Restructuring plans were introduced during the coronavirus pandemic to provide a lifeline to businesses in financial distress, under Part 26A of the Companies Act 2006. Through a restructuring plan, businesses in financial difficulty can enter formal negotiations with company creditors to negotiate repayments. To successfully pursue this path, the company must face a real threat of insolvency or believe that it cannot continue trading as a going concern.
Restructuring plans bear similarity to a Company Voluntary Arrangement (CVA), a formal restructuring procedure that enables businesses in distress that remain viable to enter a payment plan with creditors, although the creditor approval process is what separates them.
How does a restructuring plan work?
The first stage of a restructuring plan consists of categorising creditors into classes which will be determined by their involvement and interests in the business.
Once asset classes are determined, creditors will be invited to cast their votes on the restructuring plan. For the plan to be approved, 75% of creditors (by value) within a class, from each class, must vote in favour of the restructuring plan. Restructuring plans can be controversial as not all classes of creditors need to vote in favour of the restructuring plan for it to be approved by the court because of what’s known as cross-class cram down.
What is cross-class cram down?
Cross-class cram down is a provision used to bring a restructuring plan forward, even if the 75% threshold is not reached by all creditor classes. Dissenting creditors can have their votes crammed down if the court deems it ‘just and equitable’ and even if they voted against the restructuring plan.
The court has the power to apply cross-class cram down, providing that a minimum of one creditor class votes in favour of the plan, despite several dissenting creditor classes. They must be able to demonstrate that dissenting creditors will not be put at a disadvantage or be financially worse under the restructuring plan, compared to a ‘relevant alternative process’.
A restructuring plan may appeal to distressed businesses due to the discretion that could be granted through the cross-class cram down provision. If there are reservations that the proposal will be rejected by a proportion of creditors through the likes of a Company Voluntary Arrangement (CVA), a restructuring plan may be the preferred route.
The decision-making process behind a restructuring plan consists of two hearings. The first hearing is known as the convening hearing where the Court will consider whether all creditor classes have been considered and invited to submit their votes. The second hearing is known as the sanction hearing where the Court will review the results of the vote and judge whether to sanction the restructuring plan.
A survival tool for distressed businesses
A restructuring plan provides a solution to businesses in financial distress with the potential to build a prosperous future with the right backing behind them and sufficient relief from growing company debts. A restructuring plan is a newly introduced survival tool for distressed businesses, introduced at the onset of the pandemic to help businesses make a full recovery.
Sharon McDougall, Scotland Debt Solutions (part of Begbies Traynor Group)
Sharon McDougall is a trusted provider of Scottish debt advice at Scotland Debt Solutions and a DAS-approved Money Adviser.