When a business finds itself in hard times, a lot of people seem to think that the only option is to close down and call it a day. Whilst liquidation is very much an option, it doesn’t need to be the only option. There are a number of different ways that a business can handle its affairs and one of these is by laying out and following a restructuring plan.
The Corporate and Insolvency Governance Act 2020 is the legislation that introduced a brand new mechanism for a “compromise or arrangement.” This is also commonly referred to as a restructuring plan. This article is going to talk in more detail about what a restricting plan is and who is eligible to use it.
What is a Restructuring Plan?
A restructuring plan is modelled on the Schemes of Arrangement which are established under English Law. These schemes were originally provided for back in 2006 under the Companies Act. The new 2020 legislation provides that the original plan is brought under a new part.
A restructuring plan is a standalone process; however, if there is continued pressure from creditors who are owed money and have not agreed to any kind of standstill then the plan could be used along with the moratorium procedure which was introduced by CIGA and brought into force under the Insolvency Act 1986.
What Does the New Restructuring Plan Consist Of?
So, what actually is the new restructuring plan? Similar to the aforementioned schemes, it is a ‘debtor in possession’ process. This means that in order to carry out a restructuring plan, you don’t need to have an insolvency practitioner. These are required during other company processes such as liquidation as they are responsible for administering, supervising and monitoring the whole process. Restructuring plans are also subject to Court oversight and sanction as well.
A restructuring plan divides members and creditors who are affected by the business into various classes. The classes are determined based on how their rights are affected by the business and how they would be affected were the business to close down. In order for a restructuring plan to be passed, it needs to be agreed by creditors and is subject to creditor approval. In order for it to be passed a voting threshold of 75% has to be achieved. Certain shareholders may not be keen on engaging with a restructuring plan as they likely believe that the company is beyond saving.
Finally, it is worth noting that the new restructuring plan is sanctioned, which means that it binds both secured and unsecured creditors. This is different to a company’s voluntary arrangement, which does not.
There are obviously drawbacks to the scheme, one of the most significant of which is the fact that the creditors need to agree to it. If there are just a few creditors who hold out and disrupt the process then a company that could be saved might be forced into liquidation instead. To rectify this, the court has the power to impose the plan on some classes who do not agree with it. That being said, they are only able to do this if:
- None of the disagreeing members would be any worse off than they already were should the plan go ahead.
- That plan has been approved by at least one of the classes that would have a proper economic interest in it were it not approved.
Who Is Eligible for the New Restructuring Plan
If a company wants to engage in the new restricting plan then they need to meet the following criteria:
- They must have encountered some form of financial trouble that is affecting or is likely to affect the way that the company currently operates and will stop it from continuing trading.
- The plans’ purpose has to be to either eliminate, reduce or prevent those threatening financial difficulties from occurring.
An insolvency test is not necessary for a restructuring plan to be approved; however, there does need to be some degree of financial distress. If a company is dealing purely in hypotheticals and there is no legitimate reason as to why they are likely to go insolvent or find themselves in financial hardship, then chances are they will not be eligible for the restructuring plan.
There is other eligibility laid out in the 2020 Act that states any company that would be eligible to be wound up as per the Insolvency Act 1986 can apply for a restructuring plan. These include financial services companies although the Secretary of State has discretion here.
What Can Be Contained Within a Restructuring Plan?
So, what is a restructuring plan likely to contain? It is a very flexible tool and can be efficiently moulded depending on what business it applies to and what the current circumstances of that business are. This can only occur though if it offers some form of “compromise or arrangement” which are intended to deal with the current debts of the company. The whole point is so that a company can get itself out of long-term distress and as such, any proposal that is reasonable and will likely do that can be contained within the plan.
A restructuring plan can contain within it a wide range of different restructuring options, for instance, there can be swaps put in place such as a debt-for-debt or a debt-for-equity swap. There could also be refinancing put in place, as well as waivers, debt restructuring or a combination of all of these elements.
Do You Need Help with Your Businesses Finances?
It’s not uncommon for a business to fall on difficult financial times and when this happens, naturally, a business wants to do everything that it can to get out of those difficulties. If you would like some help with doing this then you should contact experts such as Leading UK. Our team will be happy to sit down with you and your business in order to discuss what your current position is and what your ways forward are. If you have any questions or require any further information then do not hesitate to get in touch.