indebted company and its creditors. The terms of any restructuring plan will be individual to each case, they will typically look to reschedule, restructure, or refinance existing borrowing in order to improve the financial position of the indebted company.
In order to be eligible for a restructuring plan, the company must be viable as a going concern with trade able to continue. The company does not necessarily have to be insolvent at the time of entering into a restructuring plan, although, it must be the case that it is likely to soon become insolvent if action isn’t taken to improve its financial position.
Restructuring Plans vs CVAs
On the surface, restructuring plans appears to share many similar characteristics with a Company Voluntary Arrangement (CVA), however, there are some notable differences between the two processes which makes the restructuring plan an extremely powerful insolvency solution in its own right.
Unlike a CVA, restructuring plans, once approved, are legally binding on both secured and unsecured creditors, including landlords. Another important difference is the ability to ‘cram down’ dissenting creditor classes; this is known as cross-class cram down.
Understanding cross-class cram down
Cross-class cram down is arguably the most powerful feature of the restructuring plan, and can be the deciding factor when it comes to weighing up the suitability of using a restructuring plan over the more established and well-known CVA. In essence cross-class cram down allows for a restructuring plan to become binding on all creditors even where there are dissenting classes of creditors who vote against the proposal. Let’s take a look at how the voting process for a restructuring plan works and where cross-class cram down could be utilised.
The voting process and dissenting creditors
Just like with a CVA, a creditor vote on the proposed terms of a restructuring plan is required as part of the initial approval process.
As part of this vote, creditors are divided into different ‘classes’ depending on their interests and characteristics. Each creditor is then asked to vote on the proposed restructuring plan. If 75% (by value) of a class vote in favour, then that class will be said to have given their consent to the plan becoming binding.
What is important to note here, however, is that not all classes need to approve the restructuring plan in order for it to be implemented. This is because unlike CVAs, final approval for restructuring plans sits with the court, not the company’s creditors.
This means that even if there is a class of creditors who vote against the proposal, so long as the court is satisfied that this dissenting class of creditors would not be any worse off under the plan than they would under a relevant alternative process, the restructuring plan can be sanctioned. Court approval also requires at least one class of creditor to vote in favour of the restructuring plan, and that class must have a true underlying economic interest in it being implemented.
What are the benefits of cross-class cram down?
Cross-class cram down helps to ensure creditors who would benefit from the proposed restructuring plan are not unfairly disadvantaged due to the actions of a dissenting class of creditors that are opposed to its implementation; it is this feature which most clearly differentiates the restructuring plan from the CVA.
When a company is insolvent, yet still viable as a going concern, it is often in the best interests of creditors as a whole that the company is given the chance to turn around its fortunes by way of a formal restructuring process. If some creditors attempt to prevent this from happening by refusing to vote in favour of a viable restructuring plan, this can severely hamper the chances of the company surviving and therefore be of detriment to other creditors. Cross-class cram down can go some way to alleviating this issue.
Restructuring plans are not only a new insolvency process, they are also one of the most complex. However, in the right situation, they could be a lifeline to financially challenged companies looking for a viable alternative to a CVA.