An alternative to a CVA?
The three most important additions introduced were:-
- New insolvency moratorium introduced
- Abolition of Ipso Facto clauses in certain contracts
- Restructuring Plan procedure adopted
We’ve talked about the insolvency moratorium at length elsewhere but it’s a positive development that can only help companies by giving them breathing space to restructure their businesses while legally protected from creditor actions.
Ipso Facto clauses used to allow suppliers to terminate contracts for goods and services if the company underwent an insolvency event but this orders them to keep the supply going which will give the company a better chance of trading their way back to profitability.
The restructuring plan procedure, which some learned writers are referring to as the “super-scheme”, should be better known than it already is because it’s going to have a big impact in 2021 and beyond.
It gives professional insolvency practitioners additional tools to help protect businesses looking to restructure but with one important new power modelled on the American style “Chapter 11” bankruptcy process.
Whilst an insolvency practitioner does not take an active appointment on the matter, assistance from such professionals, like those at business rescue expert, is key in having these arrangements approved.
It runs parallel to the existing Scheme of Arrangement process, where a court can oversee corporate restructuring efforts without the business having to enter insolvency or be sold as a result.
Whilst, like a CVA, 75% of creditors in value are required to approve the restructuring plan, if the threshold is not met, dissenting creditors can be legally bound to accept the restructuring plan by the court if it’s found to be fair and equitable to do so. The downside to this however, due to the costs of going to court, is the process is significantly more expensive to implement than a CVA.
If it can be proven that none of the creditors would be any worse off if the plan didn’t go ahead and that the plan is indeed realistic. By worse off, this is often compared to the alternative, which is often the outcome in liquidation or administration, meaning there is a wide discretion for the plan to be approved, but again the involvement of an insolvency practitioner is likely to be needed to make such a certification.
The CIGA Restructuring Plan Application Process
A CIGA restructuring plan can be applied for with or without the use of the new insolvency moratorium.
The plan will generally take time to fully implement so the moratorium can provide the necessary breathing space to allow the restructuring plan to be considered.
Because court hearings are required as well as a creditors meeting, the plan could easily take two to three months to implement, compared to the average of four to six weeks that a CVA would take.
How it works
- The first court application is to ask for a creditors meeting to consider the Restructuring Plan
- Creditors and shareholders who don’t have an economic interest in the company don’t need to participate
- If the order is granted, any Ipso Facto provisions in contracts apply and suppliers have to continue to supply the company
- Creditors attending the meeting will vote on approving the Restructuring Plan. It requires a 75% majority to pass with no additional factors like creditor numbers or numerosity requirements as there are in a scheme of arrangement
- If the majority is achieved, the court will be asked to formally approve the Restructuring Plan
- The court has the power to bind any dissenting creditors to the plan if it can be shown that they wouldn’t be any worse off under any relevant alternative such as a liquidation or if any of the creditors who approved the plan would receive a payment if the company was liquidated instead.
- “Relevant Creditors” or creditors with moratorium debts aren’t entitled to vote on the Restructuring Plan and can only be bound if they consent to be bound.
Crown Preference = CIGA > CVA ?
There’s another important calculation that businesses considering restructuring need to take into account – the return of Crown Preference.
We’ve previously written about how HMRC’s newly restored priority in the hierarchy of creditors will cause unintended effects throughout the economy.
Practically this means that some companies that would previously have been looking at a CVA to restructure their business and readjust course will now have to enter administration or even liquidation in order to satisfy this new aggressive creditor at the expense of others who might have been prepared to back a CVA and would see little return, if any from an insolvency.
As a result of the return of crown preference, HMRC will mop up the first dividends issued under a CVA. With HMRC as an unsecured creditor, all creditors may stand to receive 60p/£ from the arrangement, where with the return of crown preference, HMRC may receive 100p/£, with the remaining unsecured creditors only then receiving 10p/£ after HMRC have been paid in full.
Where this may be too much for creditors to accept under a CVA, if it is realistically the best outcome, the alternative being liquidation, the CIGA restructuring plan would still bind creditors to accept the arrangement, even if they oppose it en-mass.
The good news is that you’ve got a professional friend in your corner at exactly the time you need them.
Business Rescue Expert provides a free initial consultation for any business to discuss what problems they’re facing right now and how they fix them in the short, medium and long term.
Get in touch with us to arrange one and we can outline all the options available to make sure that no matter how rough 2020 was, you can begin 2021 with hope.