August 8, 2020

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August 07, 2020

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August 06, 2020

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Key Takeaways From the Corporate Insolvency and Governance Act 2020: A New Era for Restructuring?

On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (the Act) came into force, introducing a number of permanent reforms to English insolvency and restructuring law. Among these reforms is a new restructuring plan (the Plan). Whilst the Plan bears similarities to the existing Scheme of Arrangement under Part 26 of the Companies Act 2006 (Schemes) and comparisons can also be drawn to company voluntary arrangements under Part 1 of the Insolvency Act 1986 (CVAs), it introduces some specific nuances which may make it a preferred restructuring tool for companies in financial distress.

Eligible Companies

The Plan is available for companies of all sizes (including foreign companies which meet a “sufficient connection” test) which meet both of the following conditions:

  • A) the company has encountered or is likely to encounter “financial difficulties” affecting or likely to affect its ability to carry on business as a going concern.

  • B) a compromise or arrangement is proposed between the company and its creditors, or a (single) class of its creditors, and the purpose is to eliminate, reduce, prevent or mitigate the impact of the “financial difficulties.”

There is no guidance in the statute on what constitutes “financial difficulties,” and it remains to be seen how the Court will apply the test, but it is unlikely that it would be construed narrowly, particularly in the current economic climate, unless creditors can point to a clear lack of good faith.

Requirements for the Plan To Be Sanctioned

If the Court grants an order for the convening of a meeting of creditors, those creditors (or classes of creditors, if applicable) will be invited to vote in a meeting to approve the Plan. The same approval threshold as would apply in a Scheme — 75% in value of creditors’ (or class of creditors’) claims — applies in a Plan, however, unlike in a Scheme, there is no requirement that a majority in number of creditors (or class of creditors) approves the proposal.

Cross Class Cram-Down, and Scope for Cram-Up

The key provision which differentiates a Plan from a Scheme is that the Court has a discretion to sanction the Plan even if one or more classes of creditors vote against it, resulting in the potential for “cram-down” of those dissenting classes of creditors.

Provided that 75% or more in value of at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, in the event of the “relevant alternative” votes in favour of the proposal, and provided that the Court is of the view that the dissenting class(es) are no worse off than they would be in the event of the “relevant alternative” and that the Plan is fair and just (concepts again borrowed from Schemes case law), the Court has the discretion to sanction the Plan. Whilst this discretion would most likely be applied where a senior or essential class of creditors agrees a compromise which impacts a junior class which voted against the proposal, it is also possible that the junior creditors could approve a Plan which senior creditors have voted against, resulting in the senior class being “crammed up”.

Relevant Alternative

The “relevant alternative” for the purposes of the Court determining whether to exercise its discretion to sanction the Plan is whatever the Court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned. This appears to be indicating a “but/for” test, but it remains to be seen whether the Court will apply a similar type of test as in Schemes and CVAs or require additional or different evidence to, for example, a liquidation analysis.

A New Era for Restructuring?

Whilst formal recognition of the ability to “cram down” whole classes of creditors may technically be a new concept in English insolvency law, landlords in particular will be aware of the potential for effectively similar cram-down in CVAs. For example, in a number of recent retail CVAs, landlords have been required to take haircuts and shoulder most of the financial burden.

Even though creditors or classes of creditors are able to propose competing restructuring proposals, which may result in more active creditor involvement, in general the Plan marks a shift towards a more debtor-friendly restructuring process which could potentially impact any company around the world. Accordingly, this is likely to be an active, swiftly developing and highly contested area of law over the coming months and years.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 195

TRENDING LEGAL ANALYSIS


About this Author

Patrick Corr Financial Attorney Faegre Drinker UK
Partner

Patrick Corr delivers creative solutions and sound, business-minded legal guidance to corporations facing challenging financial circumstances. Widely recognized as a leader in the areas of insolvency and restructuring, Patrick has extensive experience in contentious and non-contentious corporate recovery and turnaround matters and regularly advises clients on their cross-border challenges and opportunities.

Clients describe Patrick as a top choice for cross-border matters, and he is an asset to clients navigating the restructuring, insolvency and liquidation laws of various European...

+44 (0) 20 3405 3453
Wayne Beck Financial Attorney Faegre Drinker Law Firm London
Associate

Wayne Beck brings a wide range of high-level experience to client engagements, including acting for creditors, creditor committees, debtors, insolvency practitioners, banks and other financial institutions, and purchasers of distressed assets in cross-border, multijurisdictional and domestic insolvency, corporate reorganization, recovery, turnaround and litigation matters.

Wayne has also assisted with the restructuring of a number of distressed securitizations and other structured finance products, including distressed collateralized debt obligations (CDOs), structured investment vehicles (SIVs) and commercial mortgage-backed securities (CMBS). He has also regularly advised clients on security and insolvency law aspects of commercial, structured and leveraged finance, particularly with respect to catastrophe bond transactions.

Representative Experience

  • A global card acquirer in connection with the proposed restructuring of a major global airline due to the impact of COVID-19.

  • A bank in its capacity as lender under a revolving credit facility and as swaps counterparty with Intu Properties plc.

  • Deutsche Bank AG, London Branch, as respondent in the latest phase of the landmark Lehman “Waterfall” litigation relating to priority between tranches of subordinated debt, release under a New York law settlement agreement and provability of subordinated future debts.

  • The largest creditor in the Irish law scheme of arrangement of Ballantyne Re plc, an Irish capital markets securitization of a closed block of U.S. life insurance policies – the first use of an Irish scheme to compromise New York law debt.

  • A global card acquirer in connection with the distressed acquisition of Flybe Limited by way of a members’ scheme of arrangement.

  • AlixPartners LLP in their capacity as interim manager of the Abraaj Growth Markets Health Fund following the filing for provisional liquidation of the Abraaj Fund.

  • A creditor in its challenge of the English law scheme of arrangement of Lehman Brothers International (Europe) (in administration).

  • Simon Appell of AlixPartners LLP and Eleanor Fisher of Kalo in their capacity as joint provisional liquidators of Ocean Rig UDW in its successful restructuring of approximately $3.8 billion of financial indebtedness, one of the world’s largest-ever restructurings. The restructuring was implemented through four separate and interconnected Cayman Islands law schemes of arrangement with Chapter 15 recognition.

  • Northwood Investors on the restructuring of a portfolio of properties formerly owned by a fund managed by Highcross Strategic Advisers Limited.

+44 (0) 20 3405 3450
Associate

Buvini Kularatne acts on a broad range of contentious and non-contentious, cross-border, financial restructuring, corporate recovery and turnaround matters. Buvini has a particular focus on distressed real estate work and has undertaken two secondments at a private equity real estate investment fund.

Representative Experience

Buvini has represented:

  • A creditor in relation to its position in the Thomas Cook proposed refinancing and eventual liquidation.
  • A creditor in relation to its position in the Casino refinancing.
  • An Irish...
44 (0) 20-3405-3452