What are the actual costs of UK restructuring plans for the SME market?
The perceived costs of proposing a restructuring plan are seen to be the biggest inhibitors to using the process for SMEs. It is still a relatively new tool and insolvency practitioners, lawyers and the courts are still grappling with it, but as we have seen recently in Amigo Loans it can provide creative and innovative restructuring solutions.
It would be a good tool for the SME market – were it not for those perceived costs – however, we have had limited insight into what the true costs of the process are and how, for example, they might compare to say a company voluntary arrangement (CVA).
The recent interim report commissioned by the government to review the operation of the Corporate Insolvency and Governance Act 2020 (CIGA) gives us a glimpse into what the actual costs might be.
Perhaps, not unsurprisingly (based on the figures quoted) the costs are likely to prohibit a restructuring plan for ‘run of the mill’ SME restructuring.
Data provided in the report estimates that the costs of a restructuring plan for the mid-market are between £1m – 2m, and at the top end of the market in the region of £2m – £10m. However, these figures should be considered in light of the fact that most companies that have proposed a restructuring plan have a turnover of over £100m and therefore are not your typical SME business.
The figures reported are based on information provided by those with experience of restructuring plans, but also have to be considered against the background that:
(a) this is a new process and as practitioners get more familiar with the process costs will likely decrease;
(b) there are proposals (referenced in the report) suggesting ways the process can be made more accessible to the SME market, and
(c) restructuring plans that have been proposed are primarily for large, sometimes multinational corporates, which necessarily are more complex and therefore costly.
The costs of proposing a plan therefore seem to be largely attributable to the size of the company, with the report stating: “Where a company’s turnover is £3bn, the costs of a RP are estimated to be around £10m. Where the turnover is between £20m and £100m the costs are estimated to be between £1m and £2m.” For a smaller company, costs are therefore likely to be significantly less, but even so the report estimates that the cost for a straightforward restructuring plan for an SME could be around £100,000 – £150,000 – which for the average SME restructuring would take a restructuring plan off the table.
Comparison to CVA costs
However, how does the above compare to the costs of a CVA?
Typically, a CVA is estimated to costs between £25,000 – £35,000, but this figure does not include the costs of challenge, something that can soon turn into an expensive exercise perhaps increasing overall costs by 50% or more.
Although a restructuring plan is court sanctioned and therefore removes the risk of post-approval challenge, creditors can, and have challenged restructuring plans.
The report touches on the challenge to Amicus Finance’s mid-market restructuring plan which, for the challenger (not the company whose costs were likely to be similar if not more) were circa £165,000.
A restructuring plan may therefore be more expensive in the short term, compared to a CVA, but overall if a CVA is challenged the costs could be comparable. However, a restructuring plan does not remove the risk of creditor challenge entirely.
Why are the costs high?
Costs were primarily attributed to the need for detailed valuation evidence, the expense of producing the necessary documentation to support a restructuring plan, two court hearings, as well as the use of senior counsel – assumedly used because of their knowledge and experience of dealing with schemes of arrangement.
Suggestions to make the restructuring plan process more accessible to SMEs
The report notes the following suggestions for improvement to reduce the costs burden for an SME:
A standardised template
Dispensing with the convening hearing in favour of a single sanction hearing
Allowing ICC Judges to deal with the hearings
Reducing reliance on senior Counsel (which may come with time and experience as more IPs and lawyers become familiar with the process)
Applicants and judges should take a pragmatic approach to evidence in simple cases
Appointment of a single joint independent expert
Let’s hope, that as time passes, we will see the restructuring plan become more accessible to the SME market, and that some of these suggestions become reality. We have seen the judges try to address some of the points highlighted and R3 is keen to support the plan for SMEs. However, as with anything new, processes take a time to bed in, and there needs to be confidence that the process won’t cost significantly more than the other tools regularly used by SMEs such as administration and CVAs.
The report is based on interviews of a cross section of the profession and will be followed up with a further online survey which the insolvency service, to determine if further changes or refinements to the processes are required. That report is expected in June 2023.
To read the full report, see here. This also covers the introduction of the ipso facto provisions and the corporate moratorium.
 In Amigo Loans the court was asked to sanction one of two schemes, a new business scheme which would allow it to continue to lend/trade and a winding down if the new business scheme wasn’t sanctioned.
 See 4.2.2 of the report.
 See 4.2.2 of the report