Recent months have seen a number of high profile retail insolvencies, and many more in the supply chain. This offers opportunities for businesses to pull back on growth plans, implement hiring freezes and/or restructure their property and people needs. This trend is unlikely to abate, and businesses should ensure that they are alert for early warning signs of issues with suppliers.
Restructuring plans here to stay?
Whilst Government pandemic support tails away, and company voluntary arrangements (CVAs) are likely to be a thing of the past, in the UK, one measure that is here to stay is the restructuring plan under Part 26A of the Companies Act 2006.
Introduced during the pandemic under the UK Corporate Insolvency and Governance Act 2020, a restructuring plan is a debtor in possession procedure which allows companies to reach a statutory compromise with its creditors and avoid formal insolvency.
The scope of compromises available under a restructuring plan is wide and includes extending maturity dates, changing the terms of existing debt where that cannot be done consensually, compromising dissenting lenders and landlords, and implementing debt to equity swaps.
The distinct feature of a restructuring plan is its ability to cram down a dissenting class of creditors, including secured or preferential creditors, provided that:
- the Court is satisfied that no member of the dissenting class would be worse off under the plan than they would in the relevant alternative ("Condition A"); and
- at least one class with an economic interest in the relevant alternative voted in favour of the restructuring plan ("Condition B").
This makes restructuring plans a useful tool to restructure liabilities compared to a CVA, which cannot bind secured or preferential creditors without their consent.
To be eligible to apply for a restructuring plan, a company must have encountered, or be likely to encounter, financial difficulties that affect or threaten to affect its ability to carry on business as a going concern. Moreover, the purpose of the plan must be to eliminate, reduce, prevent or mitigate the effect of those financial difficulties.
Although there is no requirement that a company must be of a certain size, the first restructuring plans sanctioned by the Court were used by large companies with complex debt structures, such as Virgin Atlantic (GBP2,927 million revenue), Premier Oil (USD1,213 million revenue) and Virgin Active (GBP602 million revenue).
This began to change on 19 August 2021 when the Court sanctioned the restructuring plan of a mid market company in the matter of Amicus Finance Plc [2021] EWHC 3036 (Ch). In the sanction judgment, Sir Alastair Norris noted that the utility of restructuring plans will be lost if the Court is "side-tracked into a time-consuming examination of detailed disputes without disclosure or oral evidence, and which has the potential to impose a heavy cost burden upon a company (particularly, as here, a small or medium enterprise) that is seeking rescue."
In July 2022, the second mid market company restructuring plan was sanctioned in the matter of Houst Ltd [2022] EWHC 1941 (Ch). This was the first case where the Court exercised its power to bind HMRC to the restructuring plan without its consent. HMRC now ranks as a preferential creditor in respect of certain taxes as of 1 December 2020. In doing so, the Court again considered the practical realities of a mid market company seeking to undertake a restructuring plan process, noting "while it would in theory be possible to require the Company to start again and seek to negotiate with HMRC, that is highly undesirable where the costs and delay in requiring it to do so would impose a disproportionate burden on the Company, a small to medium enterprise".
Amicus Finance Plc and Houst Ltd remain the only small to medium enterprises (SMEs) that have successfully undertaken a restructuring plan.
It is expected that 2023 will see more businesses use restructuring plans, as insolvencies are expected to increase and there is now a precedent that restructuring plans can bind HMRC, notwithstanding its preferential status, as demonstrated in Houst – an outcome that the well-established CVA cannot achieve.
Authors: Natasha Atkinson and Monica Hamid.
