Restructuring plans – do’s and don’ts
They can be used to implement a range of new arrangements including amendments and extensions of debt terms, compromises of debt, injections of new funding and debt for equity swaps. Notably, restructuring plans can overcome significant opposition to a restructuring from creditors as the court has the power to sanction (i.e. approve) a restructuring plan even where an entire class of creditors or shareholders has voted against the restructuring plan (a so-called "cross-class cram down").
However, restructuring plans are not without their complexities. Fortunately, there is a growing body of precedent on the use of restructuring plans since their introduction in 2020. We have therefore set out five do's and five don’ts for companies looking to utilise a restructuring plan.
Any company which intends to propose a restructuring plan must provide the affected stakeholders with an explanatory statement containing sufficient information to make an informed decision on whether or not they should support the restructuring plan. The court may refuse to sanction a restructuring plan if the information provided in the explanatory statement is deficient. As a minimum, an explanatory statement should explain and disclose:
- the effect of the restructuring plan on the different classes of stakeholders;
- any related transactions which form part of an overall restructuring within the restructuring plan;
- what the plan company considers will be the next most likely outcome if the restructuring plan is not sanctioned (the so-called "relevant alternative");
- the estimated outcomes for the affected stakeholders on the assumption that the restructuring plan is sanctioned and also in the relevant alternative;
- the valuation methodology used in order to determine the allocation of value to creditors and any assumptions made by the valuer; and
- the identity of the valuer and the terms on which they were appointed (including whether the valuer is prepared to accept responsibility and a duty of care to the stakeholders affected by the restructuring plan).
Creditors can apply to the court for an order requiring the plan company to make further disclosures. If necessary, this could be subject to arrangements to protect confidentiality such as recipients giving non-disclosure undertakings or disclosure of information being made only to lawyers and advisors rather than directly to creditors.
Restructuring plans are not just limited to companies incorporated in England and Wales. The English courts can sanction a restructuring plan for a company that has a “sufficient connection” with the UK. This is a lower threshold than the “centre of main interest” test found in other areas of cross-border restructuring. A company could be found to have a sufficient connection to the UK if a substantial proportion of the company’s debt is governed by English law and that the company has English creditors. If necessary, and the terms of the finance documents permit it, the governing law of the debt could be amended to English law to create a company’s sufficient connection with the UK.
In many cases it will be obvious which company should propose the restructuring plan as it will be the debtor of the debt that needs to be restructured by the plan. However, it is possible to incorporate a new company as a special purpose vehicle (SPV) to be the plan company. The SPV would then assume liability for the relevant debts, either under a deed of indemnity and contribution or by using debtor substitution provisions if available under the terms of the relevant finance documents.
Use of a SPV as the plan company can be useful as it allows debt incurred by different members of a group to be restructured within a single company. It can also potentially avoid corporate or contractual restrictions that may prevent the original debtor company from proposing a restructuring plan itself. For example, in Re Gategroup Guarantee Limited1 an English incorporated SPV was used as the plan company instead of a Swiss incorporated issuer of bonds as a restructuring plan proposed by the issuer would have triggered an event of default under the bonds.
Using an English incorporated SPV, rather than an overseas company, as the plan company may also assist with getting recognised in jurisdictions outside England and Wales. Foreign courts may be more willing to recognise the English court’s judgment sanctioning a restructuring of an English company rather a company incorporated in that foreign jurisdiction. Local counsel will inevitably be needed to advise on any potential recognition issues.
The court attaches great weight to the views of “in the money” creditors, i.e. those creditors who would expect to receive a return based on the estimated likely outcome for the plan company in the relevant alternative.
While not sufficient by itself, the support of “in the money” creditors will go a long way towards convincing the court that a restructuring plan should be sanctioned over the objections of out of the money creditors. The court is even willing to allow the in the money creditors to agree to share the benefits of the restructuring plan (the so called "restructuring surplus") with “out of the money” stakeholders. For example, “in the money” senior lenders could allow shareholders to retain their equity even if unsecured creditors ranking ahead of the shareholders are compromised by the restructuring plan. However, such an allocation of the restructuring plan will still need to be fair in the court’s view. For example, in Re Naysmyth Group Ltd 2 the refused to sanction the restructuring plan in part because the court considered that HMRC had been allocated an unfairly small share of the restructuring plan in light of the size of HMRC’s debt and position as a preferential creditor of the plan company.
A plan company may naturally want to avoid the uncertainty of whether the key “in the money” creditors support the restructuring plan before incurring the costs of progressing the plan through the courts. “Early bird fees” may be offered to induce creditors to sign up to lock-up agreements which commit that creditor to support the restructuring plan. The first restructuring plan, Re Virgin Atlantic3 suggested that the court may have concerns about sanctioning a cross-class cram down in reliance on the approval of “in the money” creditors whose support had been secured in advance by lock-up agreements. However, in the later case of Re Deep Ocean I UK Limited4 the court did sanction a cross-class cram down even though the support of the plan company’s senior lenders had been locked up in advance.
Valuation is central to a restructuring plan. A valuation establishes which creditors are “in the money” and which are “out of the money”. It also establishes whether any dissenting creditors will be no worse off in the relevant alternative, which is one of the requirements that needs to be satisfied before the court will sanction a cross-class cram down.
Any valuation should be robust enough to withstand the court’s scrutiny and challenge from dissenting creditors. The onus will be on the plan company (as the proposer of the restructuring plan which is usually but not always the case) to discharge the evidential burden of showing a crammed down class of creditors is not worse off in the relevant alternative. It is not necessary for the dissenting creditors to provide their own valuation evidence. They can instead seek to undermine the court’s confidence in the plan company’s valuation evidence. This is particularly the case where the outcome of a restructuring plan is sensitive to changes the valuation and the assumptions behind the valuation are unclear or unsupported. For example, in Re Great Annual Savings Company Limited5, the court refused to sanction the restructuring plan, in part, because it considered the company’s valuer had been too pessimistic in valuing book debts owed to the company by large energy suppliers with a face value of £18.2m at a value of between zero and £509,000.
Where there is less obvious weakness in the valuation evidence presented by the plan company dissenting creditors may need to obtain their own valuations. Where there are conflicting valuations the burden still remains with the plan company to satisfy the court that the no worse off test will be satisfied on the balance of probabilities. However, the court is prepared to accept that any valuation is inherently uncertain. The plan company can also take comfort from the court’s view in Re Deep Ocean I UK Limited6that “where evidence appears on its face to reflect a rational and considered view of the Company’s board, the court will require sufficient reason for doubting that evidence.”
The court can order the plan company to pay the costs of a creditor which has contested the restructuring plan. The general rule on the award of costs in Civil Procedure Rule 44.2 that, subject to the court’s discretion, the unsuccessful party pay the successful party’s costs does not apply to the two hearings for a restructuring plan. A challenging creditor could still be awarded its costs if the court considers its submissions helpful even if the court nonetheless decides to sanction the restructuring plan. However, in Re Fitness First Clubs Limited7 the court declined to aware the challenging creditors their costs as they were out of the money creditors.
Court involvement is inherent to a restructuring plan. There will be at least two court hearings. The first considers whether it is appropriate to order the convening of meetings of creditors and/or shareholders and issues related to the composition of each class of stakeholder. At the second hearing the court will consider whether to sanction the restructuring plan (including, if necessary, by cramming down a dissenting class of stakeholder). There is, therefore, a ready forum at which opposing stakeholders can challenge a restructuring plan.
A significant minority of restructuring plans have been contested, including right up to the sanction hearing. This contrasts with schemes of arrangement where opposition is rare once the approval of the requisite majority of each class of creditor has been obtained. This may, in part, be the result of stakeholders coming to terms with the novelty and nuances of a restructuring plan. However, the restructuring plan, with its power to cram down entire dissenting classes of creditors or shareholders, has the potential to be used to impose more aggressive restructuring on creditors and so is more likely to be contentious. Furthermore, the court in Re Smile Telecoms Holdings Limited8 was clear that opposing stakeholders should “stop shouting from the spectators' seats and step up to the plate” by formally appear at the hearings to make their arguments.
Accordingly, the plan company should be prepare for the court hearings as if it was engaged in contested litigation. Any evidence should be robust enough to withstand challenge. Experts and other witnesses should be prepared to be cross examined.
It is possible to exclude certain creditors from the scope of a restructuring plan so that they are left uncompromised even if creditors that would rank pari passu with or senior to the excluded creditors are compromised by the restructuring plan. However, there must be “reasonable commercial justification” for excluding these creditors. This may because the excluded creditors are critical to the running of the business, for example major suppliers or employees, or because the creditors are owed relatively small amounts and so their inclusion in the restructuring plan would impose an unreasonable logistical and administrative burden. Any exclusion of creditors must not be done arbitrarily nor to manipulate the classes of creditors. The rationale for excluding certain creditors must be set out in the explanatory statement.
There will be particular sensitivity around excluding debts owed to shareholders or private equity sponsors of the plan company. It may be difficult to justify their exclusion from the compromises implemented by the restructuring plan, particularly where the shareholders are not providing new funding.
It is, in principal, possible to cram down HMRC as was shown in the case of Re Houst and Re Prezzo Investco Limited9 (which was actively opposed by HMRC). However, in Re Naysmyth the court held that it should “exercise caution in relation to HMRC debts” and that it will not cram down HMRC “unless there are good reasons to do so”.
The court is prepared to give considerable weight to the views of HMRC (particularly where it is an "in the money creditor" as was the case in Re Great Annual Savings Company Limited) due to its “critical public function as the collector of taxes”. The court will also take into account the size and age of the debt owed to HMRC and the plan company’s record as a tax payer. In Re Naysmyth and Re Great Annual Savings Company Limited a history of breaching “time to pay” arrangements with HMRC was held against these plan companies when the court refused to sanction these restructuring plans.
Even when HMRC is an “out of the money” creditor the court may still be prepared to accept that HMRC has a genuine economic interest in the company. In Re Naysmyth the court found that HMRC had a legitimate interest in opposing the restructuring plan as it would remain a substantial creditor of the other members of the plan company’s group and “time to pay” arrangements would still need to be reached between HMRC and those other members of the plan company’s group.
At the sanctions hearing the court will consider if there is any “blot” on the proposed restructuring plan that means sanction should be refused. As the court will not want to sanction a restructuring plan in vain such a "blot" could include an outstanding condition that remains unfulfilled.
Part of the court’s reasoning for refusing sanction in Re Naysmyth was that the effectiveness of the plan was dependent on “time to pay” arrangements being agreed between HMRC and the other members of the group.
In Re Smile Telecoms Holdings Limited10 the sanctioning of the restructuring plan was delayed as the effectiveness of the plan was conditional on a funder extending a put option. The court was not prepared to sanction the plan while its effectiveness was dependent on a third party and not the court. Ultimately, the funder waived the extension condition and the restructuring plan was sanctioned.
A critical component of a restructuring plan will be the identification of the “relevant alternative”. This is the scenario that the court considers to be most likely to occur in relation to the plan company if its restructuring plan is not sanctioned. Part of the test for approving a cross-class cram down requires the court to be satisfied that the crammed down creditors would be no worse off than they would be in the relevant alternative.
Often the relevant alternative will be an immediate administration or insolvent liquidation in which unsecured creditors will receive little or nothing on their claims. It may therefore be relatively easy to show that the restructuring plan leaves them no worse off than this dismal counterfactual. However, the court may take a broader view of what is the relevant alternative. It may conclude that the plan company has sufficient runway remaining before it needs to enter into an insolvency procedure and that the relevant alternative is another restructuring. For example, in Re Hurricane Energy11 the court rejected the plan company’s contention that the relevant alternative was an orderly wind down followed by liquidation. Hurricane Energy’s bonds were not due to mature for another year so the court found that the relevant alternative was continuation of trading for a further year.
The court will not want to sanction a restructuring plan if it knows the restructuring plan will not be effective in relevant foreign jurisdictions. This could include the jurisdiction in which the plan company or co-guarantors of the debts which are bring restructured by the restructuring plan are incorporated or the jurisdiction whose laws governs the restructured debt.
Recognition of the order of the English court sanctioning the restructuring plan may need to be sought in the relevant jurisdiction. This will depend on the domestic law of the relevant jurisdiction, though the process can be easier if that jurisdiction has adopted the UNCITRAL Model Law on Cross-Border Insolvency, for example the United States under Chapter 15 of its Bankruptcy Code. Since the UK’s exit from the European Union the Brussel’s Judgment Recognition can no longer be used to obtain quick recognition of an English court judgment with the European Union as was commonly the case, with orders sanctioning a scheme of arrangement prior to Brexit.
Brexit has not, however, affected the ability to obtain recognition in EU member states on the basis of the Rome I Regulation. This provides that EU member states should give effect to the choice of governing law agreed between parties. The Rome I Regulation may accordingly be helpful in obtaining recognition of a restructuring plan where the governing law of the restructured debt is English law.
The court will expect expert evidence from an expert in each of the relevant overseas jurisdictions to confirm that the English court’s order sanctioning the plan would be recognised.