After a slow (but significant) start in 20201 , 2021 has been the year in which the restructuring plan has spread its wings and shown more of its stripes. Seven corporate groups made the headlines by asking their creditors to vote on restructuring plans this year. Six of them were sanctioned by the court, and one had sanction refused in an important demonstration of the limits of the cross-class cram-down power. 2021 saw the cross-class cram-down power being successfully invoked four times, with two uses being fully opposed by the dissenting creditors, further testing the parameters of the power.
In terms of plan outcomes, the plan has been used by groups (English, European and non-European) across a variety of sectors to carry out financial and, in some cases, financial and operational restructurings. From achieving a combined finance and landlord creditor plan (which would have traditionally been done through a parallel scheme and CVA) in Virgin Active to providing a going concern exit from an insolvent administration as we saw in Amicus Finance, the restructuring plan is truly shaping up to be a flexible, commercial tool.
Looking forward, we predict that 2022 will be the year that the restructuring plan really takes off. 2022 is shaping up to be a challenging year for many sectors, for the reasons we discussed in November's Thought of the Month. The restructuring plan is well suited to help over-leveraged businesses with complex financial arrangements face those challenges, and the first use of the plan by a mid-market company in Amicus Finance also paves the way for further use in the mid-market. By this time next year, we should know more about the open questions on restructuring plans. And in the meantime, financially distressed businesses should be looking at their restructuring runways to ensure they do not leave it too late to use a plan.
1. The two plans sanctioned in 2020 (Virgin Atlantic and Pizza Express) were closely scrutinised by the market, but cross-class cram-down was not ultimately required and learnings on the restructuring plan were limited.
The restructuring plan cases in 2021
The court was asked to sanction seven restructuring plans in 2021: DeepOcean, gategroup, Premier Oil, Smile Telecoms, Virgin Active, Hurricane Energy and Amicus Finance. Some brief details on these plans are contained below.
The High Court sanctioned the DeepOcean restructuring plans by exercising its discretion to apply cross-class cramdown for the first time. The case is also notable as it established that it is not essential for a restructuring plan to seek to rescue a company as a going concern. See our briefing here.
The timing of the ‘gategroup’ restructuring plan launch was very significant. As the plan was launched prior to the end of the Brexit transition period (11 pm on 31 December 2020), the Lugano Convention still applied to the UK and the court was required to consider whether the Lugano Convention applied to the plan.
In a clear departure from the case law on schemes of arrangement, the court found that restructuring plans are insolvency proceedings falling outside the scope of the Lugano Convention. This may change how restructuring plans are recognised in some foreign jurisdictions going forward. See our briefing here.
Premier Oil used the restructuring plan as the first example of its use by a listed company. The plan was used by the Scottish group as part of a wider restructuring, culminating in the merger of Premier Oil plc with Chrysador Holdings Ltd, with Premier's shares being readmitted to trading under the new name Harbour Energy plc.
In the Smile Telecoms plan, a telecoms group operating in Africa used the court’s cross-class cram-down power to facilitate further super-senior borrowings (as a bridge to an expedited sales strategy), notwithstanding that the senior lender class did not approve the plan by the requisite 75%: only 71% by value voted in favour.
In the first fully opposed cross-class cram-down judgment, the Virgin Active restructuring plan was sanctioned. The main take-away from the judgment is that where ‘out of the money’ creditors vote against a plan or raise objections at sanction, this will carry very little weight. Rather, 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 use of the plan alone enabled Virgin Active to conclude a financial and operational restructuring, in a way previously done by combining a scheme (or plan) with a CVA. See our briefing here.
The High Court declined to sanction the restructuring plan of Hurricane Energy, after objections raised by the existing dissenting shareholders who would have seen their shareholding diluted to 5% under the plan. This is the first restructuring plan which has not been sanctioned. The court found that there was a realistic prospect that the shareholders would be better off if the plan wasn’t sanctioned, and therefore the conditions for the use of cross-class cram down were not satisfied. It was central to the judge’s findings that the evidence showed that the insolvency of the company wasn’t imminent and that the company could continue trading profitably for at least 12 months, if the plan wasn’t sanctioned. The case shows that it may be more challenging for a company to use a restructuring plan to cram-down a whole class of dissenting creditors or members where the most likely alternative to the plan is not an imminent insolvency.
Amicus Finance used the restructuring plan to exit administration and continue trading as a going concern, as an alternative to an immediate liquidation. This was the first restructuring plan to be proposed by a mid-market company, the first to be used as an exit from administration and the second fully-opposed cross-class cram-down decision. As part of the plan, the shareholders were allowed to retain all of their equity, while the secured creditors were required to take a large haircut and wouldn't get any benefit from the company's continued trading. Only 50.02% of the voting senior secured creditor class by value voted in favour of the plan, but the court used its cross-class cram-down power to sanction the plan on the basis of the unanimous votes in favour cast by the expense creditors (who ranked ahead of the secured creditors due to the company being in administration at the time of proposing the plan). The case contains interesting guidance for companies and administrators proposing a plan, and is likely to pave the way for further use of the plan in the mid-market.
What do the cases tell us?
- A restructuring plan is like a scheme except when it's not. The restructuring plan was introduced as an upgrade model to the scheme of arrangement and has sometimes been referred to as the "super scheme". A reminder of the main upgrades contained in the plan is at the bottom of this article.
The early plan cases drew upon the existing body of case law for schemes enthusiastically, but it has become clear that the scheme approach requires modification when the court is considering its discretion to exercise cross-class cram-down. This was neatly summed up by Zacaroli J in Hurricane, where he said that where cross-class cram-down is being sought, "the reluctance of the court [in the scheme context] to depart from the outcome of a properly convened meeting of a class of creditors cannot have the same place in the court's approach to sanctioning a restructuring plan…" The key cases on cross-class cram-down in 2021 (DeepOcean, Virgin Active and Amicus Finance) tell us that the satisfaction of the statutory conditions for cross-class cram-down will not be sufficient in all cases, and the court must consider other factors relevant to its discretion in these circumstances.
- The financial difficulties threshold is very broad. In DeepOcean, Trower J held that the financial difficulties threshold which a plan company must satisfy should be widely construed. The test is broad enough to include a loss-making company using a restructuring plan to promulgate a solvent wind-down. A terminal financial state counts as "financial difficulties", and a plan that is designed to promote a solvent wind-down of the company by injecting additional group funds in order to give creditors an uplift above the dividend they would receive in an insolvent liquidation, counts as mitigation of those financial difficulties. The financial difficulties threshold is a fairly low bar. In Amicus Finance, the judge indicated that administration does not automatically qualify as financial difficulties but in practice we would expect that this test is highly likely to be satisfied when a plan is proposed by a company is in administration.
- Restructuring plans are insolvency proceedings but will likely still be recognised abroad. Perhaps one of the most controversial plan decisions was the convening decision in gategroup, in which Zacaroli J boldly held that restructuring plans are insolvency proceedings for the purposes of the Lugano Convention. We covered the reasoning behind the decision here. This conclusion elicited some strong reactions from parts of the UK restructuring community, being concerned that insolvency proceedings may be less easily recognised in Europe and that the decision might further limit the availability of restructuring plans for companies within scope of the Cape Town Convention Aircraft Protocol.
However, the fall-out from the gategroup decision so far has been mild. The basis for recognition of schemes has already changed as a result of Brexit, and this was confirmed in July this year when the EU declined to give its consent to the UK joining the Lugano Convention. We will have to rely largely upon private international law for recognition of both schemes and plans in Europe and beyond. As a general rule, this is most likely to be successful where the company's centre of main interests is in the UK, and the finance documents contain an exclusive English jurisdiction clause and an English governing law clause. Where these elements are present, early indications are that the market will likely still be able to find a route through to recognition in most jurisdictions, albeit this will possibly be less straightforward and more costly and time-consuming than it used to be.
- Shareholders' rights are "affected" if their shareholdings are diluted under the plan. In Hurricane, the judge held that the rights of members whose shareholdings were proposed to be diluted by 95% under the plan pursuant to the Companies Act 2006 override provisions (to overcome pre-emption and shareholder consent rights) were "affected" by the plan. This means that shareholders who are diluted by a plan in this way must be given a vote, unless it can be shown that they do not have a genuine economic interest in the company (in which case their right to a vote can be excluded). If they vote against the plan, they will need to be crammed down.
- There is such a thing as too early. The cases in 2021 drew a contrast between, on the one hand, those plan companies (such as Virgin Active, Gategroup and Amicus Finance) which were fast running out of cash, and for whom the relevant alternative was an imminent administration or liquidation, and on the other hand, Hurricane, for whom the relevant alternative was disputed but which the judge held on any analysis would likely involve a 12-month period of profitable trading before a possible orderly wind-down, or a restructuring or refinancing.
Where the relevant alternative is an imminent insolvency, and the evidence shows that the dissenting class is out-of-the-money (i.e. the dissenting class would not get a return in that insolvency), the cross-class cram-down decision seems to be more straightforward. In that scenario, provided the out-of-the money dissenting class is no worse off under the plan, which is demonstrated by showing a better financial outcome under the plan than the insolvency estimated outcome, the courts have held that it is up to the in-the-money classes to decide how the restructuring surplus should be allocated, and the courts have quite comfortably sanctioned the plan. This is the case even where the existing shareholders have been permitted to keep their equity (Virgin Active and Amicus Finance).
This contrasts with the Hurricane experience where insolvency was not held to be imminent. Cram-down of the company's shareholders was ultimately not available because the challenging shareholder was able to demonstrate at least a realistic prospect that they would be better off in the relevant alternative.
Part of the policy intention behind restructuring plans was to encourage earlier restructurings to allow for a decent length runway to effect the reorganisation, to prevent unnecessary value destruction, and to avoid uncomfortably last minute court applications. Hurricane provides a reminder that using a restructuring plan to cram-down a whole class of dissenting creditors or members may be more challenging where insolvency is not imminent, although the appropriate timing for the launch of any restructuring plan will likely remain driven by the specific circumstances relating to the plan company’s business.
- Have we missed not having an absolute priority rule? When the restructuring plan first launched, there was much speculation about the deliberate omission of an absolute priority rule (or equivalent) in the UK regime. In its strictest form, the absolute priority rule provides that no junior class of creditors or members can (without consent) receive any payment under the plan unless the next most senior class has been paid in full.
The advantage of not having an absolute priority rule is the increased flexibility. The UK’s restructuring market has always thrived on flexibility and the cases to date would suggest that this is no exception. The downside to having no equivalent statutory rule is uncertainty because at the outset, no-one knew how the courts would choose to exercise their discretion. The 2021 cases on cross-class cram-down have set down some guidance on this issue (particularly for out-of-the-money creditor classes) but there are still some uncertainties on which further judicial guidance is awaited, particularly around the treatment of shareholders. What are the circumstances in which it is fair for equity to retain its stake (or a reduced stake) when secured or unsecured creditors (such as landlords) are being heavily compromised? And on the flip side, when is it fair for impaired creditors to swap their debt for an equity stake (of what size?) at the cost of the existing shareholders?
This article is an edited version of the article 'Reflections on a year of restructuring plans' authored by Inga West and first published in Insolvency Intelligence on Westlaw in August 2021.
The main upgrades for a restructuring plan (as compared with a scheme of arrangement) – a reminder
- The restructuring plan has a threshold entry criteria requiring the plan company to have encountered (or be likely to encounter) financial difficulties that are affecting (or will or may affect) its ability to carry on business as a going concern; and furthermore, the purpose of the plan must be to eliminate, reduce or prevent, or mitigate the effect of, those financial difficulties;
- A restructuring plan permits cross-class cram-down, which means that the court can exercise its discretion to sanction the plan even where one or more classes have voted against the plan provided that: (a) no members of the dissenting class(es) are any worse off under the plan than in the relevant alternative (i.e. what would be most likely to occur to the company if the plan were not sanctioned); and (b) the plan has been approved by a class of creditors who would receive a payment, or have a genuine economic interest in the company, in the relevant alternative;
- The restructuring plan incorporates certain Companies Act 2006 override provisions, which can be used, for example, to override shareholder pre-emption and consent rights in connection with the allocation of new shares under a plan; and
- When the classes vote on the plan, there is no numerosity requirement. The requisite majority is simply that 75% or more in value of those voting in the class must approve the plan.