The Corporate Insolvency and Governance Act 2020 (“CIGA“) ushered in a flexible restructuring compromise or arrangement for companies in financial difficulty (the “Restructuring Plan“). The legislation governing the Restructuring Plan sits alongside that for schemes of arrangement and is included in a new Part 26A to the Companies Act 2006.
The Restructuring Plan does not apply to companies that are solvent with no risk of insolvency; rather it only applies to companies where two conditions have been 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; and
- condition B: a compromise or arrangement is proposed between the company and (a) its creditors, or any class of them; or (b) its members, or any class of them; and the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of those financial difficulties.
A Restructuring Plan may be proposed by the company, or its creditors, shareholders, liquidators or administrators. When the insolvency reforms were originally proposed, it was intended that the company be given exclusivity for a certain period to propose the Restructuring Plan, mirroring the position in the US; however this is not included in CIGA.
The process is similar to that for schemes of arrangement:
- a court application is made and heard for permission to convene meetings of classes of creditors (and members, if applicable) at which the court will consider class composition, and in the case of overseas companies, jurisdiction;
- the court-approved meetings of creditors or classes of creditors and/or members are held at which the creditors and/or members will vote on whether to approve the Restructuring Plan; and
- a further court application is made and heard at which the court is asked to exercise its discretion to sanction the Restructuring Plan.
The (Inaugural) Virgin Atlantic Airways Limited (“VAAL”) Restructuring Plan
The VAAL restructuring plan was sanctioned by the High Court on 2 September 2020. The UK-based airline has experienced severe financial difficulty due to the impact of Covid-19 on the aviation industry. VAAL proposed a Restructuring Plan which addressed the claims of four categories of creditors:
- revolving credit facility (RCF) creditors: the RCF was to be converted into term loan with an extended maturity date and increased margin;
- aircraft lessors under English law governed leases: they were presented with three alternative options being to receive deferred rental payments, a rent reduction plus a bullet repayment or, thirdly, termination of the lease and redelivery of the aircraft;
- connected creditors: accrued debt was to be converted into preference shares in Virgin Atlantic Limited; and
- trade creditors: any outstanding debts after a certain date would be reduced by 20% and then paid out to the creditors in installments.
The company had excluded several categories of creditors, notably those who were key to providing goods or services to the company that were critical to VAAL’s ability to continue as a going concern (following the approach seen in many UK company voluntary arrangements in relation to trading businesses). Creditors who were owed sums less than £50,000 were excluded on the basis that it would likely be more costly to include them in the plan.
In parallel, VAAL consensually restructured a number of bilateral arrangements and procured new money in the form of loans from funds and one of its stakeholders.
Prior to the hearing at which leave to convene creditors’ meetings was sought, the first three creditor classes had already signed support agreements unanimously agreeing to vote in favour of the VAAL’s plan. The critical issue for VAAL was therefore whether the trade creditors would vote in favour or whether VAAL would need to seek a cross-class cram down at the sanction hearing – see further below. However, 99.4% by value of the trade creditors voted in favour of VAAL’s plan and therefore there was no need to invoke the new provision.
Although it remains to be seen how cross-class cram down will be dealt with by the courts, VAAL’s plan did provide some guidance both on approach to class composition and how the court would approach the decision to sanction a Restructuring Plan, including in deciding if it is “fair”.
On class composition, the judges at both the convening and sanction stages felt that tests developed in relation to schemes could, in the absence of argument to the contrary, apply to Restructuring Plans.
On the court’s discretion at the sanction stage, Mr Justice Snowden noted that as this was a situation where all of the classes of creditors had voted in favour of VAAL’s plan, the task for the court at this stage was akin to that where a scheme of arrangement had been approved. He was therefore content to apply the following four-stage test which he had previously applied to schemes of arrangement and to sanction VAAL’s plan:
- had the Restructuring Plan had been voted through in accordance with the legislation;
- was each class fairly represented by the meeting and was the majority coercing the minority in order to promote interests which are adverse to the class that they purported to represent;
- was the Restructuring Plan a fair plan which a creditor could reasonably approve; and
- was there any “blot” or defect in the plan?
Differences Between the Restructuring Plan and Schemes of Arrangement
Important differences between the Restructuring Plan and schemes of arrangement include:
- voting for the Restructuring Plan must be by a majority within each class, which is defined as 75% by value only (there is no test for a certain number of votes to be cast);
- CIGA specifies which creditors/members are required to be permitted to vote:
- every creditor or member of the company whose rights are affected by the Restructuring Plan must be permitted to vote; and
- an application may be made to the court to exclude classes of creditors or members from voting, which will be granted if the court is satisfied that none of the creditors or members of that class has a genuine economic interest in the company;
- there are some exceptions as to which creditors can participate:
- where the company has triggered a moratorium under CIGA within the preceding 12 weeks of the Restructuring Plan, creditors who are owed debts which have arisen during that moratorium and those owed pre-moratorium debts which were not subject to a payment holiday (e.g. debts / liabilities arising under a financial services contract) are deemed “Relevant Creditors”. CIGA provides that Relevant Creditors cannot vote in respect of the Restructuring Plan; and
- as discussed above, the Restructuring Plan allows for cross class cram-down of creditors and/or members, meaning not all classes have to vote in favour for the court to sanction a Restructuring Plan, if:
- the court is satisfied that under the Restructuring Plan, none of the members of the dissenting class would be any worse off than under “the relevant alternative”, which is what the courts considers most likely to occur if the plan were not sanctioned; and
- the Restructuring Plan has been agreed by 75% in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company, in the event of the relevant alternative.
On the latter point, VAAL may have included the three consenting creditor classes in the VAAL plan in order that the cross-class cram down provision could be invoked had the trade creditors dissented. Snowden J in his judgment on the VAAL plan made it clear that by sanctioning of the VAAL plan he should be regarded as having decided that the new cram-down provision could be activated by including in a Restructuring Plan consenting creditor classes who otherwise would have entered into consensual agreements.
Interestingly, the modified absolute priority rule which was included in the original proposals for reform in 2018 is not included in CIGA. The proposal then was that a dissenting class would have to be satisfied in full under the Restructuring Plan before a more junior class could receive any distributions, but that the court would have a discretion to approve a Restructuring Plan where non-compliance with this requirement was “necessary to achieve the aims of the restructuring” and “just and equitable” in the circumstances.
The court is given powers to make additional orders where Restructuring Plans for companies in liquidation or administration are sanctioned, e.g., to bring the administration or liquidation to an end, to stay it, or to impose any requirements to facilitate the Restructuring Plan as the court thinks fit.
Can Overseas Companies Propose a Restructuring Plan and Have it Recognised by non-UK Courts?
As with schemes of arrangement, overseas companies can propose a Restructuring Plan as long as they are “liable to be wound up” under the Insolvency Act 1986, which in turn depends on whether the company has a “sufficient connection” to this jurisdiction. This will include companies with English law debt and/or assets in the UK.
It is understood that that Restructuring Plans will not be included within the Annex to the EU Regulation on Insolvency Proceedings 2015 and so Restructuring Plans will not have automatic recognition across the EU.
VAAL’s plan was recognised under Chapter 15 of the US Bankruptcy Code on 3 September 2020, confirming (as expected) that such recognition was likely to be granted in appropriate cases. Whether other countries which have adopted the UNCITRAL Model Law on Cross Border Insolvency (on which Chapter 15 is based) will recognise Restructuring Plans, and give effect to their terms, will depend on how they have implemented the Model Law.
It may be that a Restructuring Plan can be recognised internationally under principles of private international law, for example, where the debt in question is governed by English law or the parties have submitted to the jurisdiction of the English courts.
- Explanatory notes have now been published which provide further guidance as to the interpretation of CIGA.
- With the court being required to reach some potentially difficult decisions, we can likely expect the amount of factual and expert evidence being submitted to be substantial and subject to careful scrutiny.
- A key issue, which might lead to disputes, is what the “relevant alternative” should be regarded as. In relation to schemes of arrangement for solvent insurance companies, a similar issue, when considered by the courts, made many schemes of arrangement commercially difficult to promulgate, as the court was reluctant to find that anything other than an orderly run-off of legacy liabilities was the most likely alternative for the companies in question. As seen in relation to VAAL’s plan (where VAAL’s potential administration was considered the relevant alternative), where administration or liquidation are the relevant alternative, the threshold for satisfying the “no worse off” test is at risk of being quite low. Estimated outcome statements can be notoriously conservative predictions of the outcome in an insolvency process.
- Valuation evidence will play a centre-stage role, as the company will need to demonstrate where value breaks to exclude creditors and/or members from voting/participating in the Restructuring Plan, as well as to satisfy the court, in cross class cram-down cases, that the dissenting class members are all no worse off. It seems likely that this will in the larger, more complex, cases, be a hotly-contested issue.
- Cross class cram-down opens up some interesting possibilities:
- it should mean that junior classes of debt have less hold-out opportunity;
- but, as long as senior secured creditors are no worse off than under the relevant alternative, they can be crammed down by junior classes; and
- members can be crammed down, which in turn should mean that even where they might have in the past have had a hold-out position (e.g. where there is a sole shareholder), they will no longer. Previously, lenders/bondholders faced with this issue used a transfer scheme mechanism to effect a change in the share structure (e.g. in a debt for equity restructuring), where an administrator or provisional liquidator (in countries where administration is not available) would be appointed and transfer the shares in the scheme company to a newco.
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