Following the introduction of The Corporate Insolvency and Governance Act 2020 ("the Act"), we are starting to see use of the Restructuring Plan under 26A of the Companies Act 2006 in action.
The Restructuring Plan
Where a company is facing or is likely to experience financial difficulties affecting its ability to trade as a going concern, it can propose a Restructuring Plan ("the Plan") to creditors with a view to reaching a compromise or arrangement to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties. If the Plan does not pass with the requisite majority as one class has voted against it, the company can ask the court to sanction it under Part 26A. This process provides for a cross-class cram down, which means that all creditors of any class will be bound by the court sanction. The court has discretion to sanction a Plan where it determines that it is more favourable to creditors than an alternative insolvency process, amongst other considerations.
One of the most high-profile recent users of the Plan is Virgin Atlantic Airways Limited ("Virgin Atlantic") in a £1.2bn private-only solvent recapitalisation that completed in September 2020. Although Virgin Atlantic ultimately did not need to make use of the cross-class cram down procedure for the Plan to pass, the approach taken by the court to sanction it provides helpful practical guidance to insolvency practitioners. The court approached the Plan in the same way as a scheme. Although it acknowledged that there are differences between the Plan and a scheme, these are not so distinct as to require a separate approach. In addition, the court must be satisfied that:
- the company has or is likely to experience financial difficulties which affect its ability to trade;
- A compromise or arrangement was proposed in an effort to mitigate the impact of financial difficulties;
- the dissenting class must be limited to "those persons whose rights are not so dissimilar so as to make it impossible for them to consult together with a view to their common interest".
First case to apply Cross-Class Cram Down
This approach was applied by the High Court in England and Wales wherein it sanctioned a restructuring plan by exercising its power to apply cross-class cram down for the first time.
The DeepOcean Group Holding B.V. ("the Group") applied for sanction to restructure three UK subsidiaries of The Group being:
- DeepOcean 1 UK Limited (DO1);
- Enshore Subsea Limited (ES); and
- DeepOcean Subsea Cables Limited (DSC).
The subsidiaries form the cable-laying and trenching group ("the CL&T") which provide cable laying and trenching subsea services to those in the oil and gas and offshore renewable sectors. The CL&T were underperforming and experiencing financial difficulties with little or no potential to make a profit. The board of the Group determined that the operations should end and should do so on a solvent basis.
The Plans were proposed with four creditor classes:
- secured creditors under a multicurrency facilities agreement which constituted four facilities, of which three were drawn-down;
- Owners of two vessels chartered by DO1;
- the UK landlord of DO1;
- Remaining creditors to include unsecured creditors.
The Plans for DO1 and ES were approved with the requisite majority, however, the Plan for DSC was not. While the secured creditors voted in favour of the Plan, the unsecured creditors voted with only 64.6% being less than the required 75%. For the Plan to pass, DSC had to apply to the court for sanction. DSC asked the court to exercise its discretion to sanction the Plan despite objections from unsecured creditors. Counsel for DSC argued that unsecured creditors would receive an increase under the Plan and would be no worse off than in the alternative.
As this is the first case to use cross-class clam down powers, there is little or no guidance on how the court may use its discretion. To assist the court, Counsel for DSC suggested four factors it may consider:
- If use of cross-class cram down is 'just and reasonable'. This differs from 'fairness' as cross-class cram down is only needed where the requisite majority has not been met;
- Although unsecured creditors could not be considered any worse off under the Plan, this in itself is not sufficient to sanction the Plan;
- Consideration should be given to treatment of stakeholders between each other, creditors and classes of creditors. Counsel submitted that treatment of the unsecured creditors in the Plan was fair and equitable with each receiving a similar uplift on the recovery which they would make in a liquidation;
- Interests of other stakeholders will be relevant.
The court sanctioned the plan but noted that as this was the first decision to use cross-class cram down a reasoned judgment will follow. It will be of interest to see if the court follows the approach offered by Counsel for DSC and what further guidance it offers to insolvency practitioners and advisers.
Use of the cross-class cram down procedure for the first time marks a significant development in how companies may approach restructuring their business. Currently the Plan is used by large companies with intricate debt restructurings, however as confidence grows in the procedure, it is expected that companies may opt for the Plan's adaptability over other schemes of arrangement.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency & Business Restructuring team at Cleaver Fulton Rankin, Belfast, for further advice or information.
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