The Restructuring Plan (Plan) was introduced as part of the UK Corporate Insolvency and Governance Act 2020 (CIGA20). These measures aimed to combat the economic impact of the pandemic, with the Plan a key new addition to the toolkit of UK restructuring practitioners.
Often referred to as the ‘super scheme’, the Plan is set out in a new Part 26A of the Companies Act 2006 (CA06). It draws much of its substance from the existing Part 26 CA06 scheme of arrangement (Scheme).
The Plan requires the sanction of the court following two court hearings to examine class composition, jurisdiction and fairness amongst other considerations; first to convene creditor meeting(s) (the Convening Hearing) and second, to sanction the Plan (the Sanction Hearing).
The Plan differs from the Scheme in three key ways:
Perhaps as a result of the speed at which the new legislation made its way through parliament, take up of the plan was initially slow. Only three Plan Practice Statement Letters (PSLs) were issued in the second half of 2020 compared with 12 Schemes initiated in the same period.
The inclination to stick with the tried and tested approach of Schemes, rather than risk potential challenges from an unknown process, is understandable. A further factor is that in certain cases, such as HEMA (where a Scheme was used), the new powers of the Plan were not required.
But as the legal landscape has developed and the process becomes better understood, the use of the Plan has increased. At the time of drafting this article, six Plans have launched in 2021 so far, helping to cement it as a key restructuring tool.
We don’t expect the Plan to result in the demise of the Scheme, with the Scheme still likely to be used in solvent restructurings and to compromise financial creditors. With similar preparation required for both tools, we’ve found the final decision of which procedure to use can often be delayed until it is clear whether the additional provisions under the Plan are required.
So whilst use of the Plan is starting to tick upwards, there is likely to be room for both the Scheme and the Plan going forward.
To date the Plan has been used by companies with average revenue of c.£700m, but as highlighted by Smile Telecoms, it is not always size that determines who is using the Plan.
International-based groups seek to use the UK jurisdiction given its established body of law in relation to Schemes, and these precedents have proved effective for Plans too.This is best exemplified by the artificiality of the structure set up by Gategroup to meet the jurisdiction requirements and take on the existing debt obligations of the rest of the group.
In general, the deals using the Plan, or inter-conditional Plans, are typically more complex with several classes being impacted. But this, combined with a high level of court involvement and risk of challenge, means implementing a Plan can be an expensive process, with the overall costs not always known at the start.
As with the Scheme, it is likely the Plan will most commonly be used by companies looking for certainty when implementing a complex restructuring. But smaller companies are likely to find costs prohibitive - at least for now.
Plans have been used to amend and extend up to £5.2bn of liabilities, write off £595m and equitise £520m in the past 12 months.
When Pizza Express, the second Plan, launched in September 2020, it was part of a senior lender-led deal to deleverage the group. But it also used a parallel company voluntary arrangement (CVA) to deliver an operational turnaround and an enforcement process to transfer the assets to a new senior lender-owned vehicle.
One entry requirement for using the Plan is the ‘financial difficulties’ test. In December 2020, DeepOcean launched the Plan to facilitate a solvent wind down of an unprofitable division. The court sanctioned the Plan on the basis it was designed to mitigate the effect of the losses of a division and was not just restricted to mitigating the effect on companies to operate as a going concern.
In the case of Smile Telecoms, launched in January 2021, the cram down mechanism was initially considered to accelerate the implementation timeline where senior lender credit committee approvals were likely to delay the restructuring effective date. And in March 2021 Virgin Active launched a Plan to amend the terms of the senior lender debt, write off c.£25m of landlord arrears and amend leases to current market rents. This cemented the position of the Plan as a challenger to the CVA in addressing operational liabilities. In both cases, the courts sanctioned Plans despite dissenting classes.
In April 2021, two plans sought to push the boundaries of the Plan even further. Hurricane Energy launched a Plan with the intention of being the first to deliver a debt for equity swap without the use of an enforcement process, equitising $50m of debt for 95% of the equity. And the NCP Plan is only seeking to compromise operational claims. At the time of publication both of these proceedings are ongoing.
As companies become braver in using the Plan, its impact on financial and operational creditors will continue to grow. The court will need to decide to what extent that bravery could create unfairness to certain creditors. We explore potential new areas of impact in our ‘Where next?’ section.
At time of publication, three Plans have required the court to sanction Plans where there has been a class (or classes) where the 75% approval threshold has not been met. In these cases the cross class cram down mechanism was used to implement the Plans.
This isn’t a high proportion of cases, but the existence of the mechanism has been important when negotiating deals. In theory, it gives companies more leverage over dissenting creditors as well as providing more comfort to companies when they don’t have approval from all classes at the point of launching a Plan, as was seen on Virgin Atlantic and Pizza Express.
When seeking to rely on the cross class cram down mechanism, companies are required to demonstrate that the Plans meet the requirements set out in s.901G CA06 (summarised in section 1 of this article). But the judgments on the cases where it has been used have made clear that other factors are also crucial to the court’s assessment.
Of the dissenting classes in the DeepOcean and Smile Telecoms Plans, the approval levels were 65% and 72%, respectively.
There is limited guidance as to how the courts should use their discretion to sanction a Plan in this scenario. To date consideration has been given to how representative those dissenting parties are of the overall view of the creditors in that class, the level of turnout of creditors in each class, the voting of similar ranking classes in parallel Plans and how the quantifiable impact of the Plan on dissenting classes compares to approving classes.
The court considers these useful measures in assessing whether a Plan may be approved by an intelligent and honest person, acting in respect of his own interests.
In the case of Virgin Active, the level of approval ranged from 0% to 66% across 15 dissenting landlord and general property creditor classes. All of these classes were shown not to have a genuine economic interest in the company’s relevant alternative scenario. As a result it was deemed there was no reason for them to be given a vote in the Plan and the court was able to look past the level of challenge from these classes. Further, by including them, their treatment under the Plan was considered to be no worse off than the alternative.
Cases to date have shown that the cross class cram down mechanism works. But as well as meeting the necessary statutory conditions, companies will need to ensure their overall approach to implementing a Plan is fair. Directors will also need to be cognisant of their overall duties, principally to creditors, especially in the event the Plan fails and the company ends up in an insolvency process such as administration or liquidation.
Based on the Plans launched to date, the average length of time from the release of the PSL to the Sanction Hearing is approximately 10 weeks.
Whilst this is approximately one week longer than the average time taken to implement the 16 Schemes launched (and not abandoned) during the same period, there is large variability in the timeline required. For example, Virgin Active and Virgin Atlantic took 50 days and Gategroup 105 days.
With a new process, particularly one that gives the court the discretion to sanction a Plan against a dissenting class, the court’s focus on what constitutes a ‘fair’ procedure has increased.
This has led to increased attention given to the adequacy of information shared by companies proposing a Plan, as well as the length of time creditors have to assess the information. With both the Plan and Scheme being used in cases where time and liquidity are in short supply, companies need to navigate these challenges at speed.
In particular companies will need to consider the level of information they are releasing as part of the Explanatory Statement or if there are appropriate alternative methods of releasing commercially sensitive information. On Virgin Active a ‘confidentiality club’ was set up to share additional information with landlords’ advisors. At the NCP Convening Hearing, the judge found restrictions and redactions of commercially sensitive information acceptable, but workarounds such as advisor-only information flows were said to have limitations.
This complexity and the duration can make the Plan an expensive process. But as the number of Plans increases and stakeholders become more familiar with the process, risks and methods of approach, it is likely the difference in implementation time between Plans and Schemes will narrow.
As is already commonplace with Schemes, the evidence supporting the counterfactual analysis for a Plan is crucial given its role in demonstrating the fairness of the restructuring, class composition and illustrating which classes are in or out of the money.
This is enhanced in the Plan where there is the potential for the court to sanction a Plan against dissenting classes based on the outcome in the relevant alternative.
Choosing the ‘most likely’ relevant alternative is crucial and the level of evidence required in order to support the assumptions used is significant.
In order to support the argument that an insolvency process was the most likely relevant alternative, companies such as Gategroup and Virgin Atlantic provided liquidity information to demonstrate that the company would likely run out of cash within weeks of the Sanction Hearing absent an approved Plan.
On Premier Oil and Pizza Express, a group-wide liquidation was used as the most likely alternative. But outcomes for creditors in other scenarios (such as an accelerated sales process and supporting evidence from a public auction process) were also provided to demonstrate the thought process the company had gone through to support their choice of ‘most likely’ relevant alternative and the impact these alternatives would have on creditors compared to the Plan.
Whilst it is possible for there to be a number of feasible alternative scenarios, demonstrating which is most likely is crucial. As the use of Plans becomes more sophisticated, companies will potentially also need to demonstrate that they have considered non-insolvency based relevant alternatives, such as refinancing, an M&A solution or a capital raise. It will be interesting to see how this is addressed in future cases where the company is not facing an immediate cash flow cliff-edge.
The recent Virgin Active Plan saw a challenge from an ad hoc group of landlords in relation to the valuation evidence used to support the relevant alternative. Their challenge specifically related to the level of evidence provided to them to assess their position, the conservative nature of assumptions and discounts applied and the absence of a market testing process.
The Virgin Active Sanction Hearing judgment has set the tone for future valuation disputes. It concluded that market testing processes were not necessary, a first principles approach to valuation assumptions will be supported and the court will only be able to assess the information presented to it. Therefore there is an expectation that dissenting creditors should submit their own competing valuation(s).
The practicalities of doing so in a compressed time frame where information is at a premium should be not underestimated. But ultimately, on Virgin Active the court was clear; junior creditors should not seek to use a valuation dispute to disrupt the terms of a Plan, particularly where there is an urgent need to implement a Plan to avoid the company filing for insolvency and the ‘no worse off’ test should provide them sufficient protection.
The Plan has no absolute priority rule. Virgin Active continued a precedent of the restructuring surplus being shared at the discretion of the in-the-money creditors. In Virgin Active’s case, this resulted in the current shareholders maintaining their optionality to future equity value whilst unsecured creditors had claims written off.
As foreseen in our report by PwC valuations expert, Kellie Gread, these events underline the importance of the role of the valuer. In addition, both Plan companies and dissenting creditors need to provide evidence supported by strong industry analysis, grounded in commercial reality and based upon an objective viewpoint.
Despite initial criticism for the lack of any specific mechanism to enable rescue financing (similar to US Chapter 11 DIP financing), over the past 12 months up to £1.1bn of new money has been injected alongside Plans, where approval to insert the new money has been given as part of the Plan itself.
The new money has been used to fund working capital requirements (Smile Telecoms), wind down plans (e.g. DeepOcean) or to fund payments to creditors in excess of their estimated recoveries in the relevant alternative (e.g. Virgin Active).
The use of the Plan to get senior-led consent for the injection of super senior money is good news for sponsors and other investors willing to put capital to work.
Although a word of caution to existing lender groups - as was seen in the Smile Telecoms case, it was the super senior debt injected prior to the deal by the existing shareholder that facilitated the cram down of a more junior class.
We’ve seen the Restructuring Plan grow into a major tool for restructuring practitioners over the past 12 months.
As confidence grows, it is likely we will continue to see the legislation tested in other areas. Some may include:
Plus, a number of ongoing debates are likely to continue to evolve. In particular this is likely to focus on (i) the way valuation challenges are conducted and the level of disclosure required and (ii) the treatment of creditors when establishing classes and seeking to rely on the power of the cross class cram down mechanism.
There are also some potential hurdles to using the Plan.
Following the Gategroup judgment the Plan, unlike the Scheme, may be viewed as an insolvency proceeding in a cross border context. This may make debtors more cautious about using the Plan given the potential adverse implications this may have on underlying operations and contracts.
Consequently the Plan may be less likely to benefit from automatic recognition across the EU. Alternative European procedures (e.g. the new Dutch scheme, the Wet homologatie onderhands akkoord (WHOA)) which have automatic recognition across the EU, may attract restructurings away from London.