New UK restructuring tool: a potential game changer for the maritime sector
The Covid-19 pandemic has brought a unique set of problems, as well as opportunities, to the shipping sector. Whilst the tanker sector has fared well to date, the cruise, container and dry-bulk sectors have seen significant hits to their revenue and many companies are likely to face liquidity challenges in the coming months. Nevertheless, with some signs of cautious optimism mounting that the shipping industry may have weathered the worst of the challenges posed by the pandemic, companies will need to start considering their restructuring options to ensure that they remain competitive in an uncertain recessionary trading environment.
The Corporate Insolvency and Governance Act 2020 (the “Act”) came into force on 26 June 2020. The Act provides for a new restructuring tool (the “Restructuring Plan”) that could make the difference when it comes to both securing short-term liquidity and facilitating balance sheet restructurings to meet refinancing requirements and provide companies with a competitive edge. The Restructuring Plan largely mirrors the much-vaunted English Scheme of Arrangement (the “Scheme”’), but does have a number of additional features which will make it an even more effective restructuring tool in many circumstances.
Key features of the Restructuring Plan
The Restructuring Plan is designed to be an extremely flexible tool. The only restriction is that the proposed plan should address a company’s actual or likely financial difficulties. The plan can implement a comprehensive range of restructuring solutions, including: pushing out maturity dates on financing; amend & extend transactions; debt for equity swaps; and the amendment of above-market contracts to reflect prevailing market rates.
The Restructuring Plan, like the Scheme, provides for a mechanism to impose a restructuring solution on all creditors and shareholders where a restructuring proposal has the support of the requisite majority of those stakeholders. Stakeholders whose legal rights are sufficiently similar to allow them to vote together with a view to their common interest are grouped together into classes for voting purposes.
The process involves three core stages:
- Firstly, there is a convening hearing at which jurisdiction and class composition are considered, and the Court orders the convening of meetings for each class affected by the restructuring plan to vote on it;
- Secondly, the classes of stakeholders meet to vote on the restructuring plan; and
- Thirdly, there is a sanction hearing at which the Court considers issues of fairness and whether the statutory requirements have been fulfilled before determining whether to exercise its discretion to sanction the restructuring plan.
Restructuring Plan’s key advantage over the Scheme of Arrangement
In contrast to the Scheme, the Restructuring Plan provides for a cross-class cram down and cram up mechanic. This means that, subject to certain criteria set out below being met, an agreement reached with 75% by value of any class of stakeholders, such as secured lenders, unsecured lenders, trade creditors or shareholders, is sufficient for the Court to make the plan binding on any dissenting class of stakeholders. This is a major development from the Scheme, which requires 75% in value and a majority in number of stakeholders in each class (not just one) to approve the restructuring proposal in order for the Court to be able to make it binding on all stakeholders. Under the Restructuring Plan, it should, therefore, become quicker and cheaper to implement a restructuring, as it will be substantially more difficult for a class of stakeholders to hold up the restructuring process where their approval is not a pre-requisite for the plan to be sanctioned.
Further, if a class would not be expected to have any genuine economic interest in the case of the relevant alternative to the plan, their interests can be disregarded and they can be bound to the plan even though they have not voted on it. For example, if the relevant alternative is insolvent liquidation and there is not enough value in the business for company shareholders to recover any value, then they would not be required to even vote on the plan.
Dissenting stakeholder protections
A plan that has been approved by the requisite majority of stakeholders must then be sanctioned by the Court. At this stage, the Court will consider whether the plan is fair. The Court may only sanction a restructuring plan if it does not leave any of the dissenting classes worse off than they would be in the most likely alternative scenario (this may well be an insolvency scenario; however, it could be a distressed sale depending on the circumstances) if the plan were not sanctioned, and at least 75% by value of one of the classes with a genuine economic interest in the company, or that would receive a payment in the event of that relevant alternative, have approved the restructuring plan.
Establishing jurisdiction for foreign companies to access the Restructuring Plan
Foreign companies can apply to the English courts to restructure pursuant to the Restructuring Plan process as long as they have sufficient connection to the jurisdiction of England and Wales. With regard to the Scheme of Arrangement, the case law relating to which is expected to be followed when the courts consider the Restructuring Plan, the courts have shown themselves willing to consider a range of factors when deciding whether there is sufficient connection, including whether a company has its centre of main interests, assets or an establishment in the UK. It has also become common practice to establish a sufficient connection on less substantive grounds including, for example, that the obligations being compromised are subject to English law or that an English company has acceded to the relevant financing arrangements as a co-obligor.
Recognition of the Restructuring Plan for foreign companies
Provided it is possible to establish jurisdiction, the key question for a foreign company seeking access to the Restructuring Plan is whether or not the restructuring will be recognised in the relevant jurisdictions, such as those where the company is incorporated or its assets are situated. This involves an analysis of the rules for recognition in the relevant jurisdictions and will depend on the manner in which a sufficient connection was established to implement the restructuring. As a starting point, it is generally the case that where a sufficient connection is established on the basis of English governing law, recognition will follow on the basis of the private international law principle that an amendment or discharge implemented pursuant to the law governing the obligation will be valid and recognised. However, there are a multitude of additional options to achieve recognition depending on the relevant jurisdictions in which it is required and the nature of the sufficient connection to establish jurisdiction.
The Restructuring Plan is a flexible restructuring tool, designed to provide for pragmatic and commercial restructuring solutions which can be implemented expeditiously and maximise value for stakeholders. It will be important for foreign companies considering their restructuring options to consider the Restructuring Plan as, in many circumstances, it will likely be cheaper and quicker to implement than other international restructuring tools.
Following the global financial crisis in 2008, the Scheme of Arrangement became the go-to restructuring tool of choice, alongside Chapter 11 in the USA, for foreign companies to maximise value through a restructuring process. It is likely that the Restructuring Plan will pick up from where the Scheme left off and step into the breach to rescue and restructure both UK and foreign companies impacted by the pandemic. Companies that are facing actual or likely 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.
Please see our webinar for further details: Best in Class: the Updated UK Restructuring Toolkit