What is a Restructuring Plan?

Understanding Restructuring Plans for UK companies

A Restructuring Plan allows a company to enter into a formal arrangement with its creditors to negotiate their debts. Restructuring plans are the latest tool available to financially and operationally distressed businesses looking to restructure their affairs and liabilities and save their company from closure.

Although a company doesn’t have to be technically insolvent to propose a restructuring plan, they do have to be facing a real threat of becoming insolvent, or experiencing financial difficulties that cast doubt over their ability to continue trading as a going concern.

Restructuring plans can be seen to sit within the same family as the more well-established Schemes of Arrangement and Company Voluntary Arrangements (CVAs), as they operate on a similar premise of being a binding arrangement between an indebted – yet viable – company and its outstanding creditors following a process of creditor approval.

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What is the restructuring plan process?

How a restructuring plan differs from CVAs and Schemes, however, is in how approval for the plan is granted. In a restructuring plan, creditors (which can be secured and unsecured) are divided into ‘classes’, based on their rights and interests in the indebted company. Creditors will then be invited to vote, with a class being deemed to have approved the plan if 75% (by value) of creditors within that class give their assent.

It is at this point in the process that restructuring plans become extremely interesting. In a restructuring plan, not all creditor classes need to approve the proposed plan in order for it to become court-approved. This is because of a mechanism known as “cross-class cram down”. With cross-class cram down, dissenting creditors can have their votes ‘crammed down’ by the court if they deem this “just and equitable”.

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Understanding restructuring plans and cross-class cram down

As long as at least one creditor class votes in favour of the plan, a court has the ability to exercise its discretion and apply cross-class cram down to approve the proposed restructuring plan (even with a number of dissenting creditor classes) providing it can be demonstrated that these dissenting creditors would not be any financially worse off under the restructuring plan than they would be under an “relevant alternative” process. Once the court has approved the plan, all creditors are bound by its terms.

It is this ability to impose cross-class cram down which makes restructuring plans such a powerful tool. Companies who know they are likely to face objections from a particular group of creditors when negotiating a formal rescue process may well opt for a restructuring plan where dissenting creditors could have their votes crammed down, rather than a CVA or Scheme of Arrangement which may be unlikely to reach the required approval threshold.

Dissenting or objecting classes could include a variety of creditors, including landlords. Some landlords have already been vocal about the treatment they feel they receive in other restructuring processes such as CVAs, and are increasingly voting against CVAs where they believe they are not being treated equitably. Although in their infancy, this may make restructuring plans the preferred option for companies with significant landlord liabilities in the future.

How Real Business Recue can help

If your company is experiencing financial worries, and you feel a restructuring plan could help turn its fortunes around, the experts at Real Business Rescue are here to help. With a network of offices spanning the length and breadth of the country, you are never far from expert help and advice. Call our team today on 0800 644 6080 to arrange a free no-obligation consultation.