On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (the Act) came into force, introducing a number of permanent reforms to English insolvency and restructuring law. Among these reforms is a new restructuring plan (the Plan). Whilst the Plan bears similarities to the existing Scheme of Arrangement under Part 26 of the Companies Act 2006 (Schemes) and comparisons can also be drawn to company voluntary arrangements under Part 1 of the Insolvency Act 1986 (CVAs), it introduces some specific nuances which may make it a preferred restructuring tool for companies in financial distress.
The Plan is available for companies of all sizes (including foreign companies which meet a “sufficient connection” test) which meet both of the following conditions:
- A) the company has encountered or is likely to encounter “financial difficulties” affecting or likely to affect its ability to carry on business as a going concern.
- B) a compromise or arrangement is proposed between the company and its creditors, or a (single) class of its creditors, and the purpose is to eliminate, reduce, prevent or mitigate the impact of the “financial difficulties.”
There is no guidance in the statute on what constitutes “financial difficulties,” and it remains to be seen how the Court will apply the test, but it is unlikely that it would be construed narrowly, particularly in the current economic climate, unless creditors can point to a clear lack of good faith.
Requirements for the Plan To Be Sanctioned
If the Court grants an order for the convening of a meeting of creditors, those creditors (or classes of creditors, if applicable) will be invited to vote in a meeting to approve the Plan. The same approval threshold as would apply in a Scheme — 75% in value of creditors’ (or class of creditors’) claims — applies in a Plan, however, unlike in a Scheme, there is no requirement that a majority in number of creditors (or class of creditors) approves the proposal.
Cross Class Cram-Down, and Scope for Cram-Up
The key provision which differentiates a Plan from a Scheme is that the Court has a discretion to sanction the Plan even if one or more classes of creditors vote against it, resulting in the potential for “cram-down” of those dissenting classes of creditors.
Provided that 75% or more in value of at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, in the event of the “relevant alternative” votes in favour of the proposal, and provided that the Court is of the view that the dissenting class(es) are no worse off than they would be in the event of the “relevant alternative” and that the Plan is fair and just (concepts again borrowed from Schemes case law), the Court has the discretion to sanction the Plan.
Whilst this discretion would most likely be applied where a senior or essential class of creditors agrees a compromise which impacts a junior class which voted against the proposal, it is also possible that the junior creditors could approve a Plan which senior creditors have voted against, resulting in the senior class being “crammed up”.
The “relevant alternative” for the purposes of the Court determining whether to exercise its discretion to sanction the Plan is whatever the Court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned. This appears to be indicating a “but/for” test, but it remains to be seen whether the Court will apply a similar type of test as in Schemes and CVAs or require additional or different evidence to, for example, a liquidation analysis.
A New Era for Restructuring?
Whilst formal recognition of the ability to “cram down” whole classes of creditors may technically be a new concept in English insolvency law, landlords in particular will be aware of the potential for effectively similar cram-down in CVAs. For example, in a number of recent retail CVAs, landlords have been required to take haircuts and shoulder most of the financial burden.
Even though creditors or classes of creditors are able to propose competing restructuring proposals, which may result in more active creditor involvement, in general the Plan marks a shift towards a more debtor-friendly restructuring process which could potentially impact any company around the world. Accordingly, this is likely to be an active, swiftly developing and highly contested area of law over the coming months and years.
Next week, Faegre Drinker will be continuing this series of briefings with an overview of another of the permanent reforms introduced by the Act. In the meantime, if you have any queries, please contact a member of the London corporate restructuring team.