What is a Restructuring Plan?

Understanding Restructuring Plans for UK companies

A Restructuring Plan enables a company to formally arrange discussions with its creditors to handle debts. For financially and operationally stressed businesses, restructuring plans are the newest tool to manage their affairs and liabilities, aiming to rescue the company from closure.

While a company doesn’t necessarily need to be technically insolvent to suggest a restructuring plan, it must be under a genuine threat of insolvency or dealing with financial challenges that raise concerns about its ability to keep trading as a going concern.

Restructuring plans can be considered part of the same family as the more established Schemes of Arrangement and Company Voluntary Arrangements (CVAs). 

They work on a similar idea of forming a legally binding arrangement between a company in debt, but still viable, and its outstanding creditors, following a process of creditor approval.

 

Restructuring plan process- what is it?

The distinction in a restructuring plan from CVAs and Schemes lies in the approval process. In a restructuring plan, creditors (secured or unsecured) are categorised into ‘classes,’ determined by their rights and interests in the indebted company. 

Subsequently, creditors in each class are asked to vote, and the plan is considered approved for a class if 75% (by value) of creditors in that class provide their agreement.

At this stage of the process, restructuring plans become particularly intriguing. In a restructuring plan, all creditor classes don’t need to endorse the proposed plan for it to receive court approval. This is due to a mechanism called ‘cross-class cram down.’ 

Through cross-class cram down, the court can enforce approval even if dissenting creditors object, considering it ‘just and equitable’.

 

How does a restructuring plan work?

 

A restructuring plan is a strategic financial approach employed to address various debt-related challenges a business may face. This comprehensive strategy encompasses different debt restructuring objectives such as debt rescheduling, refinancing, and the restructuring of both secured and unsecured debts. It also includes addressing obligations to landlords and infusing fresh capital into the business without an immediate requirement to repay existing creditors.

In the process of implementing a restructuring plan, the affected stakeholders, typically creditors, are categorized into different ‘classes’ based on their legal rights against the company. Subsequently, these classes are invited to vote on the proposed restructuring plan. For a class to be considered as having approved the plan, a minimum of 75% of the class, determined by the value of their claims, must vote in favor of the proposed plan.

This voting mechanism ensures that the majority of affected creditors support the restructuring plan, providing a legal framework for the implementation of the proposed changes. It allows for a collective decision that takes into account the interests of different classes of creditors and helps achieve a more equitable and agreeable resolution to the financial challenges faced by the business.

 

Unlocking all about cross-class cram-down and restructuring plans

If at least one creditor class votes in favour of the plan, the court can use its discretion and apply cross-class cram down to endorse the proposed restructuring plan, even if some creditor classes disagree.

This is possible, as long as it’s proven that the dissenting creditors wouldn’t face worse financial outcomes under the restructuring plan compared to a ‘relevant alternative’ process. After the court’s approval, all creditors must adhere to the plan’s terms.

The capability to enforce cross-class cram down is what renders restructuring plans a potent tool. Businesses anticipating objections from a specific creditor group during formal rescue negotiations might choose a restructuring plan. 

This option allows for cramming down votes of dissenting creditors, unlike a CVA or Scheme of Arrangement, which may struggle to attain the necessary approval threshold.

Dissenting or objecting classes may involve different creditors, such as landlords. Some landlords have expressed dissatisfaction with their treatment in other restructuring processes like CVAs, and are more inclined to vote against CVAs if they perceive unfair treatment. 

While still in the early stages, this trend might make restructuring plans the favoured choice for companies with substantial landlord obligations in the future.

 

Read More: 

• How to liquidate a company
• Who can petition to wind up my company
• What is wrongful trading in company insolvency
• Limited Company Fraudulent Trading Explained
• Are directors liable for limited company HMRC tax debts

 

How Vanguard Insolvency can help you?

If your company is facing financial concerns and you believe a restructuring plan could make a positive difference, the specialists at Vanguard Insolvency are ready to assist. With offices across the country, expert help and advice are easily accessible. Contact our team today at 0121 769 1915 to schedule a free, no-obligation consultation.