Authored by Tom Bannister, Lauren Pflueger, Emma Simmonds and Barry Russell, all of Akin Gump Strauss Hauer & Feld
The English Restructuring Plan: A Year In Review
A little over one year ago, on 26 June 2020, the Corporate Governance and Insolvency Act 2020 (the Act) came into force, bringing with it the most extensive changes to the UK restructuring and insolvency landscape for almost two decades. The Act introduced a number of temporary provisions in direct response to the COVID-19 pandemic, as well as more permanent reforms of, and additions to, UK corporate insolvency law. Central to those more permanent reforms was the new restructuring plan procedure under Part 26A of the Companies Act 2006. A handful of companies have now sought to use the new restructuring plan and a helpful initial body of case law has been established as a result. Further details of what has been learnt so far follows below.
The English restructuring plan: a reminder
The restructuring plan was introduced as a flexible restructuring procedure, designed (in part) to address a perceived deficiency of the English scheme of arrangement and company voluntary arrangement (CVA): the absence of a cross-class cram down mechanism.
The restructuring plan is available to companies which have encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on as a going concern. The compromise or arrangement proposed to creditors and/or shareholders pursuant to the restructuring plan must seek to eliminate, reduce or mitigate the effect of those financial difficulties.
The cross-class cram down mechanism has now, as considered more fully below, been used in three restructuring plans (DeepOcean, Virgin Active and Smile Telecoms). The approval threshold for a class of creditors or shareholders is 75 per cent. by value (unlike a scheme of arrangement, there is no numerosity requirement in connection with the restructuring plan). The cram down mechanism allows dissenting classes of shareholders or creditors to be bound by the plan provided that:
- none of the members of a dissenting class would be any worse off under the restructuring plan than they would be in the event of the “relevant alternative” (Condition A); and
- at least one class who would receive a payment or would have a genuine economic interest in the company in the event of the “relevant alternative” must have voted in favour of the restructuring plan (Condition B).
While it is for the company proposing the restructuring plan to outline what, in its view, would constitute the “relevant alternative” to the restructuring plan, the Act provides that the “relevant alternative” is whatever the Court considers would be most likely to occur in relation to the company if the restructuring plan was not sanctioned. Liquidation or administration may be the “relevant alternative” but that may not always be the case.
The restructuring plan is different to, and separate from, an English scheme of arrangement and represents an alternative means by which a company can seek to restructure its affairs. However, many of the rules which apply or have been judicially developed in connection with schemes apply equally to restructuring plans, including:
- the jurisdictional threshold: English companies and non-English companies with a sufficient connection to England are able to propose a restructuring plan or scheme;
- in both restructuring plans and schemes, creditors are divided into classes by reference to the same principles;
- as noted, the approval threshold for a class of creditors or shareholders in connection with both a restructuring plan and a scheme is 75 per cent. by value (although a scheme also requires a majority by number in each class to vote in favour); and
- the legal process in relation to a scheme, including timings, documentation, Court hearings and meetings, is similar for a restructuring plan.
A year in review: the English restructuring plan in practice
Nine debtor corporate groups have sought to avail themselves of the restructuring plan since it became the newest tool in the UK restructuring toolkit. The administrators of a company have also proposed a restructuring plan as a means by which the company may exit administration and return to solvency.
The first restructuring plan was proposed by Virgin Atlantic shortly after the Act entered into force and while wider use of the procedure was slower than might have been anticipated, as the UK market familiarised itself with the process, uptake has steadily increased. This is a trend which is likely to continue through 2021 and beyond, particularly as the UK and Europe begin to emerge from the pandemic and companies assess the impact of it and their (potential) restructuring needs.
The cases have required the English Court to reflect on the terms of the legislation, exercise (in certain instances) its power to cram down dissenting classes of creditors and consider challenges brought by those dissenting creditors or impacted parties. While the case law will no doubt continue to develop and each case is of course different on its facts, the plans proposed to date have brought with them a number of interesting aspects for reflection.
Cross-class cram down
The cram down mechanism was first used in the DeepOcean restructuring plan and has subsequently been used in connection with the Smile Telecoms and Virgin Active plans. In DeepOcean, three English companies proposed parallel and interconditional restructuring plans. The statutory majority was achieved at the creditor meetings for each class of two of the plan companies. For the third company, one class of creditors unanimously approved the plan, yet only 64.6% of the creditors in the second class voted in favour if its terms. In sanctioning the plan and cramming down the dissenting class of creditors, the Court was clear that, when ascertaining whether a creditor is “any worse off”, consideration should begin with a comparison of the value of the likely financial outcome for that creditor in the relevant alternative, but it is a broad concept, encompassing the whole impact of the plan on all aspects of the company’s liabilities to the relevant creditor, including timing and certainty of payment. When considering whether Condition B was satisfied, the Court indicated that a “genuine economic interest” need not be material and even a small recovery would be considered sufficient to satisfy Condition B of the cram down conditions.
DeepOcean was a relatively straightforward case, with no creditors objecting at the convening or sanction hearings. By contrast, the Virgin Active proceedings involved a group of dissenting landlords, whose leases stood to be compromised by the terms of the plans, challenging the companies’ proposals before the Court. Three companies within the health club operator group proposed interconditional plans, with seven creditor classes in each restructuring plan: one comprising secured lenders under a facilities agreement, five comprising landlords (in different classes due to the difference in treatment depending on how profitable the clubs were) and one comprising creditors who were not landlords but whose claims related in various ways to properties rented by the group. While the statutory majority was achieved at two creditor meetings of each company, the consent levels at the other creditor meetings were between 0% and 66% and as a result, the Court was invited to exercise its discretion to sanction each plan using the cross-class cram down mechanism.
The case represented the first valuation dispute and of central relevance to the challenge mounted by the group of landlords was whether Condition A to the exercise of the cram down mechanism – that no member of the dissenting class would be any worse off than they would be in the event of the “relevant alternative” – could be considered satisfied. In determining that it was, the Court held that it was not required to satisfy itself that a particular or specific “relevant alternative” was definitely going to occur but instead, the appropriate test is what is most likely to occur.
The landlords criticised the plan companies’ valuation evidence, which was provided to the Court in connection with the plans in order to demonstrate likely recoveries under the restructuring plan and in the event of the “relevant alternative”. They failed, however, to provide any alternative valuation evidence and the Court concluded that their criticism did not hold much weight. It will be interesting to see what approach the Court adopts when faced with competing valuation evidence which, to date, has not been seen.
Finally, the Virgin Active case was instructive in that the Court held that if “out of the money” creditors (i.e. the landlords) vote against a restructuring plan, or raise objections to it, this will be minimally persuasive to the Court in its considerations as to whether to invoke a cram down. Instead, the key principle is that “it is for the company and the creditors who are in the money to decide, as against a dissenting class that is out of the money, how the value of the business and assets of the company should be divided”.
The early part of 2021 saw increased stakeholder activism in the UK restructuring space and restructuring plans were not immune to challenge. A significant shareholder of Hurricane Energy plc challenged the sanction of the company’s restructuring plan and the related use of the cram down mechanic, after a meeting of the company’s bondholders voted in favour of the plan but the shareholder meeting did not. In light of that challenge, the Court declined to sanction the plan, concluding that Condition A was not, in this instance, satisfied. A key creditor of Amicus Finance plc (in administration) is also opposing the administrators’ restructuring plan, which at the time of writing is working its way through the Court process.
Beyond Virgin Active, Hurricane Energy and Amicus Finance, the Courts have been busy with numerous landlord challenges to CVAs and opposition to schemes of arrangement including, in the case of the Amigo Loans scheme, opposition of the Financial Conduct Authority. The level of in-Court opposition to UK restructurings is unprecedented and only time will tell if this is simply the result of a number of test cases coming to the fore or whether it represents a more permanent shift towards disputed restructuring proceedings.
Engaged and involved Court
It is against this activist backdrop that the restructuring plan continues its ascent. The English judiciary has made it clear, in the restructuring plan judgments handed down to date, that it is willing to address challenges from dissenting stakeholders and provided comprehensive, reasoned judgments for reaching their conclusions. The Court has also shown a willingness to interrogate and critically assess the “relevant alternative” proposed by the plan company and, as in the case of Hurricane Energy, where appropriate, deviate from it.
What’s next for the English restructuring plan?
It remains to be seen what the future holds for the use of restructuring plans but it is undoubtedly clear that, over the last twelve months, the plan has become a significant and important tool for the English restructuring market. There remain many untested areas and existing debates are likely to continue to evolve, in particular in relation to valuation and disclosure. In relative terms, it is still early days, but restructuring plans are forging a name for themselves as useful, flexible and credible restructuring tools.