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Freshfields Bruckhaus Deringer

Posted: 04 May, 2021

On 28th April TMA UK, in partnership with Freshfields, hosted an insightful webinar where Richard Tett and Emma Gateaud of Freshfields’ Restructuring and Insolvency team discussed the new UK restructuring plan and the impact it has had on the insolvency regime in the 10 months since it was introduced. Heralded as one of the most significant insolvency regime changes since 1986, Richard and Emma took a look at how it differs from schemes and CVAs and how it is already being used.

If you missed it, or would like to watch it again, you can find the recording here.

The new restructuring plan – an overview

Beginning his overview of the new restructuring plan Richard Tett, a Partner in Freshfields’ London Restructuring and Insolvency team, said he is excited by the new plan and what it offers to the UK’s restructuring and insolvency regime.

Dubbed the ‘super scheme’, the legal process of the new restructuring plan is very similar to schemes of arrangement, whilst having some differences. Like a scheme, there are two court hearings and the court has to consider class composition, jurisdiction and fairness. However, unlike a scheme, to use the new restructuring plan a company has to be encountering or likely to encounter financial difficulties which are affecting, will or may affect its ability to carry on business as a going concern. While this is a low bar, it ensures that the cross-class cram down feature can’t be used for a solvent “normal” corporate merger or transaction. These will continue to be done by schemes.

Unlike CVAs, a plan can be done with everyone, including secured and unsecured creditors, and unlike schemes they don’t need every class to approve. Indeed, the feature Richard said he was most excited about was this cross-class cram down. With this feature, dissenting classes can potentially be crammed down provided two conditions are met. First, that no member of the dissenting class would be any worse off than in the relevant alternative if the plan failed. Second, that the plan has been agreed by a class who would receive a payment or have an economic interest in the company in the event of the relevant alternative. This ability to cram down dissenting creditor classes is the feature that will change UK restructurings over time. However, it is important to bear in mind that there is still court discretion and if the court feels a plan is not fair it might reject it

How does the new restructuring plan differ from schemes

Taking a deeper look at the differences between schemes and the new restructuring plan, Emma Gateaud, a counsel in Freshfields’ London Restructuring and Insolvency team, said there are four key differences:

First, there is a requirement for the company to demonstrate that it is encountering or will encounter financial difficulties that are affecting, will or may affect its ability to carry on business as a going concern.
Second, the cross-class cram down feature. This makes the restructuring plan a powerful tool, but the court is very alert to the risks of artificial classes being created and so scrutiny is high.
Third, the restructuring plan can combine balance sheet and operational restructurings. Restructuring of financial creditors, equity, landlords and trade creditors is now possible in one plan whereas previously one might have used a scheme to deal with financial creditors and a CVA to deal with landlords.
Finally, the ability to cram down equity in one plan without the need for a pre-pack or enforcement process. This hasn’t yet been seen in practice, so it is a space to watch.

How will it be used?

Emma then went through some scenarios in which Freshfields thinks the new restructuring plan is likely to be used. First, she said it is likely to be a popular tool for senior secured creditors who will use it to cram down other creditors. This scenario has already been seen in the Pizza Express case. Second, it’s likely to be used to effect full balance sheet and operational restructurings via a single process – as seen in the Virgin Atlantic and Virgin Active (which is currently before the court seeking sanction of the plan) cases. Finally, although not yet tested, there is potential for it to be used in a junior-led cram down. While more difficult, if juniors can demonstrate that they have a genuine economic interest in the relevant alternative, it could be possible.

Case Study – Virgin Active

Emma also spoke in some detail about the Virgin Active restructuring plan which is currently going through the courts. As a full balance sheet and operational restructuring, it is being used as an alternative to a CVA plus scheme. In this case, three of the Virgin Active Group companies presented a plan to deal with seven classes of creditors, five of which are landlord creditors. The relevant alternative that Virgin Active has presented is that if the plan isn’t approved it will have to trade in administration and it will run out of funds by May.

The landlords are dissatisfied, saying that they don’t believe the company’s situation is as bad as they say it is and that they don’t have enough information to test whether what the company is saying is true. As this case is likely to set a precedent, many companies and landlords are looking closely to the Virgin Active case to see what the outcome will be.

Why are landlords worried about the new restructuring plan?

Answering a question from the audience, Richard said that landlords are particularly worried about the new restructuring plan because plans have the potential to be much worse for landlords than CVAs. In a CVA, all unsecured creditors vote in one class, and you need 75% by value of that class to vote in favour. So, although landlords don’t like CVAs, they have the comfort that 75% of the unsecured creditors need to vote in favour. Plans, on the other hand, split creditors into different classes and only need one class to approve. They tend to get put together with a view to getting the best treated class to approve. The effect of this is that in theory, all the other classes can be crammed down and the deal can be forced upon them, provided that the company shows that they will be getting at least as much as they should in the relevant alternative.

Are CVA’s no longer needed?

Answering another audience question, Richard said plans are not the death of CVAs. The CVA process remains slightly less expensive because the courts aren’t involved and unsecured creditors vote as one class making the process/analysis less arduous. However for bigger restructurings, particularly where secured creditors are involved, Richard thinks plans will start to be used more.

European restructuring tools

Touching briefly on the new restructuring tools introduced in Germany and the Netherlands Richard said that the new Dutch scheme is currently (on paper at least) looking like the best in Europe. There’s a lower threshold to use it, and companies just need to have their COMI in the Netherlands or have sufficient legal nexus to the Netherlands. Because of this, it’s likely to attract more European companies and, given time and the right precedents, Richard thinks we will see a lot of companies using or at least considering it. Commenting on the new German restructuring plan, Richard said that while it had the potential to look very attractive, by requiring a strong link with Germany to use it, it seems likely to be predominantly used by German companies.

Thank you to Freshfields for its continued support of the TMA and to Richard, and Emma for sharing their thoughts on the new restructuring plan. We hope everyone who attended the session found it useful and that you can join more of our upcoming webinars.

TMA’s Upcoming Webinars

5th May – What’s next? The Glasman Lecture 2021. Register here.
13th May – The Evolution of Consumer Brand Investments. Register here.
19th May – The Importance of Being Different. Register here.

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