It will be very apparent to anyone following the business news that the high street has seen a number of its flagship residents take steps in order to deal with tough trading conditions. One of the steps that businesses can now try to take is to get court approval of a restructuring plan.
If the restructuring plan is approved, the troubled business can avoid going into formal insolvency through either liquidation or administration. Both River Island and Poundland were able to persuade the court that a restructuring plan can go ahead, and so the respective companies can survive in the long term. “Restructuring Plans” are a relatively modern innovation, albeit based on an older principle of the company voluntary arrangement, the “CVA”.
Here, we look at both how a Restr-ucturing Plan (a “Plan”) works and how it may provide businesses with a chance to stay afloat even if they will be operating at a reduced level in the future. The legal basis behind a Plan is found at Part 26A of the Companies Act 2006. A Plan is available to companies that have either encountered or are likely to encounter financial difficulties which are likely to affect their ability to carry on business as a going concern.
A Plan creates a formal and binding agreement between the company and its creditors, which allows the company to continue trading whilst it addresses its financial difficulties. Typically, a company’s Plan will involve either injecting more funds into the business/or reducing the scale of its operation, thereby cutting costs. In order to make the Plan more appealing, the company will be doing both.
A Plan must, in the first instance, be approved by 75% of each voting class. The company’s voting class will be both its shareholders and creditors. The Court will still need to approve a Plan even if the requisite proportion has been approved by 75% of both its shareholders and members. However, it is unlikely that the Court will reject a Plan that the requisite number of creditors and shareholders has approved.
The creditors initially rejected the recent proposed Plans for both River Island and Poundland. The main creditors were landlords who were owed rent, and they wanted their non-paying tenants either to pay that rent or vacate the premises entirely. Therefore, both River Island and Poundland had to approach the court directly.
A company can try to exercise the “cross-class cram down” mechanism, whereby it asks the court to allow a Plan even though the requisite number of voting creditors and shareholders have opposed it.
The company must convince the court that:
1. if the Plan went ahead, then none of the objectors would be any worse off than they would be if the Plan was not allowed and the company went into formal insolvency; and
2. the Plan has been approved by at least one class of either creditors or shareholders who would either receive payment or have a genuine economic interest in the company if the Plan goes ahead.
In the instances of both Poundland and River Island, they were able to convince the Court that its plans fulfilled these requirements and the Court approved their Plans. This outcome was not a given, as Waldorf Productions UK Ltd found out when their Plan was rejected. Unlike “pre-restructuring plan” insolvency measures, there is scope for dispute and litigation whereby dissenting creditors try to persuade the court to reject the Plan. This dissent can extend to a formal appeal of any court decision.
Once a Plan has been approved, it will be binding on the Company’s creditors. If a Plan is not approved, the Company will inevitably go into either administration or liquidation. That will effectively mean the death of the Company in any recognisable form and structure.
In the cases of both River Island and Poundland, significant restructures are already in place both in advance of and as part of the Plan. This has involved closing stores, implementing redundancies, and reducing overall operations. Therefore, a Plan does not simply allow the troubled company more time to “turn it around”.
Despite being referred to as part of the Companies Act 2006 and introduced in 2020, the Restructuring Plan is a relatively new addition to the insolvency world. There is no restriction on the size of a troubled company that can try to obtain a Plan, even though bigger companies are currently using it. The legal process behind having a Plan in place is both legally and evidentially complex, and the case authority as to a successful Plan application continues to develop.
However, a Plan aims to be a less terminal outcome for both the company, its employees and its creditors than either liquidation or administration and so is to be welcomed.
