In June 2020, the Corporate Insolvency & Governance Act 2020 (CIGA) became law which introduced a new restructuring procedure for businesses. To support businesses in finding a way to recover rather than go through an insolvency process due to the pandemic, CIGA incorporated the Restructuring Plan, which gave companies that were struggling financially an alternative option.

Recently there has been a review of CIGA’s restructuring plan and whether it has been a success, with an interim report being published by the Insolvency Service in June 2022.

Measures introduced by CIGA

Whilst other temporary measures were introduced at the same time, which have now ceased, three permanent measures were incorporated which are designed to help recover businesses as going concerns. These are:

  • Restructuring plans – companies arrange with creditors, and other stakeholders as necessary, to restructure and reschedule some of their debts. Alternatively, they can put new capital into the business to recover the company as a going concern.
  • Moratorium process – a ‘debtor in possession’ process where the directors are still in control so they can implement a restructuring scheme has the benefit of a moratorium against some creditor action for a specific period of time – 20 working days initially but can be extended by agreement.
  • Ipso facto clauses – restrictions on the contractual termination provisions for contracts that are attributed to the supply of services and/or goods. This applies when the right to terminate comes because of the business entering into an insolvency procedure, including voluntary arrangements, administration and liquidation.

The CIGA Restructuring Plan

The Restructuring Plan makes it possible for businesses to agree on an arrangement/compromise with their creditors and with shareholders or other stakeholders as well, if applicable. The difference between the CIGA Restructuring Plan and a Scheme of Arrangement is that the former incorporates a cross-class cram-down measure.

The cross-class cram-down clause means that it is possible to ask the court to bind a class of creditor or shareholder to the Restructuring Plan arrangement. An example of a class would be creditors/shareholders/stakeholders that don’t meet the 75% value threshold but are in favour of the arrangement. However, in order for companies and insolvency practitioners to implement the cross-class cram down, two conditions need to be met:

  • The court has to be satisfied that no dissenting class(es) would be worse off than in the ‘relevant alternative’. This means what the court thinks would be most likely to happen to the company if the arrangement (or compromise) wasn’t sanctioned.
  • The restructuring plan has to be approved by 75% of the value of a minimum of one class of creditors/shareholders/stakeholders. Also, the class will receive a payment or have a genuine financial interest in the company, should the above ‘relevant alternative’ happen.

The Restructuring Plan is designed to help any company that could potentially be wound up in accordance with the Insolvency Act 1986. This can include foreign companies, and the eligibility criteria is the same as you would find for a Scheme of Arrangement, plus two additional requirements:

  • The company must be or is likely to be, struggling financially, which is affecting, or will affect, its ability to continue trading as a going concern.
  • The purpose of the arrangement (or compromise) that’s being proposed has to be to reduce, mitigate, prevent or eliminate the impact of the company’s financial struggles.

Since its launch, the Restructuring Plan has been used by several companies, including Virgin Atlantic and DeepOcean.

The outcome of the Interim Report on the CIGA Restructuring Plan

The Insolvency Service commissioned the University of Wolverhampton to carry out independent research. Under consideration were the three new permanent measures introduced in June 2020 – restructuring plans, the Moratorium and ipso facto clauses regarding contractual terminations.

Overall, the research determined that the new processes had proved to be a success, and the policy objectives had been met. But the following recommendations were made:

  • Some of the restructuring plan procedures could be simplified to incorporate their use by SMEs (small and medium-sized companies).
  • A higher level of transparency and disclosure, as well as lower costs, would allow creditors to assess and challenge restructuring plans more effectively.
  • Better clarification within the insolvency industry regarding changes to priority arrangements in future insolvency procedures after a moratorium process.

The Interim Report found that the blocking of well-supported restructuring plans by some creditors had been significantly reduced, mainly because of the incorporation of the cross-class cram-down clause. This resulted in a higher level of arrangements (compromises) being agreed upon and implemented.

It was also found that the volume of previous case law has really helped many companies and insolvency practitioners better understand what they need to do and the role they play in the new process.

However, The Insolvency Service did feel that dissenting creditors may not have been adequately protected. This could be due to a lack of timely or sufficient access to commercially sensitive information. Therefore, creditors may not have been able to analyse the impact the restructuring plan would have adequately or the ‘relevant alternative’ scenario, which, when realised, may have meant the plan would have failed. In light of this, The Insolvency Service is considering further restrictions on voting by related parties, as well as reducing the cost by looking to appoint single joint independent experts with respect to valuation evidence.

Areas that need to be considered following the Interim Report include:

  • Reducing the cost and simplifying the process to allow SMEs to use Restructuring Plans.
  • Using evaluators, like those used in pre-packaged administration sales procedures, to have a future role in the process to improve fairness for all parties while keeping costs to a minimum.
  • Being able to include multiple debtor companies in single restructuring plans in order to allow certain obligations across capital structures in complex groups to be met.

As well as the restructuring plan measures being considered a success and policy objectives being met, it was also found that the moratorium clause provided companies with the breathing space they needed to resolve their financial difficulties. This gave them a greater opportunity to survive and recover. In addition, they also found that the ipso facto clauses have met policy objectives, although the true picture is difficult to determine as the Covid-19 temporary measures have only recently been excluded.

Business Liquidation Procedure

If you are struggling with corporate or personal debt and unsure what the right route is to deal with your creditors, the first step is to seek professional advice.  Our highly experienced professionals at Leading are on hand to help with advice on managing personal and professional insolvency matters. Contact us today and discover how we can help you.