Restructuring And Insolvency: What Is A Restructuring Plan?
Restructuring plans are a relatively recent inclusion to the restructuring market. They were introduced back in 2020 under the Corporate Insolvency and Governance Act.
The Corporate Insolvency and Governance Act 2020 was introduced in order to help businesses during the Covid-19 pandemic. As such, the restructuring plan is a powerful tool for business recovery.
A restructuring plan can be a useful way to help businesses facing financial distress and struggling with their existing debt obligations.
Like a Company Voluntary Arrangement (CVA), restructuring plans are only available to companies that are facing or expected to face financial issues and can demonstrate that they have a viable future. A high profile example was the Virgin Atlantic restructuring plan in September 2020, part of a broader solvent recapitalisation of approximately £1.2 billion.
In this article, we will explore restructuring plans. What are they? How do they work? And what are their benefits?
What is a restructuring plan?
Restructuring plans are a form of debt restructuring. Debt restructuring aims to help ease a company’s financial difficulties via an agreement between a company and its creditors, such as financial institutions.
A restructuring plan can be used for numerous debt restructuring purposes, such as:
- Debt rescheduling
- A compromise in the amount of debt
- Refinancing
Arrangements can be made with both secured and unsecured creditors under a restructuring plan. Restructuring plans are court-approved and legally binding on all parties once they’ve been approved.
How does a restructuring plan work?
Restructuring plans require a high degree of court involvement. The process requires two court hearings.
In the first meeting, court permission is sought to hold a meeting of creditors (the Convening Hearing). A restructuring plan is then proposed to all of a company’s creditors. Creditors must vote on whether or not to accept this plan. The court will then decide whether to sanction the plan (the Sanction Hearing).
For the purpose of voting on the plan, creditors are divided into classes by the court depending on their characteristics and interests. If 75% – by value – of a class votes in favour of approving the proposed plan, then that class is said to be in favour of it.
Classes of creditors that would have no genuine economic interest unless the plan is approved can be excluded from the voting if the court approves.
Cross-class cram-down
Restructuring plans can be approved by just one class of creditors as long as they have a genuine economic interest, and the classes of creditors that oppose are no worse off under the proposed plan than they would be under the relevant alternative.
The relevant alternative is the most likely outcome if the restructuring plan is not sanctioned. Often, in the case of companies with serious financial difficulties, the relevant alternative is financial restructuring or entering into formal insolvency procedures.
This feature of restructuring plans, where the objections of dissenting classes of creditors that would be no worse off under the restructuring plan than a relevant alternative are crammed down, is called a “cross-class cram-down”.
The cross-class cram-down is a powerful feature of the restructuring plan as it makes it possible for a company to secure a restructuring plan despite dissenting creditors.
Restructuring surplus
The restructuring surplus is the additional value made available by the restructuring plan that would not be available in the relevant alternative. This additional value is shared fairly among a company’s creditors.
The distribution of restructuring surplus has become a point of debate in many restructuring plan cases. It is up to the court to ensure that the surplus is distributed fairly among creditors.
The court can refuse to sanction a plan even when conditions have been met for a cross-class cram-down if the proposed distribution of the surplus is not deemed fair.
What’s the difference between a restructuring plan and CVA?
Company Voluntary Arrangements and restructuring plans are similar. Both involve negotiating renewed terms for repayment with a company’s creditors. However, there are some differences.
CVAs do not allow for cross-class cram-down. The objections of dissenting creditors cannot be crammed down when voting to approve the arrangement.
Meanwhile, while CVAs may only be used to restructure debt owed to unsecured creditors, a restructuring plan may be used to restructure debt owed to both unsecured and secured creditors.
Finally, restructuring plans require court involvement, making their effects legally binding. Meanwhile, a CVA is an out-of-court procedure.
We have also written previously about the difference between a CVA and CVL – a Creditors’ Voluntary Liquidation.
What’s the difference between a restructuring plan and a scheme of arrangement?
Schemes of arrangement and restructuring plans are very similar in some ways. Both are court-sanctioned processes which allow a company to renegotiate its debt with its creditors.
A key difference is the eligibility criteria for the two processes. Schemes of arrangement are available to solvent and insolvent companies. Meanwhile, restructuring plans are only available to companies facing financial difficulties or expecting to face them.
As with a CVA, there is no cross-class cram-down in a scheme of arrangement. This feature is particular to restructuring plans.
For more information, read our article on schemes of arrangement.
Benefits of a restructuring plan
Restructuring plans can be an excellent way for a company to release working capital into the business or deal with debt owed to financial creditors, potentially preventing insolvency proceedings or insolvency litigation.
Restructuring plans can be used to compromise both secured and unsecured debt. Debt repayments can be negotiated with landlords, HMRC, and other unsecured creditors, as well as secured creditors, in one process.
In a separate guide we explain the difference between secured and unsecured loans from creditors.
Similarly, the cross-class cram-down, which allows for the possibility of a corporate restructuring plan being approved despite certain creditors dissenting, is often cited as one of the process’ main benefits.
These benefits make restructuring plans an incredibly useful process in order to help companies in financial difficulty restructure debt despite varied and dissenting creditors.
Conclusion
Restructuring plans are a great way to restructure debt with both secured and unsecured creditors in one process. However, they are a complicated process.
Features of the process, such as the cross-class cram-down, can be particularly hard to navigate.
If your business is facing financial issues and is considering contingency planning, seek the advice of a licensed insolvency practitioner as soon as possible.
At Hudson Weir, we specialise in business recovery and insolvency processes. If you have questions about insolvency restructuring plans, want advice about business recovery or need help closing a business, please don’t hesitate to get in touch.
