Corporate Insolvency and Governance Act: The Restructuring Plan

The new Corporate Insolvency and Governance Act 2020 (the "CIGA"), which became law on Friday 26th June, introduces a new restructuring procedure (referred to as to the "Restructuring Plan"). This provides a company encountering financial difficulties with a more powerful restructuring tool than the existing scheme of arrangement process in the UK. Unlike some of the other temporary changes in the CIGA, which we review in our overview briefing, the Restructuring Plan is a permanent change to the UK's restructuring and insolvency regime.

What is a Restructuring Plan?

A Restructuring Plan, which is an "arrangement" or "compromise" between the company and its creditors and/or shareholders, may be proposed by companies or their creditors or shareholders. The new procedure shares some of the features of the UK's existing scheme of arrangement procedure, which remains available, with some important improvements including "Cross-Class Cram Down" discussed below. It requires voting of creditors and shareholders in "classes" and each class will be deemed to have approved the plan if 75% by value of that class vote in favour (unlike a scheme of arrangement, there will be no requirement that a majority in number vote in favour). To become binding on the company, creditors and/or shareholders (as appropriate) the plan must be sanctioned by a court.

Who can use the Restructuring Plan?

The Restructuring Plan procedure applies in relation to any company liable to be wound up under the Insolvency Act 1986, which would include foreign companies, with a similar eligibility test to that which applies for a scheme of arrangement. However, in order to be eligible for the Restructuring Plan, the company must also satisfy two further hurdles:

• it must have 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
• the purpose of the compromise or arrangement proposed must be to eliminate, reduce, prevent, or mitigate the effects of, any of the company's financial difficulties.

What is Cross Class Cram Down?

One critical improvement compared with a scheme of arrangement is the possibility of "Cross Class Cram Down", the ability for a Restructuring Plan to bind one or more dissenting classes of creditors or shareholders (i.e. a class in which those voting in favour do not meet the 75% value threshold). However, the use of cross-class cram down would have two conditions:

(a) the court must be satisfied that none of the dissenting class(es) would be any worse off than in the "relevant alternative", which is defined as what the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned; and

(b) the restructuring plan must have been approved by 75% by value of at least one class of creditors or members and that class would receive a payment or have a genuine economic interest in the company in the event of the "relevant alternative" referred to above.

How is the Restructuring Plan being used?

Since the proposal of the (then) Corporate Insolvency and Governance Bill 2020, the Restructuring Plan has been eagerly anticipated, in particular for complex debt restructurings with a number of creditor classes. A small number of Restructuring Plans have been launched to date (as summarised below), however use of the Restructuring Plan is expected to increase as the various government COVID support measures come to an end.

In July 2020, Virgin Atlantic Airways was the first to launch a Restructuring Plan, which proposed to implement a solvent recapitalization to raise c. £1.2bn (further details of which are considered here).

A significant judgment was also handed down in February 2021 in connection with the gategroup Restructuring Plan. The High Court concluded that Restructuring Plans are insolvency proceedings falling outside the scope of the Lugano Convention¹, marking a clear departure from established case law on schemes of arrangement. The reasoning behind this conclusion and its likely practical impact are examined here.

A much awaited feature of the new Restructuring Plan has been the ability to cram down the plan on dissenting junior classes of creditors or shareholders who may be 'out of the money':

• Under the CIGA, the court is given the power to disapply certain shareholder rights to implement a Restructuring Plan, including in particular shareholders' rights of pre-emption and the requirement to seek shareholder authority to allot and issue further shares. Prior to the CIGA, such rights had often given shareholders a right of consent over equity issued as part of a debt for equity swap. It now appears possible to remove that consent right through the court as part of a Restructuring Plan. This may well change the dynamics of negotiations between shareholders and lenders in some complex debt restructurings.

• There had also been some speculation that the Restructuring Plan would give the court a power to eliminate claims of dissenting junior classes of creditor or shareholders where they have no economic interest in the company (i.e. they are 'out of the money'). The CIGA does not explicitly provide that power. However, exactly what is achievable in this respect as part of the "arrangement" under a Restructuring Plan would be an area worth watching (in particular whether a Restructuring Plan could fundamentally alter the rights of 'out of the money' dissenting creditors and shareholders to their detriment while still meeting the conditions for Cross-Class Cram Down and pass the court's 'just and equitable' test). For now, the route to eliminating the claims of junior creditors or shareholders of using a security enforcement or twinning a restructuring procedure with an insolvency procedure (such as a pre-pack administration twinned with a scheme of arrangement) would remain the 'tried and tested' route.

In January 2021, the DeepOcean Restructuring Plan provided the first Restructuring Plan judgment in which the court exercised its discretion to apply cross-class cram down. While DeepOcean is notable as the first cross-class cram down decision, and provided important guidance on the court's approach to Restructuring Plans, there remain further features to be tested in future cases and developed further in the courts (which we examine in more detail here). In particular, the meaning of "relevant alternative" and whether a creditor is "worse off" under the Restructuring Plan than in that scenario are likely to be disputed between competing creditor classes. Valuation evidence as to whether a creditor is "worse off" in the relevant alternative will become crucial. Consistent with the trend we have been observing in CVAs and schemes of arrangement in recent years, valuation is likely to come to the fore and may be a focus for a greater scope for creditor challenge.

Prior to the CIGA, it was expected that the Restructuring Plan would require that the claims of a dissenting class of creditors be satisfied in full before a more junior class receives any distribution (referred to in the US Chapter 11 as the 'absolute priority rule'), or at least a flexible version of that rule. That protection exists in Chapter 11 to protect senior creditors' rights against compromise by junior classes of creditors and/or shareholders. In the CIGA, it has been replaced by the weaker protection for senior creditors of being no worse off than in the most likely alternative if the Restructuring Plan were not sanctioned. How this might be used by junior creditors in negotiating complex debt restructurings will also be worth watching.

It is also worth noting that if a Restructuring Plan is proposed within 12 weeks following a Moratorium process (see our summary here), any 'moratorium' debts and pre-moratorium debts that do not have a payment holiday may not be compromised without consent. This will include finance debts (except for those accelerated during the moratorium itself). This may make a Restructuring Plan preceded by a moratorium unworkable unless the finance creditors are willing to consent.

Overall, the new Restructuring Plan is a welcome addition to the UK's restructuring toolkit. How the restructuring market uses the Restructuring Plan and its impact on negotiating dynamics within the capital structure will become clear as companies and stakeholders address the financial distress caused by COVID-19.

For more information on these reforms please contact your usual contract in Ashurst's Restructuring and Special Situations Group.

1. The Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial matters signed in Lugano on 30 October 2007.