Guidance

Restructuring plan

Updated 5 June 2020

This guidance was withdrawn on 22 February 2023

This bill became law on 25 June 2020. See the Corporate Insolvency and Governance Act 2020.

What are we going to do?

The restructuring measures in the Bill will support viable companies struggling with debt obligations to restructure under a new procedure. They allow the court to sanction a plan that binds creditors to a restructuring plan if it is fair and equitable and in the interests of creditors. Creditors vote on the plan, but the court can impose it on dissenting creditors (‘cram down’) provided that the necessary conditions are met.

How will it work in practice?

Background

The existing ‘scheme of arrangement’ (scheme) procedure , predominantly used to undertake the restructuring of companies with complex capital arrangements, has been a very successful financial restructuring tool in the years since the Financial Crisis of 2007/2008 (though has been around since the 19th Century). The scheme framework is very flexible and has been used in increasingly creative ways to address a variety of financial challenges faced by companies and given them improved chances of future viability.

Despite the success of the scheme as a favoured restructuring tool for both UK and international companies , it does lack one key feature that limits its effectiveness and puts it at a disadvantage compared to the restructuring frameworks of a number of other jurisdictions (such as the US Chapter 11 model) and that is cross-class cram down (CCCD). Without CCCD, a single class of creditors can block a scheme from being agreed even when it is in the company’s and creditors’ interests.

How one class can block a scheme that all other classes support

Creditor class	Details	For or against
Class A	- Debt: £100 million - In liquidation, would receive: £100 million - Scheme proposes: retain debt of £95 million	For
Class B	- Debt: £100 million - In liquidation, would receive: £48 million - Scheme proposes: retain debt of £48 million	Against
Class C	- Debt: £20 million - In liguidation, would receive: £2 million - Scheme proposes: retain debt of £7 million	For

A company has unsustainable debts that threaten its ability to continue to stay in business. The company has debts totalling £220 million and assets totalling £150 million (realisable in a liquidation – which is the next most likely outcome if the scheme is not sanctioned).

The table shows how a scheme proposal seeks to redistribute value from ‘Class A creditors’ to ‘Class C creditors’.

Class C contains trade suppliers whose supplies are needed going forward. Class A views the company’s long-term survival as in its interests. To secure the support of the trade suppliers in Class C, Class A agrees under the scheme to ‘gift’ some value to Class C to secure support for the scheme. Class C therefore votes in favour.

Class B also wants to benefit from value flowing down the order of priority. There is no advantage to the company (or Class A) from giving Class B more than it would otherwise receive so this is resisted. Class B therefore votes against the scheme.

As schemes require all classes to vote in favour, Class B’s rejection of the scheme means the court cannot sanction the scheme. The company is now in real risk of entering liquidation.

CCCD

CCCD prevents dissenting classes of creditors (and/or shareholders) from blocking a restructuring that is in the best interests of the company. Providing conditions protecting creditors’ interests have been satisfied, a restructuring can be approved even though not all classes of creditors have agreed.

The Corporate Insolvency and Governance Bill introduces a new restructuring plan (RP) procedure that closely resembles existing restructuring schemes but incorporates new CCCD provisions that will allow a court to sanction a RP, even where certain classes of creditors vote against it. The Government believes creditors, particularly those with no genuine economic interest (i.e. those who would receive nothing if the company was to enter an insolvency procedure), should not be able to frustrate a restructuring that may secure the company’s future, providing those creditors are no worse off than they otherwise would be in the next most likely outcome.

Creditor protections

In the RP procedure, creditors will be formed into classes approved by the court and will vote on the proposed RP. At least 75% of creditors, by value, within a class must vote in favour in order for that class to have approve the RP.

Where a class does not vote in favour, the court will still be able to sanction the RP providing the class or classes that voted against it are no worse off than they would be in the next most likely outcome. In addition, at least one class of creditors who would receive something in the next most likely outcome must vote in favour.

The court has an absolute discretion whether to sanction the RP and may refuse to sanction if it is just and equitable to do so.

How CCCD can overcome a blocking class

Creditor class	Details	For or against
Class A	- Debt: £100 million - In liquidation, would receive: £100 million - RP proposes: retain debt of £95 million	For
Class B	- Debt: £100 million - In liquidation, would receive: £48 million - RP proposes: retain debt of £48 million	Against
Class C	- Debt: £20 million - In liguidation, would receive: £2 million - RP proposes: retain debt of £7 million	For

In the same scenario as before, using an RP instead of a scheme, the court’s ability to impose a CCCD produces a better outcome for the company and creditors as a whole.

Class B again votes against the RP as it unsuccessfully seeks to unfairly benefit by holding out in an effort to extract more value than it would otherwise receive.

Even though Class B has voted against the RP, as it would receive the same as it would under the next most likely outcome (£48 million), it is no worse off so the court can impose CCCD and sanction the RP.

Intended outcomes

The introduction of RPs with their ability to impose CCCD should result in better outcomes where a financially distressed company is attempting to restructure its debts in order to secure its long-term survival.

At present, without the CCCD, creditors can seek to unfairly benefit by ‘holding out’ support unless they are offered more than they are due, based on what they would likely recover in the event of the company failing and entering an insolvency procedure. This situation can be exploited by predatory market actors who may seek to buy debt (such as bond debt) in financially distressed companies, in the expectation the company will attempt a restructuring to address its difficulties (and the company will then have to come to an agreement with these predatory actors).

This may lead to sub-optimal outcomes, both for the company and other creditors. Either higher-ranking creditors (those who would be paid first in the order of priority in an insolvency procedure, such as traditional lenders with the benefit of fixed security over company assets) must surrender value to the hold-out class, which may be viewed as unfair, or, the hold-out class blocks the restructuring. This may lead to the company failing, with a resulting loss of jobs and economic output.

With the option of using an RP and the court’s ability to impose a CCCD, a company will be able to achieve a restructuring that is fairer for all parties and will allow the company to have an improved prospect of long-term survival with a more sustainable debt profile going forward. This prospect of rescue is balanced by the need to protect creditors from unfair treatment. No class that votes against the RP can be worse off than they would be if the RP was not sanctioned so the interests of all creditors, from banks, to employees, to HM Revenue and Customs are protected to the extent that, even though sometimes they may not get paid, they will be no worse off.

Having an RP sanctioned, however, should help the company overcome its financial difficulties, which in turn should safeguard the jobs of employees, result in continuing tax revenues for the Exchequer, and provide the company’s suppliers with a customer with which they can continue to do business.

Who will it apply to?

• As a general principle, restructuring plans will be available to all companies which can be wound up under Parts IV and V of the Insolvency Act 1986, (including “unregistered companies”). This includes overseas companies, where they meet the criteria of being liable of being wound up.

Regulations will provide for application to:

• Charitable Incorporated Organisations
• mutuals (including co-operatives and community benefit societies)
• limited liability partnerships

Regulations may apply exclusions to:

• Financial services