CVA or Cross Class Cram Down?
As part of the Corporate Insolvency and Governance Bill 2020, there’s provision for the court to be able to support otherwise viable businesses that are struggling with debt obligations.
They will do this through allowing them to restructure through a new procedure that allows the court to bind creditors to a restructuring plan if it’s considered fair, equitable and in the interests of creditors.
While they will vote on it as usual in an administration or restructuring process, the court additionally has the power to impose the plan on any dissenting creditors if certain necessary conditions are met.
The new system is dubbed the cross class cram down as it affects all classes of creditors and minority objections are “crammed down” in order to ensure the restructure passes.
This means that minority creditors no longer have the ability to block viable restructuring proposals if the court judges that if the plan would leave them no worse off than the likely alternative if the plan was not passed. If, however there are a large number of dissenting creditors, the court is likely to be reluctant to go against their wishes.
Some experts have likened the new provisions to the more well-known American Chapter 11 bankruptcy system which was seen as more lenient and dynamic than the traditional British system.
There are some similarities but also significant differences too. For instance it would be available to both solvent and insolvent companies and stand alongside any existing scheme of arrangement processes.
Combined with the new insolvency moratorium which was also announced in the bill, insolvency practitioners now have even more tools and strategies available to help otherwise viable companies to navigate through the current choppy economic waters.
Alternative to a CVA
One point to make is that the plan is part of a corporate restructuring process and is not a formal insolvency process. An insolvent company could make use of the new restructuring plan but it isn’t mandatory and it doesn’t carry the protections from creditors that a company voluntary arrangement (CVA) does.
The restructuring plan allows a restructuring of debt to be implemented within the existing corporate structure without the need for a sale of the business and/or subsidiaries through a pre-pack administration or CVA but this might not be appropriate for every business.
Also while the court involvement in the CVA process is minimal, this lack of scrutiny can occasionally lead to uncertainty and resentment for some parties if they feel that their interests haven’t been treated fairly or represented appropriately at the creditors or shareholders meetings.
The court being integral to the restructuring plan will ensure that every point of view will have an official hearing – even though they may be ultimately bound to a decision they don’t like. The downside to this however is that the new restructuring scheme is likely to be extremely expensive. Solicitors will be required at all stages along with barristers to attend the hearings and represent companies. This will likely mean that the scheme is only viable for larger businesses, making a CVA a much better alternative for SMEs.
Chris Horner, Insolvency Director with Business Rescue Expert, thinks the additional options are a positive. He said: “An insolvency practitioner has a toolbox they use with various strategies designed to be used on different scenarios.
“There is no one-size-fits-all approach and the recent rule changes announced in the 2020 bill including the restructuring plans and insolvency moratoriums are giving us even more ways to help businesses out of their current difficulties and get back on a firmer footing even more quickly than before.”
It’s not just the insolvency industry that’s having to adapt to a new set of rules.
Every company and sector has been impacted by the coronavirus response and the recovery will be uneven and will depend on a lot of factors and decisions that need to be taken right now.
One of the best things you could do is get in touch with us to help reassure you that you’re making the right calls at the right time.
We will work with you to understand the unique circumstances and pressure you’re facing and suggest some ideas and moves that you might not have considered but could prove the key difference in reopening your doors confidently or possibly even at all.