Understanding the restructuring plan: The latest insolvency solution

11 January 2024

Introduced as part of the Corporate Insolvency and Governance Act (CIGA) 2020 and covered by Part 26A of the Companies Act 2006, restructuring plans are the latest insolvency solution, giving company directors another avenue to consider when exploring their rescue and recovery options.

How do restructuring plans work?

Restructuring plans work as a form of payment plan, allowing a company to come to a formal compromise with its creditors in a manner which allows the company to continue trading both during and after the process while dealing with its liabilities in an affordable and manageable way.

Restructuring plans can be utilised to implement a variety of restructuring strategies including amendments and extensions of debt terms, compromises of debt, injections of new funding, and debt for equity swaps.

On the face of it, restructuring plans appear to have much in common with the more established Scheme of Arrangement and Company Voluntary Arrangement (CVA) options.

Like with CVAs and Schemes of Arrangement, a proposal for an intended restructuring plan is drawn up by the indebted company which is then presented to creditors who will be asked to vote on its terms. As part of the voting process, creditors are separated into ‘classes’ depending on their common characteristics and/or interests. Each class will then be asked to vote on the proposal, with a 75% approval rating needed before a class can have said to have approved the plan.

What makes a restructuring plan different?

Where a restructuring plan differs from Schemes and CVAs, however, is in the ability to invoke something known as cross-class cram down, a first in English Law.

Cross-class cram down allows a company to apply directly to the court to approve a proposed restructuring plan even when there are creditor classes who have voted against it. So while a creditor vote is required as part of the process, final approval will ultimately rest with the court who can exercise its discretion and sanction the plan even with dissenting creditors.

In practice this means that a class of creditor could vehemently oppose the restructuring, yet still be bound to its terms if the court is satisfied that none of the dissenting class(es) of creditor would be worse off under the proposed restructuring plan than they would in comparison to the relevant alternative.

The court can only sanction a plan if at least one creditor class (who must have an economic interest) has voted in favour of the proposed restructuring. The intention behind cross-class cram down is to ensure that these creditors’ voices are not drowned out by dissenting classes when there is a viable restructuring option on the table. Where a proposed restructuring plan is voted against by all creditor classes, however, the court will not be able to sanction this and the proposal will be rejected.

Do restructuring plans mean the end of the CVA?

The advent of the restructuring plan does not mean similar alternative restructuring processes – such as the CVA – are now redundant. CVAs, as long as they are kept out of court, are typically cheaper and less time-intensive than a restructuring plan, and are likely to be the more suitable option in many cases.

The restructuring plan, however, is an extremely powerful tool in situations where it is clear that there is likely to be significant resistance from some creditors yet support from others.

Restructuring plans, with the feature of cross-class cram down, reaffirms the court’s belief that the directors of the company are often in the best position to determine what is best for their company and its long-term viability. A restructuring plan allows directors to work towards this objective, in conjunction with a professional adviser who can best identify the likely relevant alternative, and put forward their case to creditors.

About the author

Shaun Barton is a partner at Company Closure and boasts a wealth of experience in helping directors of distressed companies understand their options. A director-facing adviser, Shaun is often the first point of contact for business owners in financial distress, consistently delivering expert advice when it is needed the most.