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The Corporate Insolvency and Governance Bill (CIGB) introduces a new process for the reconstruction of companies in financial difficulties (a Restructuring Plan). In this article we introduce the Restructuring Plan.
Background and introduction
The ideas underpinning the Restructuring Plan have been around for some time, drawing on elements of our Scheme of Arrangement and Chapter 11 of the US Bankruptcy Code. The Government consulted on similar proposals in 2016, being mindful, we assume, of the impending enactment of Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications (Directive), which requires EU Member States to provide access to a preventive restructuring framework that is compliant with the Directive on or before 17 July 2021.
Of course, later in 2016 the United Kingdom voted to leave the European Union, meaning that it would probably not become subject to the Directive. The Plan was seemingly lost in the long grass, at least until now. While the Restructuring Plan legislation is not entirely compliant with the Directive (it does not have to be), it is a close approximation.
To summarise (more detail follows), a company that is suffering, or is likely to suffer, financial difficulties (please note, this gating requirement does not apply to Schemes of Arrangement or Company Voluntary Arrangements) may be made subject to a Restructuring Plan provided that:
- The purpose of the Restructuring Plan is to eliminate, reduce or prevent, or mitigate the effect of, any of those financial difficulties; and
- The Restructuring Plan is approved by 75% by value of each class of creditors and/or members (unlike a Scheme of Arrangement, there will be no requirement that a majority in number vote in favour). Crucially, dissenting classes of creditors and/or members can, subject to certain conditions, be bound by the scheme (a cross-class cram down mechanism).
Who can propose a Restructuring Plan?
A Restructuring Plan can be proposed by the company, any creditor of the company, a liquidator of the company or an administrator of the company.
What is the process?
Approving and implementing a Restructuring Plan is a three-stage process:
- An application to court to summon a meeting of creditors and/or members to approve the Restructuring Plan.
- Meetings of members and/or creditors at which they approve (or reject) the Restructuring Plan.
- An application to court to sanction the Restructuring Plan.
Creditors and members must receive a statement that explains the effect of the compromise or arrangement, and in particular states:
- Any material interests of the directors of the company (whether as directors or as members or as creditors of the company or otherwise), and
- 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.
A compromise or arrangement sanctioned by the court is binding:
- On all creditors or the class of creditors or on the members or class of members (as the case may be), and
- On the company or, in the case of a company in the course of being wound up, the liquidator and contributories of the company.
What conditions must be satisfied to propose and implement a Restructuring Plan?
Two conditions must be satisfied.
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 compromise or arrangement is proposed between the company and its creditors or members, or any class of them; and
- The purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the aforementioned financial difficulties.
Who is subject to a Restructuring Plan?
Every creditor or member of the company, whose rights are affected by the compromise or arrangement (and that has a genuine economic interest in the company) must be permitted to participate in a meeting summoned to approve a Restructuring Plan.
What thresholds apply for approving a Restructuring Plan?
If a number representing 75% in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy, agree a compromise or arrangement, the court may sanction the compromise or arrangement.
Can dissenting classes be crammed down (i.e. can they be bound by the Restructuring Plan, even if they vote against it)?
If the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors or (as the case may be) of members of the company (dissenting class), but conditions A and B below are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning the Restructuring Plan.
Condition A is that the court is satisfied that, if the Restructuring Plan were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative. The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the Restructuring Plan were not sanctioned.
Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
Unlike the cross-class cram down provisions in Chapter 11 of the US Bankruptcy Code there is no absolute priority rule, and unlike the cross-class cram down provisions mandated in the Directive, there is no relative priority rule (or absolute priority rule, which is a permitted alternative). However, there is scope for further conditions to be prescribed.
Conclusions
The proposals are sensible, and will fulfil a long-held objective of policy makers; a restructuring process that can bind secured creditors and that can effect a cross-class cram down. Some blanks will need to be filled in over time; for example, how is economic interest quantified?; and what is the proper approach to class composition?; but we assume that the court will look to jurisprudence developed in respect of Schemes of Arrangement, at least in the first instance.
If you would like to discuss any of the issues raised in this article, please contact Sacha Pickering or Karen Williams in Michelmores’ Restructuring & Insolvency team.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.
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