Restructuring and Corporate Recovery in the UK

A Practical Guide to Restructuring and Corporate Recovery in the UK

Perhaps surprisingly, considering the country’s business sector forced into lockdown situations and taking the Government’s hand of financial support, the number of insolvencies to date has remained lower than expected. That’s not to say we won’t see more insolvencies over the coming months as the financial support ends and the companies that were in trouble before the pandemic are likely to declare insolvency.

With a report suggesting that as many as 723,000 businesses could be in ‘significant financial distress’, what we are seeing is an upturn in businesses restructuring and refinancing as they adjust to dealing with substantially more debt than anticipated a year ago. Debt management schemes are certainly on the rise and it’s not been limited to the smaller or medium-sized businesses. The likes of Virgin Atlantic, Pizza Express, Virgin Active and DeepOcean have all implemented corporate recovery and insolvency schemes. But is a restructuring or corporate recovery solution the right option for your business?

To restructure or not?

Some businesses will be prepared to just manage the debt and pay it back over a period of time. But others don’t have that luxury and if they are going to survive into 2022, they need to find a restructuring solution as soon as possible.

In most cases, companies that have been severely impacted by the coronavirus pandemic, i.e. their debt has been a direct result of Covid-19, have a good, solid base from which to work on. Nicknamed ‘zombie’ businesses, they have had support from the Government over the past year but have not been able to trade efficiently and grow. A restructure or corporate recovery package could be the difference between them thriving or sinking into insolvency oblivion over the coming years.

The Corporate and Insolvency Governance Act 2020 (CIGA)

As a response to the UK’s lockdowns and the problems facing businesses across the country, a new Corporate and Insolvency Governance Act 2020 (CIGA) was introduced to allow for ‘compromise or arrangements’ to be agreed between creditors and debtors. Generally referred to as a ‘Restructuring Plan’, it has been based on the Schemes of Arrangement facility under English ‘Schemes’ which were included in the Companies Act 2006.

Combined with the new moratorium procedure in CIGA (and Part A1 of the Insolvency Act 1986), it allows businesses to enter into a Restructuring Plan if they are under pressure from their creditors and no other corporate recovery process has been agreed with them.

What is the new Restructuring Plan?

Similar to Schemes, the Restructuring Plan is a ‘debtor in possession’ process and an insolvency practitioner (IP) does not need to be appointed to administer, monitor or supervise the process. That said, businesses do involve IPs as they are usually already in discussions with them. The plan must be:

● Subject to a court oversight of sanction
● Subject to 75% of creditor value approval.

If sanctioned, the Restructuring Plan binds secured and unsecured creditors’ but it does create a division among members and/or creditors depending on how they are affected.

As with any restructuring or corporate plan, without 75% of the gross value of votes across secured and unsecured creditors agreeing, it may not go ahead. In addition, the court is allowed to impose a Restructuring Plan on a business, whether they like it or not, if:

● The business would be worse off than if the Plan was sanctioned
● The Plan is approved by a minimum of one creditor that has a genuine economic interest if the Plan is not sanctioned.

This is called a cross-class cram down, a feature in US Chapter 11 bankruptcies, and allows for debt-to-equity swaps to be imposed without shareholders having to agree; DeepOcean was the first UK company to cross-class cram down under their recent Restructuring Plan.

To be eligible to enter a Restructuring Plan, the business must:

● Be facing financial difficulties that may or currently do affect them and its ability to continue as a viable business; and
● Be clear that the purpose of the Plan is to reduce, prevent, eliminate or mitigate their financial difficulties.

Whilst there isn’t an insolvency test to determine the level of insolvency, the company must be in a situation where they can demonstrate current financial difficulties and/or be able to forecast them in the future.

A Restructuring Plan can contain a variety of restructuring options, such as debt-for-debt or debt-for-equity swaps, debt rescheduling or waivers, refinancing or even a combination of them. Unlike CVAs and other voluntary arrangements, IPs do not need to be involved, but the Restructuring Plan proposal has to be approved not only by the creditors, but also the court across two hearings.

Alternatives to the Restructuring Plan

If a Restructuring Plan is not the right option for your business, there are other corporate recovery solutions. For example:

Creditor Voluntary Arrangements (CVAs) used to be the preferred option but with creditors (landlords in particular) challenging CVAs in recent months, it has become more difficult to get sufficient agreement to a CVA
● Company receivership/administration processes are favoured over insolvency liquidation and potentially attracts a buyer prepared to take over the business, and take on its debts.
● Refinancing is a suitable option for businesses that are rich in assets and able to use those assets as collateral with lenders. Invoice discounting and invoice factoring are often included in refinancing processes if the company has a healthy sales ledger.
● Peer-to-peer lending is a way of raising funds for businesses that are suffering from a cash flow issue. Whether it is a loan from business investors or a crowd funding scheme, the interest rate is often more favourable.

Of the number of businesses in the UK, few have benefited from the coronavirus pandemic. Businesses across the country are looking at ways to save money, raise finance and restructure their business to ensure they can survive and thrive in a post-Covid-19 world.

Individual or company restructuring and corporate insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential there is for the debt to be paid off. If you or your business is struggling with debt, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help you, contact us today.