Update on new UK restructuring plan and overview of key cross-border restructuring considerations
The Covid-19 pandemic has brought considerable financial challenges to companies across a broad range of industry sectors, including the maritime sector. Distressed companies will need to consider their restructuring options early in order to preserve optionality and maximize value for their stakeholders. The UK has a very effective restructuring toolkit which can assist both non-UK, as well as UK, companies to maximise value for their stakeholders. In particular, the recent addition of a supercharged scheme of arrangement process, the so-called new restructuring plan introduced under the Corporate Insolvency and Governance Act 2020, is expected to be a game changer, which will sit alongside the English scheme of arrangement and the US Chapter 11 as one of the international restructuring tools of choice.
Update on new restructuring plan
There are a variety of reasons for the success of the scheme as the go-to restructuring tool for non-UK and UK, companies. Its key attributes are that it is readily available to foreign companies and it is a flexible restructuring tool capable of delivering tailored, expeditious and cost effective restructuring solutions with minimal execution risk. The new restructuring plan largely mirrors the much-vaunted scheme; however, the restructuring plan also includes a cross-class cram down mechanic which will make it, in many circumstances, an even more effective restructuring tool than the scheme. Unlike a scheme , which requires the support of all creditor classes, this cross-class cram down mechanic will allow the Court, subject to certain criteria being satisfied, to sanction a restructuring plan where a class or classes of its stakeholders have voted against it. For an overview of the restructuring plan and its key features please see our previous update here.
Although new to the restructuring toolkit, the restructuring plan has already proved its worth on two major high profile domestic restructurings, Virgin Atlantic and Pizza Express. In both cases, each creditor class voted in favour of the restructuring plan and the cross-class cram down mechanic was not deployed. Nevertheless, it was the threat of the cross-class cram down that was key to ensuring the necessary support from each class of creditors and providing the requisite level of certainty for each company to launch its restructuring, safe in the knowledge that a class of creditors could not derail the restructuring if they were to withhold their support.
The market eagerly awaits the first deployment of the cross-class cram down mechanic to go before the courts. In a scheme, provided all stakeholders receive adequate information with sufficient time to make an informed decision, and there is no evidence that stakeholders are voting for reasons not related to their class interest, the Court is slow to second guess a majority decision of the scheme meetings. However, the Court will potentially be required to take a more activist approach in the restructuring plan process, and determine difficult issues of valuation and how value is allocated to different stakeholder groups where there is a cross-class cram down.
The restructuring plan is notable for not having an absolute priority rule, in the vein of the US Chapter 11 rule, which addresses this value allocation point. This rule provides that no lower-ranking class of stakeholder can receive any payment under a restructuring proposal subject to a cross-class cram down unless all higher-ranking classes are first paid in full. We will have to wait and see whether the courts develop a form of the absolute priority rule as they are asked to sanction restructuring plans with a cross-class cram down.
Overview of key cross-border restructuring considerations
There are a complex range of factors which need to be considered by any debtor when determining which restructuring tools will be most effective at maximising value for its stakeholders. These factors will depend on the nature of the restructuring that is required, whether that be an incisive balance sheet restructuring to access liquidity or a fully-fledged financial and operational restructuring.
The starting point is to consider the local restructuring tools that are available in the home jurisdiction of the distressed debtor. To the extent that these tools are not capable of delivering an effective restructuring which maximises value, then it may be appropriate to consider what the UK restructuring toolkit has to offer. Relevant factors to consider when determining which international restructuring tools are best fit for purpose include:
1) the location of the key stakeholders;
2) the nature of the required restructuring tools, which will include an analysis of:
(i) the threshold of support that is required from different creditor and shareholder classes to impose the plan on dissenting stakeholders;
(ii) the ability to impose the plan on secured creditors and shareholders;
(iii) any restrictions on the nature of the compromise that can be proposed under the restructuring plan;
(iv) the availability of a moratorium to provide breathing space from hostile stakeholder action to allow for the implementation of the restructuring;
(v) the availability of so called ipso facto clause protection against the termination of contracts as a result of the restructuring; and
(vi) the ability to reject executory contracts;
3) the jurisdictional gateway to provide access to the relevant restructuring tool;
4) the recognition of the restructuring in the relevant jurisdictions, e.g. where the debtor company is incorporated or holds assets;
5) the level of execution risk associated with the restructuring tool; and
6) the ability to deliver an expeditious and cost effective restructuring solution.
In circumstances where a foreign company has English law-governed debt, the scheme or the restructuring plan will often be the only viable option as the English courts will only recognise the discharge of English law governed debt through a foreign restructuring process in very limited circumstances.
It is expected that, in 2021, the restructuring plan will step into the breach to rescue and restructure non-UK, as well as UK, companies impacted by the pandemic. Companies that are facing financial stress should start to consider their restructuring options early in order to preserve optionality and maximise value. Understanding the available restructuring tools is a key step in this process.