The Corporate Insolvency and Governance Bill 2020 (the "Bill") introduces a flexible restructuring compromise or arrangement for companies in financial difficulty (the "Restructuring Plan"). It is proposed that the legislation governing the Restructuring Plan will sit alongside the schemes of arrangement and be included in a new Part 26A to the Companies Act 2006.
The Restructuring Plan will not apply to companies that are solvent with no risk of insolvency; rather it will only apply where two conditions are satisfied:
- condition A: 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; and
- condition B: a compromise or arrangement is proposed between the company and (a) its creditors, or any class of them; or (b) its 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 those financial difficulties.
The Restructuring Plan may be proposed by the company, or its creditors, shareholders, liquidators or administrators. When the insolvency reforms were originally proposed, it was intended that the company be given exclusivity for a certain period to propose the Restructuring Plan. This exclusivity period would mirror the position in the US; however this is not included in the Bill, as drafted.
Can overseas companies propose a Restructuring Plan?
As with schemes of arrangement, overseas companies will be able to propose a Restructuring Plan as long as they would be "liable to be wound up" under the Insolvency Act 1986, which in turn depends on whether the company has a "sufficient connection" to this jurisdiction. This will include companies with English law debt and/or assets in the UK.
In our view it is unlikely that Restructuring Plans will be included within the Annex to the EU Regulation on Insolvency Proceedings 2015 and so Restructuring Plans will not have automatic recognition across the EU.
Although it is probable that Restructuring Plans will be recognised under Chapter 15 of the US Bankruptcy Code, whether other countries which adopted the UNCITRAL Model Law on Cross Border Insolvency will recognise them, and give effect to their terms, will depend on how they have implemented the Model Law.
It may be that a Restructuring Plan can be recognised internationally under principles of private international law, for example, where the debt in question is governed by English law or the parties have submitted to the jurisdiction of the English courts.
The process proposed is similar to that for schemes of arrangement:
- a court application is made and heard for permission to convene meetings of classes of creditors (and members, if applicable) at which the court will consider class composition, and in the case of overseas companies, jurisdiction;
- the court approved meetings of creditors or classes of creditors and/or members are held at which the creditors and/or members will vote on whether to approve the Restructuring Plan; and
- a further court application is made and heard at which the court is asked to exercise its discretion to sanction the Restructuring Plan.
In the Bill there is no specific test set out for the court to apply when approving the Restructuring Plan. We expect the court will apply similar approach to that for schemes of arrangement, namely to check that:
- the Restructuring Plan has been voted through in accordance with the legislation;
- those voting in favour are representative of those within the class and were not, for example, receiving ancillary benefits for voting in favour, which may have influenced their decision to support the Restructuring Plan; and
- the Restructuring Plan is fair.
Differences between the Restructuring Plan and schemes of arrangement
Important differences between the Restructuring Plan and schemes of arrangement include:
- voting for the Restructuring Plan must be by a majority within each class, which is defined as 75% by value only (there is no test for a certain number of votes to be cast);
- the Bill specifies which creditors/members are required to be
permitted to vote:
- every creditor or member of the company whose rights are affected by the Restructuring Plan must be permitted to vote; and
- an application may be made to the court to exclude classes of creditors or members from voting, which will be granted if the court is satisfied that none of the creditors or members of that class has a genuine economic interest in the company;
- there are some exceptions as to which creditors can
- where the company has triggered a moratorium under the Bill within the preceding 12 weeks of the Restructuring Plan, creditors who are owed debts which have arisen during that moratorium and those owed pre-moratorium debts which were not subject to a payment holiday e.g. debts / liabilities arising under a financial services contract, are deemed "Relevant Creditors". The Bill provides that Relevant Creditors cannot vote in respect of the Restructuring Plan; and
- also included in the concept of Relevant Creditors are creditors with "aircraft-related interests", that is, a registered interest within the meaning of the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (S.I. 2015/912).
- the Restructuring Plan allows for cross class cram-down of
creditors and/or members, meaning not all classes have to vote in
favour for the court to sanction a Restructuring Plan, if:
- the court is satisfied that under the Restructuring Plan, none of the members of the dissenting class would be any worse off than under "the relevant alternative", which is what the courts considers most likely to occur if the plan were not sanctioned; and
- the plan has been agreed by 75% in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company, in the event of the relevant alternative.
The Government has reserved the ability to amend these requirements by regulation.
Interestingly, the modified absolute priority rule which was included in the original proposals for the Bill in 2018 is not included in the Bill. The proposal then was that a dissenting class would have to be satisfied in full under the Restructuring Plan before a more junior class could receive any distributions, but that the court would have a discretion to approve a Restructuring Plan where non-compliance with this requirement was "necessary to achieve the aims of the restructuring" and "just and equitable" in the circumstances.
The court is given powers to make additional orders where Restructuring Plans for companies in liquidation or administration are sanctioned, e.g., to bring the administration or liquidation to an end, to stay it, or to impose any requirements to facilitate the Restructuring Plan as the court thinks fit.
- The trend for explanatory statements in relation to schemes of arrangement to be lengthy and detailed is likely to be as applicable to those for Restructuring Plans. With the court being required to reach some potentially difficult decisions, we can also expect the amount of factual and expert evidence being submitted to be substantial and subject to careful scrutiny.
- A key issue, which might lead to disputes, is what the "relevant alternative" should be regarded as. In relation to schemes of arrangement for solvent insurance companies, a similar issue, when considered by the courts, made many schemes of arrangement commercially difficult to promulgate, as the court was reluctant to find that anything other than an orderly run-off of legacy liabilities was the most likely alternative for the companies in question. If a court is persuaded that administration or liquidation is the relevant alternative, the threshold for satisfying the "no worse off" test is at risk of being quite low. Estimated outcome statements can be notoriously conservative predictions of the outcome in an insolvency process.
- Valuation evidence will play a centre-stage role, as the company will need to demonstrate where value breaks to exclude creditors and/or members from voting/participating in the Restructuring Plan, as well as to satisfy the court, in cross class cram-down cases, that the dissenting class members are all no worse off. It seems likely that this will in the larger, more complex, cases, be a hotly-contested issue.
- Cross class cram down opens up some interesting possibilities:
- it should mean that junior classes of debt have less hold-out opportunity;
- but, as long as senior secured creditors are no worse off than under the relevant alternative, they can be crammed down by junior classes; and
- members can be crammed down, which in turn should mean that even where they might have in the past have had a hold-out position (e.g. where there is a sole shareholder), they will no longer. Previously, lenders/bondholders faced with this issue used a transfer scheme mechanism to effect a change in the share structure (e.g. in a debt for equity restructuring), where an administrator or provisional liquidator (in countries where administration is not available) would be appointed and transfer the shares in the scheme company to a newco.
Originally published June 1, 2020
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