Challenging Restructuring Plans: what can plan creditors do?

The value of quick action and sound strategy

Since their introduction in 2020, Restructuring Plans (RPs) have provided a powerful option for businesses to protect value in the face of financial difficulties.

But for each plan proposed, there will be creditors who are being asked to make concessions and compromises. And in some cases, they won’t feel it’s in their best interests to consent.

If a company finds itself as a creditor to a plan, what options, other than voting against the plan, do they have to object – and how best should they proceed?

Act fast

Plan creditors can seek to challenge an RP. There are two overarching factors to keep in mind if they’re considering this path.

The first is timetable. Following the launch of an RP, the window in which objections can be raised and pursued will be very narrow. The Court expects objections to be raised as soon as possible in the process. Parties will also be expected by the court to provide evidence on any points of dispute and time will need to be allowed if expert evidence needs to be prepared to support the plan creditor’s arguments.

All of this requires swift action from a dissenting creditor as soon as an RP is launched – the importance of reacting quickly cannot be overstated.

Assess likelihood of success

The second overarching factor when considering challenging an RP is the likelihood of success. Plan creditors need to consider on what grounds they might be able to object, their goals in pursuing an objection and the realistic likelihood of success. All this needs to be weighed against the potential costs of the process.

Central to any assessment of likely success will be whether a plan creditor can demonstrate that they are ‘in the money’.

This requires them to show that they would in fact receive a return in the event of the ‘relative alternative’ – the outcome that is deemed most likely to happen if the RP is not approved. In most cases, this will involve scrutinising the plan company’s relevant alternative analysis, and in particular any valuation work within.

A strong precedent has emerged in RPs to date that the court will attribute little or no weight to ‘out of the money’ creditors’ views.

Another key area when assessing an RP is the plan company’s choice of relevant alternative scenario and how this might play out. The outcomes in the relevant alternative provide the benchmark against which the RP outcomes are compared.

Here, plan creditors may value engaging the support of a restructuring expert, who can combine their experience with that of other specialists, such as legal advisers, property advisers or industry specialists, to argue why the stated relevant alternative is in fact not the most likely outcome – and therefore not the correct scenario against which to compare the RP.

And then there’s the element of fairness, which, given its subjective nature and the limited number of RP precedents to date, can prove a potential area of challenge. Objections can be considered in terms of the treatment of individual creditors, creditor classes and shareholder treatment or the proposed course of action in the relevant alternative and whether that treatment is fair to certain classes of creditors particularly if an administration sale is the proposed alternative.

Again, from our experience, the path to a successful objection can be extremely narrow. And this is why it can be incredibly valuable for a plan creditor to seek outside support from an expert restructuring adviser and legal team experienced in RP processes as soon as possible, before they decide whether to proceed with a challenge.

Experienced advisers can help a plan creditor to objectively assess whether it is indeed worth the time, cost and resource to proceed with a challenge. If this is seen as a viable option, they can then support with developing a strategy that is both commercial and pragmatic.

In addition to our role as advisers to plan companies – including successfully securing the first RP in the mid-market for Prezzo and the first RP for an AIM-listed company for Tasty PLC – we have also supported a number of companies who have found themselves as plan creditors. This has ranged from acting as an expert witness on matters of restructuring or valuation, to supporting with feasibility studies and options reviews alongside legal advisers.

Negotiation

An alternative to pursuing a full-scale challenge might be to try and first negotiate with the plan company to improve the plan creditor’s position under the RP.

Effectively, this is offering to support the plan, and not pursue a challenge, if certain conditions are met – and is a path that can be in the best interests of both parties. 

As with any negotiation, a good strategy is the key to success. And a plan creditor’s position at the table is strengthened if they can demonstrate that they do indeed have good grounds for proceeding with an objection, if negotiations fail.

For this reason, and given the timing constraints mentioned previously, the option of negotiation should be considered right at the start, as part of an overall plan – and certainly not as an afterthought.

Help at hand

Challenging a plan can be difficult, with the potential for significant costs to be incurred and no guarantees of success. There is also an inevitable imbalance in information and time to contend with, given the company proposing an RP will have been planning it for months, while plan creditors might only have a matter of days to consider their response.

However, plan creditors can maximise the chances of a good outcome through quick action and sound strategy – underpinned by good advice.

A robust initial challenge may well be sufficient to get the plan changed in your favour as it will also avoid the plan company incurring significant costs of a court challenge.

FRP are happy to discuss a plan creditor’s position on a no obligation basis, either with the plan creditor themselves or their legal advisers.

For more information on RPs, along with insights and commentary from our team, please visit our dedicated hub here.