restructuring

On 20 May 2020, the Government in London presented the Corporate Insolvency and Governance Bill to Parliament where it passed through the House of Commons in one day on 3 June 2020 (for updates see the tracker). [Update: The Bill received Royal Assent on 25 June 2020 and entered into force on 26 June 2020.]

This new bill will introduce a stand-alone moratorium for up to 20 business days for troubled companies (which can be extended for further 20 business days) and new rules on ipso-facto-clauses to the Insolvency Act 1986. More importantly, it will introduce an new type of a scheme of arrangement to the Companies Act 2006: „Arrangements and Reconstructions for Companies in Financial Difficulty“ – or in short: a reconstruction plan.

Reconstruction plan – it looks like a scheme process

The new plan procedure would follow the procedural steps of a common scheme of arrangment (first hearing, class meetings, confirmation hearing). It could be accompanied by the new moratorium if necessary. The key feature of the new plan process is that it will allow a company to bind all creditors, whether senior or junior, even if they vote against the plan, through the use of the  “cross-class cram down” provision. In contrast, the scheme of arrangement only allows to bind a dissenting class of shareholders if they have „no economic interest“ in the company; dissenting creditor classes can veto a scheme.

For companies in financial difficulties

While a scheme of arrangement is available to all companies regardless of their financial status (solvent and insolvent schemes), the new plan would need to explain that the company has encountered or is at least likely to have encountered financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. This rather soft threshold of financial difficulties would probably be met by most companies that use solvent schemes today.

A cram-down rule with no (absolute) priority rule

With respect to the ongoing discussion in EU Member States about the best implementation of a cram-down rule, the statement of the UK government and restructuring practice is clear (and no surprise).  A dissenting class is bound if the best interest test is observed and one „in-the -money“ class supports the plan. The court does not test whether the distribution of the restructuring surplus follows the waterfall of a liquidation in or outside bankruptcy proceedings. English law does not implement any (relative or absolute) priority rule for the sanctioning of the new reconstruction plan. This comes as no surprise as no such rules have existed for schemes of arrangements when shareholder classes were crammed down. Both the Englisch restructuring practice and finance industry have flourished without them.

Takeaways for Europe (and Germany)

For the overall EU discussion about APR/RPR and the implementation of art. 11 of the Directive, the UK approach demonstrates two key insights.

First, there is obviously no need for an absolute priority rule in order to save the world of credit, company or even private law as we know it. Fearmongering of such kind against the implementation of any kind of a relative priority rule (see de Weijs at al. or Brinkmann) neatly overlooks the fact that the UK (as most other European jurisdiction) has been fine without any such rules. Even more, London has established itself as a restructuring hub with schemes of arrangements being routinely recognised elsewhere, even in the US.

Second, the combination of actual consent and a best interest test (or no creditor worse off test) provides a solid basis for a cramdown rule, provided that the latter does not simply compare the plan distribution with the low payoff in a bankruptcy liquidation. I made this point earlier already (see most prominently here). I doubt, however, that actual consent is sufficiently demonstrated if only one class of in-the-money creditors supports the plan. Such a low threshold leaves a lot of room for coercive plans that can only be trusted to parties in a jurisdiction where practitioners and judges are capable and willing to recognise possible misuse. Most jurisdictions would be well-advised to require a higher level of actual consent before allowing a plan to be confirmed against the veto of a class.

 

The relevant cram-down provision in Part 26A of the Companies Act 2006 would read as follows:

901G Sanction for compromise or arrangement where one or more classes
dissent
(1) This section applies if the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors or (as the case may be) of members of the company (“the dissenting class”), present and voting either in person or by proxy at the meeting summoned under section 901C.
(2) If conditions A and B are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning it under section 901F.
(3) Condition A is that the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (see subsection (4)).
(4) For the purposes of this section “the relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F.
(5) Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
(6) The Secretary of State may by regulations amend this section for the purpose of—
(a) adding to the conditions that must be met for the purposes of this section;
(b) removing or varying any of those conditions.
(7) Regulations under subsection (6) are subject to affirmative resolution procedure.