As the support extended by the government during the COVID-19 pandemic begins to wind down, many businesses reliant on the measures and with higher debt levels may soon find themselves facing unsustainable balance sheets. The number of firms entering into insolvency remains low, but the effects of the increased debt burden left by COVID-19 are starting to be felt, and many businesses will face challenging headwinds in the coming months.
We sat down with Chad Griffin, Partner in our Restructuring Advisory team, to discuss the restructuring plan, which is becoming an increasingly important option for businesses looking for a route to recovery.
The process, which came into effect via the Corporate Insolvency and Governance Act (CIGA) last year, has already proved to be a viable alternative to traditional restructuring processes such as Schemes of Arrangement and company voluntary arrangements (CVAs). Restructuring plans could provide a more flexible, efficient and powerful tool to enable companies to restructure their balance sheets and operations. Although there have been a number of high-profile examples since its introduction, to date, these have been limited to situations requiring complex restructurings.
A restructuring plan is a court-approved agreement, similar to a Scheme of Arrangement, between a company and its creditors that can be used to affect a solvent reorganisation of a company. In order for a restructuring plan to be passed, it requires creditors to vote on its approval. Creditors are split into classes based on their rights against the company. Each class will be deemed to have approved the plan if 75 per cent by value of that class voting vote in favour.
However, unlike a Scheme of Arrangement, it does not need to be approved by a number majority in order to pass. Additionally, a restructuring plan can become binding with only one class of creditors voting in favour, as long as none of the creditors or shareholders in the dissenting classes would be worse off than under a relevant alternative. This makes it more powerful than a Scheme of Arrangement, as it can be used to impose restructurings on dissenting parties, reducing the control of ‘hold-out’ creditors.
Alternatively, a CVA can be used when a restructure involves unsecured creditors only. These have proved especially valuable for managing debt arising from rental leases. However, a CVA cannot be used to restructure secured debt or compromise preferential creditors, including HMRC, without their express consent, unlike a restructuring plan.
The restructuring plan procedure can be undertaken by any company liable to be wound up under the Insolvency Act 1986. A firm must also be judged to be “likely to encounter financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern” in order to apply.
Putting together a restructuring plan requires a large amount of financial and legal due diligence and documentation. It tends to be costly as, like a Scheme, it requires two court hearings – the first to approve voting classes, the second to sanction the plan. For this reason, in most cases to date, practical usage of restructuring plans has been limited to big-ticket, market-leading companies with international operations and high value, potentially complicated financial arrangements. For smaller to mid-sized businesses, the development of a restructuring plan is unlikely to be financially feasible at least for the time being, and so a CVA or administration may be more appropriate.
Provided that it offers a viable and fair arrangement to deal with the debts of the company, a restructuring plan can feasibly contain any proposal. In the first restructuring plans rolled out, they’ve been used to restructure both secured debt and unsecured creditors, such as landlords. Restructuring plans have proved an attractive proposition as the process can be used as a ‘one stop shop’, addressing multiple facets of a company’s liabilities and balance sheet. This makes the process more efficient while also delivering a more sustainable result.
Furthermore, a restructuring plan proposal ensures no parties are in a worse position than the relevant alternative. The alternative is often, although not always, an insolvency process, resulting in a range of outcomes, such as an accelerated merger and acquisition (AMA) process. Identification of the appropriate relevant alternative and estimating the financial outcome of that scenario is a key aspect in developing a restructuring plan. Therefore valuation considerations are pivotal to the formulation of restructuring plans, alongside assessment of the relevant alternative.
Valuation has always been critical in restructurings processes. However, restructuring plans provide a court forum to argue differing opinions between creditors and shareholders affected. As restructuring plans are court processes and open to challenge, it is increasingly important to undertake a robust independent valuation and insolvency analysis.
A restructuring plan may be a more expensive option, but it provides a flexible and powerful alternative compared with many other restructuring processes; the benefits of which are already being recognised by larger companies. In the past, large firms looking to restructure would often have to undertake a range of different restructuring procedures separately, which can extend and complicate the process. However, a restructuring plan offers the potential to integrate numerous processes into a single proposal, making it a viable option for firms with complex, cross-border offerings across a range of sectors. An example of this recently came during the restructuring of Virgin Atlantic, who utilised the process as a part of its broader solvent recapitalisation deal.
The aim of CIGA was to provide more options for companies looking to avoid insolvency and to promote a rescue culture. Restructuring plans and moratoriums, both introduced by the bill, have allowed us to bring different tools to the table to help companies struggling as a result of the pandemic – and with insolvencies set to rise, it’s important that we utilise all of the tools at our disposal.
It’s important that management teams consider their options at the earliest sign of distress, and that companies are proactive in engaging advisers to ensure they have as many options and tools at their disposal as possible.