Restructuring Plan
Following the advent of the COVID-19 pandemic we saw the introduction of a new insolvency tool, the Restructuring Plan by the Corporate Insolvency & Governance Act 2020. It is not as well-known as other formal compromise arrangement options such as Company Voluntary Arrangements (CVAs) or Schemes of Arrangement. All such compromise arrangements can be used in isolation or in tandem with other tools, for example to create a moratorium against creditor enforcement.
A Restructuring Plan is a formal arrangement between a company and its creditors and/or its shareholders. It may be used by companies facing financial difficulties that are capable of being rescued as a going concern (there is no need to wait for imminent insolvency).
A Restructuring Plan may take many forms including:
- A compromise on the amount of the debt
- A debt for equity swap
- Resetting of lending covenants
- Rescheduling debt repayments.
The terms of each Restructuring Plan can be tailored to the relevant circumstances.
A Restructuring Plan is subject to approval by creditors formed into classes with similar characteristics/interests, but those classes of creditors that have no financial interest in the outcome (i.e., which would have no economic interest in the company were the plan not approved) may be excluded if approved by the Court. The plan must be sanctioned by the Court.
Even classes of creditors with a financial interest in the outcome can be compromised by such a plan, as long as they receive more than they would receive if the plan were not approved and at least one class of creditor approves the plan. That approving class must be one with an underlying economic interest were the plan not approved.
This particular mechanism has become known as a ‘cross-class cram-down’ and is one of the most significant and potentially advantageous aspects of a Restructuring Plan. The underlying intention is to ensure that those creditors with the true economic interests are able to approve such plans, without issues arising because of creditors with no financial interest which may otherwise (as within a CVA) prevent the plan from being approved. This feature is what distinguishes the Restructuring Plan from CVAs and Schemes of Arrangement, as well as informal restructuring approaches.
