Not every business will be able to battle through the headwinds we’re currently facing – for some, market pressures can make the business model unviable in its current form. For many, the only way to secure a long-term future for the firm is to undertake a restructuring process.
There are a host of restructuring options available. Popular routes include refinancing, debt rescheduling and a Company Voluntary Arrangement (CVA), which is often used by retailers to strike a deal with landlords to reduce rents or change leases on stores. However, another tool was recently introduced in the Corporate Insolvency and Governance Act (CIGA) named the ‘Restructuring Plan,’ which may well be a more flexible and practical tool for businesses.
What is a Restructuring Plan?
A restructuring plan is an agreement between a company and its creditors to reorganise the business, which is then legally approved by a court. Creditors are split into classes based on their rights against the company. Each class will be deemed to have approved the plan if 75% of that class votes in favour.
Creditors vote to approve the deal, which must have the backing of the holders of at least 75% of the company’s debts. A business can propose a restructuring plan to creditors if it is judged to be “likely to encounter financial difficulties that are affecting, will or may affect, its ability to carry on business as a going concern.”
Since their introduction, restructuring plans have mostly been used by large firms with international operations and complex financial arrangements. Notable examples including Virgin Atlantic Airways and Pizza Express. However, more recently, courts have shown that they can be flexible about the amount of financial evidence required in cases like these, reducing the costs involved and opening the door to SMEs to use restructuring plans too.
How does a restructuring plan work?
For any firm experiencing operational difficulties, it’s important to act before warning signs become bigger problems. In this case, the first step would be approaching a specialist advisor who can deem a restructuring plan as an appropriate route. The process starts when a firm issues a Plan Practice Statement Letter, which lays out the proposed restructuring plan to its creditors and the court, including cash flow analysis and an independent valuation of all assets.
It might ask creditors to write off a proportion of the money they are owed or take equity in the business instead of cash, for example. This is followed by an initial court hearing to consider whether technical aspects of the plan are in order, called the convening hearing.
Once that is confirmed, all parties then get an opportunity to review the proposed plan and vote on whether to either approve or reject it. However, the key way in which the new restructuring plans offer greater flexibility, is that they can still be pushed through, even if one or more creditor objects. This is only possible as long as none of the objectors would be any worse off under the plan than they would be under an alternative restructuring process, like a CVA for example. That means that in cases where the 75% approval threshold isn’t met, a judge can decide to ‘cram down’ the views of those stakeholders who object to the plan and approve it anyway, if they think it is broadly fair to everyone involved.
It is this feature which sets the restructuring plan apart from less flexible alternatives. So far, the average length of time for a plan to be approved has been around 10 weeks, but these have typically been for very large organisations. We expect this to keep falling dramatically as advisors become more experienced with the process and the option becomes more openly available to smaller firms.
This can provide a nimble alternative option for firms looking to turn over a new leaf and start afresh, without the resources to pursue lengthier, drawn out processes such as a CVA. This may act as a lifeline for many firms looking to navigate the headwinds of the coming months.
With this in mind, it’s worth noting that the restructuring plan is still a relatively new and complicated process, that can often involve a large amount of financial and legal due diligence. As with any other restructuring option, we wouldn’t advise businesses to take this route alone. Having an experienced advisor on your team can help to turn your restructuring plan into a reality.