New restructuring process for companies in financial difficulty
Updated as of 22 May 2020
The Corporate Insolvency and Governance Bill introduces a new restructuring process, building on the current scheme of arrangement regime contained in the Companies Act 2006. The proposed Part 26A restructuring plan is more aligned with the Chapter 11 bankruptcy procedure seen in the US and similar procedures already available in the EU.
Existing scheme of arrangement
A scheme of arrangement is a legal process where a company can come to an arrangement or compromise with its shareholders or creditors, which is then approved by the court. A company can undertake almost any form of restructuring using the scheme, subject to the obtaining the required approvals, and it is often used for restructuring insolvent companies, group reorganisations, returning value to shareholders, acquisitions and demergers. Thus the current regime is available to both solvent and insolvent companies.
New Part 26A restructuring plan
The new Part 26A restructuring procedure contained in the Corporate Insolvency and Governance Bill, broadly follows the same process as the existing schemes of arrangement but with a number of key differences.
A Part 26A plan will only be available where the company has encountered, or is likely to encounter, financial difficulties that call into question the company’s ability to continue to trade as a going concern. Moreover, the purpose of the plan must be to eliminate, reduce, prevent or mitigate the effect of any of these financial difficulties.
The Part 26A plan requires approval from “75% in value” of the creditors’ debts or shareholders’ shareholding. This is slightly different to the approval of a scheme of arrangement which requires “a majority in number and at least 75% in value”.
The fundamental difference with the new procedure is the court’s ability to approve and implement the Part 26A plan notwithstanding that a class of creditors or shareholders has voted against it (i.e. the 75% threshold is not achieved). In a scheme of reconstruction this would be fatal; not so with a Part 26A plan. This power brings us more in-line with EU and US corporate insolvency procedures and the hope is that it will allow more companies to be rescued in their existing form, and reduce the number of pre-pack administration sales.
In order for the court to override the wishes of a class of creditor or shareholder (“dissenting class”):
- it must be satisfied that if the Part 26A plan were to be sanctioned, none of the members of the dissenting class would be worse off than under a “relevant alternative”, the relevant alternative being “whatever the court considers would be most likely to occur in relation to the company if the plan were not sanctioned”. It will be interesting to see how this plays out in practice – whilst it will often be obvious that the Part 26A plan would not disadvantage the dissenting class compared to the alternative, there are likely to be a significant number of cases where this will not be clear cut; and
- at least 75% by value of a class of creditor or shareholder, which would receive a payment or have a genuine economic interest if the relevant alternative were pursued, had still voted in favour of the plan.
On the face of it, once the bill passes into law, it will be welcomed by businesses in financial distress, especially in the current climate as it provides more options for a company to survive. The legislation though, has been rushed through and without the benefit of the usual scrutiny or consultation, so expect to see changes in the months and years to come.
It will also be interesting to see how willing the courts will be to exercise their discretion to push through an arrangement where a class of creditors or shareholders has voted against the plan.