The Restructuring Plan is one of the most significant changes to insolvency law & practice in recent years, and was introduced in 2020 via the Corporate Insolvency & Governance Act as part of a range of government measures designed to assist struggling businesses. Whilst use of the new procedure was fairly slow at the outset, it has started to become more prevalent as a restructuring tool, and its suitability for SMEs is now being considered amongst Insolvency Practitioners and advisors in light of the recent decisions in the Houst Limited and Amicus Finance cases, which were the first mid-market Plans sanctioned by the UK courts.
Here, Phil Smith, a leading insolvency lawyer and partner at law firm Boyes Turner in Reading, explains what a Restructuring Plan is, who can use them, their pros and cons, and provides a summary of the Houst and Amicus Finance cases.
The Restructuring Plan – what is it?
The Plan is a formal, court-approved arrangement between a company and its creditors and/or its shareholders. It can be used by companies facing financial difficulties that are capable of being rescued as a going concern.
A Plan may take a number of forms, such as:
- a compromise in the amounts owed to a companies’ creditors,
- a rescheduling of dates for the repayment of debts, or
- a ‘debt for equity’ swap whereby sums owed to creditors of the company are converted into shares in that company.
In order for a Plan to be approved, creditors must be willing to vote for its approval. Under the new procedure, they are divided into ‘classes’ based on the nature of their claims against the company, and each class is deemed to have approved the Plan if 75% by value vote in favour of it.
Who can use the Plan?
The procedure can be used by any company which is liable to be wound up under the Insolvency Act 1986, but the company must also be able to satisfy the court that:
- it 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; and
- the purpose of the Plan must be to eliminate, reduce, prevent, or mitigate the effects of any of the company’s financial difficulties.
What are the pros & cons?
The Plan has a number of advantages over other forms of restructuring tools, namely Company Voluntary Arrangements (CVAs), ‘pre-pack’ Administrations and Schemes of Arrangements, such as:
- Unlike a ‘pre-pack’, a Plan ensures the survival of the company as a going concern.
- Unlike a CVA, preferential debts, including debts owed to HMRC, can be compromised, and the rights of secured creditors can also be affected.
- The possibility of deploying a new feature called the ‘Cross-Class Cram Down’ – whereby (subject to certain conditions being met) the Plan will bind one or more dissenting classes of creditors or shareholders (namely where those voting in favour don’t meet the 75% value threshold).
The main disadvantage of the Plan procedure (at least thus far) is that it is perceived to be a lot more expensive than other forms of restructuring tools, as it requires a high amount of due diligence work to be carried out in advance, and also two court hearings (to approve the voting classes, and sanction the plan). Most of the Plans which have been sanctioned to date have therefore involved large, multi-national companies, but the Houst and Amicus cases suggest that they are feasible for SMEs.
Houst
Houst is an SME which provides property management services in respect of short-term / holiday lets. Its business was severely affected by the pandemic. The objective of the Plan was to allow the company to be returned to solvency and for its creditors and members to receive more than they would if the company were placed into administration.
The Plan involved a minimum of £500k being advanced by certain members (in exchange for the issue of new shares), a reduction in the sum outstanding to the bank from £3m to a total of £750k to be repaid over 3 years, and monthly contributions to other creditors, including HMRC.
Although HMRC voted against the Plan, the cram-down was exercised because all creditors (including HMRC) would be worse off in an administration.
Amicus Finance
Amicus is a short-term property finance business, which had been placed into administration in 2018 due to financial difficulties. However, the joint administrators considered that their process was no longer viable and therefore promoted a Plan, which involved three key elements:
- the injection of shareholder funds of £3m;
- the making of lump sum payments to creditors; and
- a waterfall of payments to certain creditors from the proceeds of Amicus’ remaining loan book.
The Plan was sanctioned by the court, which was particularly influenced by the fact that it was proposed by administrators who had been in office for two years, and would provide for a solvent exit from administration, enabling Amicus to be rescued as a going concern.
Conclusion
In these very uncertain economic times, it is more important than ever that companies seek expert advice at the earliest signs of distress, so that all available options can be considered, and so that they can be guided towards whatever restructuring tools might be available to support their businesses.
Matt Waghorn, one of our Licensed Insolvency Practitioners comments:
“I am grateful to Phil Smith for this insightful article about Restructuring Plans. Although currently the costs involved in preparing and delivering a Plan are out of reach for all but the largest of SMEs, it is likely that these will fall as more Restructuring Plans are approved. We look forward to being able to add these to the variety of tools we have available to rescue your clients.”
Contact our Insolvency Practitioners for more about Restructuring Plans
Our advice is that if you know that the underlying position of your company is weak, then act now. The sooner you contact the Licensed Insolvency Practitioners at Antony Batty & Company, the sooner we can recommend a solution. We will talk you through all the options available, including Restructuring Plans, so that you know exactly where you are, helping you to make the best possible decisions.
In the meantime, if you need our help and advice in any of our specialist insolvency areas, please contact us or call any of our offices, below, for a FREE initial discussion on the phone or over a coffee, with one of our Licensed Insolvency Practitioners.
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