Since the start of last year, some businesses will inevitably have accumulated high levels of debt in order to survive. Debt and consequent repayments can put enormous pressure on cash flow and in some cases, the viability of a business. If this is a situation you recognise, there are various options available. This article explores just one of those, known as a ‘Restructuring Plan’.
Last year saw the introduction of a 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 has so far only been used on a handful of occasions but are nevertheless a useful restructuring tool and may be the right option for your business.
What is a Restructuring Plan and how is it different?
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 in the amount of the debt
- A debt for equity swap
- Resetting of 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 are ‘out of the money’ (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 ‘in the money’ classes of creditors 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 latter mechanism has become known as a ‘cross-class cram-down’ and is one of the most powerful aspects of a Restructuring Plan. The underlying intention is to ensure that those creditors with the true economic interests are able rationally to approve such plans, without ‘holdouts’ from out of the money creditors scuppering such a plan. This feature is what distinguishes the Restructuring Plan from CVAs and Schemes of Arrangement, as well as informal restructuring approaches.
What are the benefits of a Restructuring Plan?
In situations such as compromising of debt burden, a Restructuring Plan enables a company to restructure its balance sheet and hence release working capital into the business. A Restructuring Plan may also provide a sustainable platform from which new monies (whether debt or equity) can be injected into the company to fund future operations and growth rather than the repayment of existing debt.
Situations when you might use a Restructuring Plan
- Directors will likely use a Restructuring Plan to restructure a balance sheet where the underlying business is viable but for the existing debt burden.
- The plan will likely be focused on a particular debt or category of contracts where the terms are particularly onerous. The rationale is that the company would be solvent if the specific debt or contracts could be restructured. This has already been seen in relation to the categorisation and restructuring of property leases. However, this may equally apply where there is one particular contract that is so onerous as to impact upon the solvency of an otherwise viable company.
As mentioned above, a Restructuring Plan does not necessarily need to be approved by all of the creditors but only those that currently hold a vested economic interest in the company. So, such a plan may also be a useful option when dissenting creditors that are not ‘in the money’ are preventing a consensual restructuring or other formal compromise arrangement. Because the creditors do not vote together, but in classes, even large individual debts cannot block a Restructuring Plan where the relevant conditions
- While the underlying basis of a Restructuring Plan will likely be the compromise or restructuring of the debt, it may also provide a sustainable platform for the injection of new monies into the company for the future. As such, a Restructuring Plan may well be an appropriate option where a shareholder or debt provider wishes to retain control/primary security and is prepared to extend further funding to the business but only on the basis that such funding is used for the future benefit of the business and not used to fund the payment of historic liabilities.
- A Restructuring Plan may also be used to deal with an underperforming division of a group in a wider group needs to be wound down in a controlled manner in order to minimise the impact on the remaining companies within the group.
However, each situation will have its own facts and circumstances and a Restructuring Plan can be shaped to each one as needed.