Since the introduction of the Corporate Insolvency and Governance Act 2020 (CIGA) and the creation of the new Part 26A restructuring plan procedure, questions have been raised about whether the cost of using such a procedure would restrict its use to larger, better capitalised companies.
In our previous update, we summarised the findings in the Insolvency Service's interim report on the implementation of certain CIGA measures, including the use of the Part 26A restructuring plan. This confirmed the concerns of many in the restructuring industry regarding the costs of implementing a restructuring plan. In particular, the Insolvency Service noted that restructuring plans are seen as too costly and time consuming for use in the SME market. The Insolvency Service pointed to the requirement for two Court hearings and the required level of information disclosure as contributing factors to the high expense involved in implementing a restructuring plan.
- The emergence of SME restructuring plans
- Will we see more SME restructuring plans?
1. The emergence of SME restructuring plans
There have now been at least three sanctioned restructuring plans proposed by SMEs, which, given the relatively small number of restructuring plans sanctioned to date, is not an insignificant percentage. However, whilst the numbers are increasing, each of these restructuring plans have relatively specific fact patterns.
Two of these restructuring plans were proposed when the relevant company was already in administration. The restructuring plan proposed by Amicus Finance plc (in administration) ("Amicus") was proposed by its administrators. The most recent SME restructuring plan, proposed by Good Box Co Labs Ltd ("Good Box") and sanctioned by the Leeds High Court, was proposed by a creditor of Good Box, which provided funding for the administration to allow trading to continue while the rescue was pursued. It also appears to be the first restructuring plan approved outside of the London Courts.
Whilst these restructuring plans illustrate that there is a place for the use of this procedure in the SME space (and outside of London), it would clearly be preferable if a restructuring plan was a viable option for SMEs prior to administration and/or where the relevant company may not have creditors with the means to inject new money to fund the process.
The Houst Limited ("Houst") restructuring plan remains the primary example of an SME restructuring plan proposed outside of administration. This plan compromised a number of classes of creditors and members, but the only class which dissented was HMRC. Whilst HMRC voted against the restructuring plan, it did not appear at the sanction hearing to make oral representations or to challenge the sanction of the plan; a factor that the Court took into consideration when it came to its decision to sanction. Houst's restructuring plan therefore faced no active dissent at the sanction hearing. As has been seen from other restructuring plans, such as Virgin Active's successfully sanctioned restructuring plan (Travers Smith advises Virgin Active on its successfully sanctioned, ground-breaking Restructuring Plan), dealing with a substantive challenge against a restructuring plan can add time and significant cost to the process.
2. Will we see more SME restructuring plans?
It does seem to be apparent that the Court will take into account the size and resources of the company proposing a restructuring plan when determining whether to sanction the plan and, in particular, whether the procedural requirements have been met. In the case of Houst, for instance, the Court showed flexibility in allowing a lower evidential burden on valuation evidence than may be required from a larger company.
The emergence of these SME restructuring plans is an encouraging sign that parties are thinking of inventive ways of using restructuring plans in the SME space. However, these plans were all either proposed when the relevant company was already in administration or were not substantively challenged in the Court. It therefore remains to be seen whether a restructuring plan is generally considered as a viable option for SMEs that are not already in administration and/or who may have more mobilised opposition to their proposals. It would seem that some of the recommendations covered in the Insolvency Service's interim report (such as slim-lining the process to a single Court hearing for SMEs) should not be discounted.