Restructuring plans – a tool to help companies post-Covid
Companies must now decide how they intend to deal with their liabilities as the schemes and restrictions come to an end. Failing to do so in a quick and efficient manner is likely to create a drag on growth or, in the worst case, the risk of insolvency proceedings.
Last year's introduction of restructuring plans into English law provides such businesses with a potentially helpful tool to address the issue and to implement a wide range of restructurings of financial, lease, trade, tax and other liabilities.
Cross-class cram down – a seismic change to the restructuring landscape
Restructuring plans bear some resemblance to schemes of arrangement, which have been used to implement a number of restructurings in the UK market over recent years. Like a scheme, restructuring plans involve the company’s creditors voting to approve the plan and, if the vote passes, all creditors are bound to the plan, including those who failed to vote or voted against it. For voting purposes, creditors are divided into "classes", in the same way as creditors are placed in classes to vote on a scheme. If the voting thresholds are met the restructuring plan is then subject to the final sanction of the Court, in the same way as a scheme.
There are however some key advantages to using a plan when compared to a scheme. Whereas a scheme requires an affirmative vote from every class of creditor affected by the scheme, a plan may be approved if one or more classes of creditors vote against it, provided that the following conditions are met:
- if the restructuring plan is sanctioned, that any member of a class of creditors which voted against the plan is not worse off than they would be in the event of the "relevant alternative";
- that the plan is approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative; and
- in all the circumstances, that the Courts consider that the plan is fair.
The "relevant alternative" for these purposes is the outcome which the Court considers to be most likely to happen if the plan is not approved. In the vast majority of cases this will be an administration or liquidation. Consequently, provided that 75% by value of a class of creditors which would be ‘in the money’ if the company entered administration or liquidation votes in favour of the plan, and no class which votes against the plan is left in a worse position than they would be if the company entered administration or liquidation, then the voting requirements will be met.
The inclusion of this mechanism, known as "cross class cram down" (which has not previously been a feature of English law) represents a major change to the tools available to companies seeking to restructure their affairs. Despite restructuring plans being in their infancy, it is already apparent that they can be used to (for example) effect debt for equity swaps, amend leases (including to reduce rental payments and effect changes from contractual rent to turnover rent), amend the terms of debt facilities and write-down liabilities.
The introduction of restructuring plans into English law could not be more timely, and there is potential for plans to be used by businesses in a variety of sectors to reduce and restructure their liabilities as trading activity begins to pick-up. Whilst restructuring plans have, so far, been used by companies with relatively substantial balance sheets, they are expected to become more widespread as the market adapts to their potential advantages.
We have therefore put together a briefing discussing the key aspects of restructuring plans, their potential use and how they may be used by medium-sized companies to help address their liabilities and ensure a strong return to growth after Covid.