Over a year on – the new restructuring plan in action

October 2021  |  SPECIAL REPORT: RESTRUCTURING & INSOLVENCY

Financier Worldwide Magazine

October 2021 Issue

The addition in June 2020 of a supercharged scheme of arrangement process, the so-called new restructuring plan introduced under the Corporate Insolvency and Governance Act 2020, was a game changing event for the UK’s restructuring toolkit. This new tool will likely sit alongside the English scheme of arrangement and the US Chapter 11 as one of the international restructuring tools of choice for cross-border situations.

There are a variety of reasons for the success of the scheme as the go-to restructuring tool for foreign as well as UK companies. Its key attributes are that it is readily available to foreign companies, and it is a flexible restructuring tool capable of delivering tailored, expeditious and relatively cost-effective restructuring solutions with minimal execution risk.

The new restructuring plan largely mirrors the much-vaunted English scheme. However, the restructuring plan also includes a cross-class cram-down mechanic that will make it an even more effective restructuring tool in many circumstances than the scheme.

Overview of the restructuring plan

The restructuring plan is designed to be an extremely flexible tool which, like the scheme, is readily available for foreign companies. The plan can implement a comprehensive range of restructuring solutions, including extending maturity dates on secured and unsecured financing, debt for equity swaps, and the amendment of above-market contracts to reflect prevailing market rates.

The restructuring plan provides for a mechanism to impose a restructuring solution on all creditors and shareholders where a restructuring proposal has the support of the requisite majority of those stakeholders affected by the plan. Stakeholders whose legal rights are sufficiently similar to allow them to vote together with a view to their common interest are grouped together into classes for voting purposes.

The process involves three core stages: (i) a convening hearing at which jurisdiction and class composition are considered, and the court orders the convening of meetings for each stakeholder class affected by the restructuring plan to vote on it; (ii) classes of stakeholders meet to vote on the restructuring plan; and (iii) a sanction hearing at which the court considers issues of fairness and whether the statutory requirements have been fulfilled, before determining whether to exercise its discretion to sanction the restructuring plan.

Cross-class cram-down and out of the money stakeholders

In contrast to the scheme, the restructuring plan provides for a cross-class cram-down and cram-up mechanic. This means that, subject to certain criteria set out below being met, a restructuring plan approved by the requisite majority (75 percent in value of those present and voting) of any class of stakeholders can, with the sanction of the court, be imposed on any dissenting class of stakeholders.

This is a major game-changing development from the scheme, which requires 75 percent in value and a majority in number of stakeholders present and voting in each class (not just one) to approve the restructuring proposal, in order for the court to be able to make it binding on all stakeholders.

Further, if a class of stakeholders does not have any genuine economic interest in the case of the relevant alternative to the restructuring plan, their interests can be disregarded, and they can be bound to the plan – even though they have not voted on it.

Dissenting stakeholder protections

A plan that has been approved by the requisite majority of stakeholders must then be sanctioned by the court. At this stage, the court will consider whether the plan is fair, and the statutory requirements have been complied with. The court may also only sanction a restructuring plan which involves a cross-class cram-down or cram-up if: (i) the plan does not leave any of the dissenting classes worse off than they would be in the most likely alternative scenario if the plan were not to be sanctioned (this alternative will likely be the anticipated recoveries from an insolvent liquidation or a distressed sale); and (ii) at least 75 percent by value of one class of stakeholders with a genuine economic interest in the company in the event of that relevant alternative, have approved the restructuring plan.

Developments since the introduction of the restructuring plan

Initial deployment of the restructuring plan in 2020 was limited as advisers got to grips with the uncertainties around using a new untested tool. Only two restructuring plans were sanctioned in the second half of 2020 following its introduction in June; however, 2021 has seen a significant uptick with the implementation of six restructuring plans to date.

As more restructuring plans are implemented, advisers crafting restructuring plans are becoming more confident around its parameters, minimising execution risk. The expectation is that this will allow restructuring plans to be implemented on a more cost-effective basis and encroach upon the territory traditionally occupied by the company voluntary arrangement and the prepackaged administration, as well as the scheme. The recent implementation of the mid-market Amicus Finance restructuring plan is a likely precursor of what is to come as the restructuring plan finds its place in the mid-market space.

The flexibility provided for by the restructuring plan was shown in the Virgin Active restructuring plan, which was used to impose a compromise on landlords, traditionally the preserve of the company voluntary arrangement. This demonstrated the ability of the restructuring plan to implement an operational as well as a financial restructuring. This restructuring, along with the Deep Ocean and Smile Telecom restructurings, established the effectiveness of the cross-class cram-down mechanic to implement a restructuring solution in the face of opposition from a whole stakeholder class.

Nevertheless, the Hurricane Energy restructuring plan showed the need for advisers to tread carefully and ensure that the company has identified the most likely alternative to its restructuring plan. In this instance, the court rejected the comparator proposed by the company and refused to sanction the company’s restructuring plan on the basis that the company had failed to establish that the shareholder class subject to the cross-class cram-down would be no worse off under the plan than it would be in the likely alternative to the plan put forward by the shareholder challenging the plan.

The Virgin Active restructuring determined a number of key issues including that the restructuring plan has no absolute priority rule, and the so-called restructuring surplus can therefore be shared freely with shareholders at the discretion of the in-the-money creditors. It also provided useful guidance on the type of valuation evidence that courts will need to determine a valuation dispute. Importantly, on the facts in the Virgin Active case, the court did not find that the company should have conducted market testing to support its desktop valuations.

The scope for valuation disputes is inherent in the cross-class cram-down mechanic. The approach the court takes in balancing the interests of plan proponents and dissenting creditor groups in relation to issues, such as disclosure, identifying the appropriate comparator for the no worse off test and ultimately the allocation of costs between parties in the context of any dispute, will be a key determinant of how the restructuring plan continues to develop. Courts are acutely aware of these tensions as they find their feet with this new tool while seeking to ensure that the restructuring plan’s utility is not stymied as a result of protracted valuation disputes.

On the cross-border front, it remains to be seen, following the Gate Guarantee restructuring plan, whether the restructuring plan will enjoy the same level of cross-border recognition and be able to deliver cross-border restructurings with the same degree of certainty as the scheme. The concern is that other countries may fail to recognise the restructuring plan in cross-border restructuring scenarios on the basis that the restructuring plan is more akin to an insolvency process than the scheme as a result of the additional insolvency-orientated entry requirements for using the restructuring plan. These requirements are that a company looking to use the restructuring plan must have encountered, or be likely to encounter, financial difficulties that will affect its ability to continue as a going concern, and its proposed plan must seek to address those difficulties.

 

Alex Rogan is legal director at Eversheds Sutherland. He can be contacted on +44 (0)7917 198 263 or by email: alexrogan@eversheds-sutherland.com.

© Financier Worldwide

BY

Alex Rogan

Eversheds Sutherland

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