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Clive Garston

DAC Beachcroft, London

cgarston@dacbeachcroft.com

Francesco Rosso

DAC Beachcroft, London

frosso@dacbeachcroft.com

The Corporate Insolvency and Governance Act 2020 ('CIGA') introduced a number of temporary and permanent procedures, reforming the United Kingdom insolvency and restructuring framework. These are the most significant changes to UK insolvency law for some time. This article focuses on the new restructuring plan.

CIGA

The permanent measures introduced by CIGA are:

• a new standalone moratorium, similar to automatic stays under the United States' Chapter 11 reorganisations, to help a company continue as a going concern;

• a prohibition on terminating a supply contract for the supply of any goods or services, not just essential goods or services as was previously the case, and where the customer has entered almost any form of insolvency, not just administration and company voluntary arrangements (CVAs) as was previously the case; and

• a new restructuring plan (the 'Plan').

Despite being in the pipeline for years, the Covid-19 pandemic and the latest trend reports estimating a surge in restructuring (largely resulting from the government's withdrawal of emergency packages), have made the Plan more relevant than ever.

Virgin Atlantic, hit by the recent and drastic drop in air traffic, has been the first company to effect such a restructuring as part of its £1.2bn private-only solvent recapitalisation.

This article sets out and evaluates the new Plan.

Introduction to the Plan

The Plan is a court-supervised process, and is aimed at companies that encounter financial difficulties and wish to restructure to avoid insolvency.

The Plan is largely modelled on schemes of arrangement, but with the important addition of a cross-class-cram-down (CCCD). A CCCD means that the plan can be imposed on dissenting creditors in certain circumstances and minority objectors will be crammed down to ensure that the restructuring goes ahead. The Plan involves compromises or arrangements between companies and their creditors or members (as the case may be), convening hearings, class meetings and sanction hearings. The Plan may be used in conjunction with the new moratorium.

In addition, and due to the commonalities between Plans and schemes of arrangement, CIGA's explanatory statement establishes that courts asked to assess Plans will be able to draw on existing case law.

Eligibility requirements

To render the Plan as widely available as possible, size and turnover will not be factors determining whether a company is eligible. Instead, two conditions must be satisfied:

1. The first condition is that 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.

2. The second condition is that: (i) a compromise or arrangement is proposed between the company and its creditors or members; and (ii) the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of any of the financial difficulties affecting or likely to affect the company.

The effect of this is that, provided there is a compromise or arrangement and the objective is to deal with financial difficulties, the Plan imposes no restrictions on what can be proposed.

CIGA does not provide clear guidance on the interpretation of financial difficulties. In Re Virgin Atlantic, the Court held that the company satisfied the condition on the basis that '[t]he evidence demonstrates that, if the restructuring is not approved the Company's ability to carry on business as a going concern will, at the very least, be severely impaired'.

Overseas and unregistered companies will be eligible subject to the latter being liable to be wound up under the Insolvency Act 1986. The condition is very similar to that used for schemes of arrangement, namely that the company effecting the scheme must have a sufficient connection with the UK.

The procedure in overview

Step 1

An application is made by the company to the court for an order convening a meeting of creditors or members. Creditors, members, liquidators or administrators may also apply to the court for an order, although, in practice, this is unlikely to occur. Where a meeting is summoned by the court, a notice and explanatory statement must be sent to all creditors or members, whose rights are affected by the compromise or arrangement. The explanatory statement must set out, among other things, the effect of the compromise or arrangement and any material interests the directors of the company may have in respect to the restructuring.

Step 2

At the convening hearing, the court will, among other issues, address class formation. Should any disagreements arise, the court is likely to determine the class by mirroring the rationale used in schemes of arrangement, where a class 'must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest'.

Step 3

The court will direct the creditors or members to vote on the proposal in advance of the sanction hearing. A Plan will obtain the necessary threshold if a number representing 75 per cent in value of the creditors or class of creditors, or members or class of members, agrees the compromise or arrangement.

Step 4

Provided that the threshold is met and that the court is satisfied that the Plan is just and equitable, the court will hold a sanction hearing, at which it may sanction the Plan. All creditors or members, and the company, will be bound by the Plan once the court order is delivered to the registrar (or, in the case of an overseas company, published in the Gazette).

A note on pension schemes

As a result of intense lobbying, the Pension Regulator and the Pension Protection Fund (PPF) have obtained a right, where the company is an employer, to receive any notice or other document sent to creditors. Moreover, the board of the PPF may, in certain circumstances, exercise any rights that are exercisable by the trustees or managers of the pension scheme as a creditor of the company. The right to vote at the convening hearing as a creditor will be exclusive to the board of the PPF and will not be exercisable by the trustees.

Excluded creditors

Each creditor or member whose rights are affected by the Plan is permitted to participate in a meeting ordered to be summoned by the court. Companies are, however, allowed to apply to the court to exclude a class of creditors or members on the basis that none of the members of that class had a genuine economic interest in the company.

The ability to propose a compromise or arrangement with some, but not all, of a company's classes of creditors is considered to be a major advantage of schemes of arrangement and Plans. The principle, reiterated in Re Virgin Atlantic, was first laid out by the Court in SEA Assets v PT Garuda, a case concerning a scheme of arrangement. In Garuda, the Court also held that '[i]f the creditors within the Scheme think the proposal unfair to them and unduly favourable to those left outside the Scheme, they can vote against the Scheme'.

In Re Virgin Atlantic, the Court accepted the argument brought forward by the company in its explanatory statement against the inclusion of trade creditors (ie, trade creditors owed less than £50,000, and others) on various grounds, including, in particular: the tight deadlines, limited resources and the fact that, had the company included such trade creditors in the Plan, it would have had to review contracts in place with more than 1,000 suppliers. The Court held that 'on the face of it [the Excluded Trade Creditors] all appear to have been excluded for respectable commercial reasons'.

A number of concerns have been raised as to the fate of excluded creditors and their claims. Under schemes of arrangement, disenfranchised creditors do not have a right to vote, but will also not be bound by the scheme. CIGA does not state that residual claims will not be bound by the Plan and this has been interpreted by commentators to mean that a Plan may bind their claims as well.

Moratorium creditors

Under CIGA, where a Plan is proposed within 12 weeks after the end of a moratorium and includes relevant creditors (ie, creditors in respect of moratorium debts or priority pre-moratorium debts), the relevant creditors may not participate at the meeting of creditors summoned by the court. However, the relevant creditors will have a right of veto as the court will not sanction a Plan if it includes provisions in respect of any relevant creditor who has not agreed to it. In most cases, this means that the company will have to wait until the expiry of the 12-week period.

CCCD

Perhaps the most significant reform brought by CIGA has been the introduction of the CCCD, already used under Chapter 11 of the US Bankruptcy Code and other jurisdictions. The CCCD avoids a single dissenting class of creditors from blocking a Plan; this instrument is not available in schemes of arrangement.

The fact that the compromise or arrangement is not agreed by a number representing at least 75 per cent in value of a class of creditors or members of the company will not prevent a court from sanctioning a scheme, subject to the following two conditions being satisfied:

1. The first condition is that the court is satisfied that, if the compromise or arrangement were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative.

2. The second condition is that the compromise or arrangement has been agreed by a number representing 75 per cent in value of a class of creditors or of members who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.

The relevant alternative will be assessed on a case-by-case basis, although it is likely to include administration and, in limited circumstances, liquidation.

In Re Virgin Atlantic, although the CCCD was not applied as a result of the voting threshold being satisfied, the Court held that the relevant alternative for creditors was receiving a return ranging from 10.5p (worst case) to 21.4p (best case) in the pound, and a first dividend two years after commencement of administration. Under the plan, creditors would receive 80p in the pound with quarterly payments commencing shortly thereafter.

The low threshold under the second condition is particularly significant as it may allow a single class of creditors to approve the Plan. A class of junior creditors could therefore cram down a senior class of dissenting creditors, provided that the latter class would not be worse off in the event of the relevant alternative.

Concluding remarks

The Plan's flexibility and the availability of the CCCD will persuade a growing number of companies to seek a restructuring Plan as opposed to a scheme of arrangement or CVA.

However, it remains to be seen how the likely outcomes of the relevant alternative will be evaluated in order to determine whether dissenting classes would be worse off in the event of a CCCD, and how the concept of genuine economic interest will be interpreted.

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