Restructuring Plans Under the UK’s Companies Act

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Restructuring Plans Under the UKs Companies Act
When a business finds itself in hard times, a lot
of people seem to think that the only option is
to close down and call it a day. Whilst
liquidation is very much an option, it doesnt
need to be the only option. There are a number of
different ways that a business can handle its
affairs and one of these is by laying out and
following a restructuring plan. The Corporate and
Insolvency Governance Act 2020 is the legislation
that introduced a brand new mechanism for a
compromise or arrangement. This is also
commonly referred to as a restructuring plan.
This article is going to talk in more detail
about what a restricting plan is and who is
eligible to use it.
What is a Restructuring Plan?
A restructuring plan is modelled on the Schemes
of Arrangement which are established under
English Law. These schemes were originally
provided for back in 2006 under the Companies
Act. The new 2020 legislation provides that the
original plan is brought under a new part. A
restructuring plan is a standalone process
however, if there is continued pressure from
creditors who are owed money and have not agreed
to any kind of standstill then the plan could be
used along with the moratorium procedure which
was introduced by CIGA and brought into force
under the Insolvency Act 1986. What Does the New
Restructuring Plan Consist Of? So, what actually
is the new restructuring plan? Similar to the
aforementioned schemes, it is a debtor in
possession process. This means that in order to
carry out a restructuring plan, you dont need to
have an insolvency practitioner. These are
required during other company processes such as
liquidation as they are responsible for
administering, supervising and monitoring the
whole process. Restructuring plans are also
subject to Court oversight and sanction as
well. A restructuring plan divides members and
creditors who are affected by the business into
various classes. The classes are determined based
on how their rights are affected by the business
and how they would be affected were the business
to close down. In order for a restructuring plan
to be passed, it needs to be agreed by creditors
and is subject to creditor approval. In order for
it to be passed a voting threshold of 75 has to
be achieved. Certain shareholders may not be keen
on engaging with a restructuring plan as they
likely believe that the company is beyond
saving. Finally, it is worth noting that the new
restructuring plan is sanctioned, which means
that it binds both secured and unsecured
creditors. This is different to a companys
voluntary arrangement, which does not. There are
obviously drawbacks to the scheme, one of the
most significant of which is the fact that the
creditors need to agree to it. If there are just
a few creditors who hold out and disrupt the
process then a company that could be saved might
be forced into liquidation instead. To rectify
this, the court has the power to impose the plan
on some classes who do not agree with it. That
being said, they are only able to do this if
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None of the disagreeing members would be any
worse off than they already were should the plan
go ahead. That plan has been approved by at least
one of the classes that would have a proper
economic interest in it were it not
approved. Who Is Eligible for the New
Restructuring Plan If a company wants to engage
in the new restricting plan then they need to
meet the following criteria They must have
encountered some form of financial trouble that
is affecting or is likely to affect the way that
the company currently operates and will stop it
from continuing trading. The plans purpose has
to be to either eliminate, reduce or prevent
those threatening financial difficulties from
occurring. An insolvency test is not necessary
for a restructuring plan to be approved however,
there does need to be some degree of financial
distress. If a company is dealing purely in
hypotheticals and there is no legitimate reason
as to why they are likely to go insolvent or find
themselves in financial hardship, then chances
are they will not be eligible for the
restructuring plan. There is other eligibility
laid out in the 2020 Act that states any company
that would be eligible to be wound up as per the
Insolvency Act 1986 can apply for a restructuring
plan. These include financial services companies
although the Secretary of State has discretion
here. What Can Be Contained Within a
Restructuring Plan? So, what is a restructuring
plan likely to contain? It is a very flexible
tool and can be efficiently moulded depending on
what business it applies to and what the current
circumstances of that business are. This can only
occur though if it offers some form of
compromise or arrangement which are intended to
deal with the current debts of the company. The
whole point is so that a company can get itself
out of long-term distress and as such, any
proposal that is reasonable and will likely do
that can be contained within the plan. A
restructuring plan can contain within it a wide
range of different restructuring options, for
instance, there can be swaps put in place such as
a debt-for-debt or a debt-for-equity swap. There
could also be refinancing put in place, as well
as waivers, debt restructuring or a combination
of all of these elements. Do You Need Help with
Your Businesses Finances? Its not uncommon for
a business to fall on difficult financial times
and when this happens, naturally, a business
wants to do everything that it can to get out of
those difficulties. If you would like some help
with doing this then you should contact experts
such as Leading UK. Our team will be happy to sit
down with you and your business in order to
discuss what your current position is and what
your ways forward are. If you have any questions
or require any further information then do not
hesitate to get in touch.
By Viv1 June 20th, 2023 Business Rescue
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