Introduced in 2020, the Restructuring Plan builds on the principles of a Scheme of Arrangement (a compromise or arrangement between a company and its members or creditors).
But importantly prioritises the rights of creditors who stand to benefit from the terms of the plan, allowing them to take precedence over those classes of creditors with less or no economic benefit.
Thank you to our friends at PKF GM for producing the facts around Restructuring Plans for our use.
Restructuring Plans – The Key Facts
A Restructuring Plan is a statutory procedure under which a binding, but flexible arrangement can be made between a company facing financial difficulties and its creditors. The process is designed to enable the company’s rescue as a going concern.
Much like a Scheme of Arrangement, The Restructuring Plan enables a company to restructure its balance sheet and may also provide the necessary stability to support new lending (whether debt or equity). Future operations can then be focussed on growth as opposed to paying down historic debt.
A Restructuring Plan is subject to the approval of creditors who are arranged into various classes; any class of Creditor that would under normal circumstances have no economic interest, may now be excluded from the process with the approval of the Court, (which must ultimately sanction the Plan).
More significantly, those classes of creditor who are likely to receive some form of financial return may also be compromised by a Restructuring Plan, as long as they receive more than they would otherwise have received if the Plan were not implemented.
This ‘cross-class cram-down’ differentiates Restructuring Plans from other similar procedures. It allows those creditors with an actual economic interest to approve such Plans without being held to ransom by creditors who would otherwise not benefit at all.
Restructuring Plans – The Process
Step 1 – Initiating the Process; the company must be experiencing difficulties or be likely to encounter such difficulties in the short term. The process can be instigated by any one of the company’s directors, creditors, or shareholders applying to Court to seek approval to convene meetings of creditors and members.
Step 2 – First Court Hearing; a first Court hearing will be held to consider whether:
The company meets the eligibility criteria (i.e. it is insolvent or likely to become so)
All classes of creditor have been correctly identified/formulated.
Any classes of creditors or members who should be excluded on the basis that they have no genuine economic interest.
Step 3 – Convening of Meetings; if the Court consents to the meetings being convened, a formal Notice will be sent to the creditors and members. At the meetings, the votes of the creditors and members are recorded. The requisite majorities are 75% by value of those present and voting in each class, which if achieved, will result in a second Court hearing. If the majority threshold is not met, the process ends.
Step 4 – Second Court Hearing and subsequent insolvency; at this hearing, the Court will determine whether to sanction the Plan, for which it has absolute discretion. It should also be noted that even If the Restructuring Plan is approved, but the company subsequently enters into another insolvency process, “bound creditors” will continue to be compelled to abide by and will only be able to claim in the second proceedings for their compromised debt.
