How might a restructuring plan provide an alternative to formal insolvency in England and Wales?

Under Part 26A of the Companies Act 2006 (CA 2006), companies or groups encountering financial difficulties affecting their ability to carry on business can propose a compromise or arrangement (a restructuring plan) which mitigates or eliminates the effects of those financial difficulties.

The terms of the plan can be highly flexible, and tailored to the needs of the individual company or group. This can include, among other things, changes to equity structure and the provision of new funding, as well as the compromise of certain liabilities and/or to vary certain creditor rights. The court can also facilitate the transfer of property or liabilities from one company to another.

Typically, the aim of the plan will be to secure the future of the company (or group) as a going concern and provide continuity of trading without the need for a formal insolvency process. Companies proposing a restructuring plan will need sufficient funding to continue trading, probably for a number of months.

Which companies are eligible?

Broadly speaking, any company that can be wound up under the Insolvency Act 1986 is eligible to propose a plan (including certain foreign companies). This is providing it has encountered, or is likely to encounter, financial difficulties that are affecting, or will or could affect, its ability to carry on business as a going concern.

To date, restructuring plans have been used in a wide range of sectors, including energy and utilities, financial services, aerospace, retail and consumer, and tech, media and communications.

There are some limited restrictions, which are not explored in detail here. For example, the secretary of state retains powers to exclude certain companies from being able to propose a restructuring plan in the future, such as those authorised under the Financial Services and Markets Act 2000.

What is the process?

Providing the restructuring plan presents a viable proposal which eliminates, reduces or prevents, or mitigates the effect of the relevant financial difficulties, the process involves:

• Assessing viability and commercial negotiation with key stakeholders – before initiating the process, analysis will need to be undertaken as to whether it can in fact eliminate or mitigate the current financial difficulties. Depending on the complexity of the plan, this could take a number of months and is likely to involve commercial negotiation with certain key stakeholders who are necessary for the plan to be implemented. Professional advice will need to be obtained on the viability of the proposed terms, including valuation evidence and details of what the alternative to the plan would be: usually an insolvency procedure.
• Preparing a practice statement letter – this sets out, in more high level terms, why the plan is required, what it will do, and the rights of creditors both pre- and post-restructuring. This is typically provided to all creditors at least 14 days before the convening hearing.
• Convening hearing – the company (or group) would then apply to court to list a convening hearing. The purpose of this hearing is to establish (i) that the court has jurisdiction in respect of the company and (ii) the classes of creditors and/or members which need to vote on the restructuring plan. Typically, creditors/members will be split into classes with other creditors/members who have similar rights to others so that they can vote together. The court will often direct that the company provide certain documentation and/or information to affected creditors/members to enable them to assess the impact of the plan and the method in which key financial data has been analysed ahead of voting at the relevant meeting(s).
• Meetings – those affected by the plan are invited to vote on the proposals within their relevant class, which is determined at the convening hearing. Meetings may be held in person or virtually, and the relevant threshold for each class to consent is 75% in value of those present and voting.
• Sanction hearing – the court will consider the outcome of each vote at the relevant creditor/member meetings. It will also check that the statutory requirements and other factors have been met which may otherwise influence its discretion not to sanction the plan.

What happens if the 75% threshold is not met?

If not all classes achieve the required threshold of 75% in value of those present and voting, the court may still sanction the restructuring plan if the requirements of the cross-class cram down are met.

This is a mechanism under section 901G of CA 2006 through which a plan can be sanctioned even though one or more classes of creditors or members dissented.

The court may choose to exercise the cross-class cram down where it is satisfied that:

• No one in the dissenting class(es) would be worse off than they would be in the "relevant alternative", being the most likely outcome if the restructuring plan is not sanctioned.
• At least 75% in value present and voting of a class which is "in the money" (that is, those who would receive a payment, or have a genuine economic interest in the company, in the relevant alternative) has voted in favour.

Notwithstanding the above, the court still retains discretion to refuse to sanction for other reasons.

Osborne Clarke comment

The highly flexible nature of a restructuring plan means it can be tailored to the needs of a specific company or group in financial difficulty. While such companies should seek to actively engage with key stakeholders ahead of presenting a plan, the availability of the cross-class cram down mechanism has proved a useful tool to avoid "out of the money" creditors or members blocking an otherwise viable restructuring which puts the company or group back on a sustainable footing.

Providing there is sufficient time and funding available to achieve it, a restructuring plan can present a viable alternative to entering a formal insolvency process, and can mitigate the risks of such processes, including maintaining continuity of trading and retaining critical contracts and employees.

Given that the plan is a relatively new procedure (introduced in 2020), the time and funding requirements may still present challenges to small and medium enterprises, however efforts are being made to make the process more accessible over time.

Osborne Clarke's Restructuring and Insolvency team are well-versed on advising on the viability and process for restructuring plans. Connect with one of our experts today.

This article is the first in Osborne Clarke's restructuring plan series, which explores the key developments affecting Restructuring Plans and the developing body of case law in this area.