For some the worst effects of the coronavirus pandemic are starting to seem like a distant memory; for others the consequences are still very real as many businesses struggle to repay various government support loans whilst coping with vastly increased energy costs, Brexit and the effects of inflation. Over the last few years, the opportunity for businesses in financial difficulty to be rescued by proposing a restructuring plan rather than entering an insolvency procedure has generally been well received by stakeholders. Making this measure more accessible to SMEs may see it become an even more popular regeneration option for businesses and their creditors.
Options before restructuring plans
With a view to strengthening the business rescue culture, Part 26A restructuring plan were born upon the enactment of the Corporate Insolvency and Governance Act 2020 pursuant to which Schedule 9 introduced a new Part 26A to the Companies Act 2006 (CA06). Prior to this the only available statutory business rescue procedures were Company Voluntary Arrangements (CVAs) and Administrations. One perceived disadvantage of a CVA is that it requires a majority of 75% of creditors who attend and vote at a creditors’ meeting to approve the company’s proposals and all creditors are treated equally which can cause to some creditors to vote against the proposals if they feel that acceptance would leave them disadvantaged compared with other creditors. Administration, although technically a rescue procedure, rarely results in the survival of the company. Neither CVAs nor Administrations can prejudice the interests of preferential or secured creditors without their consent.
How restructuring plans work
Part 26A plans are different from other processes under the Insolvency Act 1986 in that there is no need for the company to be insolvent in order to propose a Part 26A plan. A company can propose a Part 26A plan in order to avoid becoming insolvent.
Creditors are divided into classes with similar interests such as secured creditors, preferential creditors, landlords, suppliers etc, and an application is then made to court for permission to convene meetings of the various classes of members and creditors. The court must satisfy itself that two conditions are satisfied:
Condition A: The company has encountered or is likely to encounter financial difficulties that are affecting or will or may affect its ability to carry on business as a going concern.
Condition B: There must be a compromise or arrangement proposed between the company and its creditors, or any class of them, and its members or any class of them, the purpose of which is to eliminate, reduce or prevent or mitigate the effect of any of the financial difficulties in question.
If the conditions are satisfied and permission is granted, the meetings take place, and the plan is approved if a majority of 75% by value in each class votes in favour. However, if one class of creditors votes against the plan the principle of “cross class cram down” comes into play. Another hearing takes place where the court is asked to sanction the plan notwithstanding the dissenting class of creditors. In deciding to do this, and “cram down” the dissenting class, the court will consider a range of issues including the constitution of the classes of creditors and the proposal generally as well as satisfying itself that two further conditions are satisfied:
Condition A: If the restructuring plan is sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative – which is whatever the court considers would be most likely to occur in relation to the company if the restructuring plan is not sanctioned, which could well be liquidation or administration.
Condition B: The restructuring plan has been approved by at least one class of creditors or members who would receive payment or have a genuine economic interest in the company in the event of the relevant alternative.
If the court is satisfied that both conditions are satisfied, and that it is just and equitable for the plan to proceed, it will sanction the plan which then becomes binding on all creditors and members including those who dissented.
Examples of companies using restructuring plans
Several large businesses have made successful use of Part 26A plans: Prezzo, the parent company of a chain of casual dining restaurants, and Fitness First, the fitness business with many gym outlets, have been allowed to restructure their liabilities and to continue trading. This rescue option seems well-suited to businesses with large property portfolios, such as Prezzo and Fitness First. The court has also allowed the restructuring plan proposed by Houst, an SME property management company offering services for short term/holiday lets.
Restructuring plans may be overturned on appeal
On 23 January 2024, the Court of Appeal handed down its judgment in the first appeal concerning a Part 26A plan. In the case of AGPS Bondco Plc (Adler) the Court of Appeal overturned the sanction order on the basis that the judge at first instance had wrongly found that condition A had been satisfied. In this case creditors were divided into classes of bondholders with each class comprising bondholders whose bonds were due to mature at different times. The plan imposed staggered maturity dates on bondholders which mirrored the relevant payment dates already in place. One class of bondholders who were not due to receive payment until 2029 only voted to approve the plan with a majority of 62.28%, so below the requisite majority of 75%. The dissenting bondholder believed that because of a disagreement over the value of the company’s assets, that there was no absolute certainly that they would be paid in full under the plan and could receive as little as 10%.
It was accepted that the relevant alternative to a Part 26A plan was German insolvency proceedings which would have resulted in all the bondholders being treated equally and receiving dividends at the same time as each other, albeit at the rate of around 63% and, significantly for the dissenting class, earlier than 2029. This was in contrast to payment in full for the bondholders who has approved the plan. The court found that this was a better outcome for the dissenting class and therefore Condition A was not satisfied.
The Court of Appeal therefore set aside the sanction on the basis that no justification had been provided as to why the plan had departed from the equal treatment of bondholders which would have applied in the German insolvency proceedings and which would have yielded a better outcome for the dissenting bondholders. This is a significant decision bearing in mind the overwhelming support for the scheme across all the bondholder classes.
Restructuring plans in the future
Despite these examples, take up of Part 26A plans has been slow largely due to the costs of implementation leading to a perception that they are more suitable for large corporate entities than SMEs. This is in part due to the requirement for two court hearings. A CVA in contrast involves no court hearings unless a creditor applies to challenge the outcome of the creditors’ meeting.
The Insolvency Service and R3, the Association of Business Recovery Professionals, believe that Part 26A plans can be a successful rescue option for all sizes of business,. As the experience of professional advisors grows, documents and practises become more standardised and areas of uncertainty are resolved by a body of established case law, costs will inevitably fall and Part 26A plans will become a useful tool for businesses seeking to survive challenging economic conditions.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
