The future of restructuring plans is being shaped by emerging case law

Restructuring plans are still relatively new, but case law, including from the Court of Appeal, continues to give clarity and guidance to those proposing plans and can help avoid pitfalls in the future.

What is a restructuring plan?

A restructuring plan is a compromise or agreement made by a company facing financial difficulties with its creditors or members, the purpose of which is to alleviate those difficulties whilst keeping the company operational.

The restructuring plan was introduced in the UK in 2020. It is a very flexible restructuring tool, having no prescribed content, and can be used to bind dissenting creditors – including secured creditors – or members, with what is known as a cross-class cram down (CCCD) mechanism. It was the introduction of CCCD that distinguished it from the long-standing scheme of arrangement and provides the restructuring plan with greater flexibility.

Two court hearings are required to complete a restructuring plan: the convening hearing, where the party proposing the plan applies to the court for directions to convene meetings of classes of the company's members and/or creditors to consider and approve the plan; and the sanction hearing, where the court considers whether to sanction or reject the plan.

Restructuring plans are being increasingly used

Since businesses gained the option of pursuing a restructuring plan on 26 June 2020, 35 restructuring plans have been filed. Of those, 29 have been sanctioned, two have been rejected, two discontinued/ stayed and one is on appeal to the Supreme Court. There is also currently one plan still proceeding through the courts.

In the past year, the restructuring plan has continued to be used successfully with a number of companies having used the tool to compromise, among other liabilities, landlord liabilities, which may have previously been dealt with via a company voluntary arrangement (CVA). Plans have also continued to be used successfully in a cross-border context, and, following guidance from HMRC, plan companies are now aware of what they need to do to gain the support of HMRC for their proposals.

However, this year has seen the first sanctioned plan being overturned by the Court of Appeal. The use of litigation has also continued to be used by opposing creditors, with the first security for costs order being made in favour of a dissenting creditor for their costs of challenging a plan.

Landlord compromises

Companies with large leasehold portfolios have long sought to use the insolvency and restructuring legislation to restructure their “bricks and mortar” portfolio; the aim being that if rents can be reduced or rescheduled, arrears reduced or written off and unprofitable sites closed, the streamlined business can survive and hopefully flourish. Such plans were often implemented alongside operational changes and a restructuring of the business’ other financial obligations.

The procedure of choice to compromise landlords was usually a CVA. However, CVAs were often challenged by landlords, leading to uncertainty. CVAs can also not bind secured creditors meaning that, unless a consensual deal could be reached, a parallel scheme of arrangement may also need to be implemented to deal with financial indebtedness. The introduction of the restructuring plan offered businesses a new all-in-one solution; a flexible approach to compromising landlords and financial creditors with more certainty due to the judicial oversight involved in sanctioning the plan, and the ability to bind secured creditors and dissenting creditors through the use of CCCD. Many businesses, including Virgin Active and Prezzo, have had “landlord” restructuring plans sanctioned by the court, and that trend has continued into 2024.

The clothes retailer Superdry, the Revolution Bars pub group, the Wildwood and Dim T restaurants and cinema chain Cineworld have all used restructuring plans in the past year to compromise landlord liabilities, as well as dealing with other classes of creditors.

For example, in the case of Revolution Bars Limited, its circumstances were that it was the loss-making part of a wider group holding 49 leases of pubs and bars across the UK. It found itself in financial difficulties having breached its obligations to its secured creditors and entered into “time to pay” arrangements with HMRC. The plan sought to: reduce, amend and extend obligations to its secured creditor; extend the deadline to pay HMRC and; right-size its leasehold portfolio with a view to creating a sustainable business going forward.  

As is common in “landlord plans”, the Revolution Bars leasehold portfolio was considered on a site-by-site basis and the landlords were then divided into four classes, with rent concessions varying from switching to monthly payments without any rent reductions, to sites that were deemed unviable where no rent was to be paid; landlords were also given the option to terminate the leases.

The court used CCCD to approve the Revolution Bars plan as two creditor classes did not obtain the requisite votes of 75% in value in favour of the plan, although the creditors that did not vote in favour did not oppose the plan at the hearing. The sanctioning of this plan demonstrates that a restructuring plan offers the flexibility to compromise a secured creditor, HMRC, and the ability to bind dissenting creditors through the CCCD mechanism.

In the Cineworld plan, the court used CCCD to bind dissenting landlords. Two landlords sought injunctions to remove certain leases from the plans. This was on the basis that, as part of an earlier consensual restructuring, the landlords and Cineworld had entered into side letters whereby it was agreed that Cineworld would not seek to compromise the leases further by including them in a restructuring plan for a set period.

The court refused to grant the injunction and approved the plan. It determined there was no bad faith on the part of Cineworld, its financial position had deteriorated more than was expected, and, notwithstanding the side letters, it was fair to treat all similarly performing leases the same. To treat the two opposing landlords “better” than other classes of creditors would, it considered, be in breach of requirement to treat creditors equally, unless there was justification to do so. In Cineworld’s case there was no reason to give the opposing landlord’s special treatment, and to do so would not have facilitated or improved the success of the plan, the court considered. The court granted one of the landlords permission to appeal the decision.

Cross border plans

The English scheme of arrangement has long attracted overseas companies looking to restructure their debts. That appeal has now extended to restructuring plans, with the English courts being asked to approve plans proposed by foreign companies, often in parallel to local law schemes.

In order to approve a restructuring plan proposed by an overseas company, the court must be satisfied that the company has a sufficient connection to England and that it will be effective in the relevant foreign jurisdiction. The latter is demonstrated to the court by the provision of an expert’s opinion. Despite Brexit, the courts continue to be persuaded that restructuring plans will be recognised overseas.

By way of example, in early 2024, an amended restructuring plan proposed by Project Lietzenburger Strasse HoldCo Sarl was approved by the High Court. Project Lietzenburger is a Luxembourg incorporated company which owns property in Germany. The plan sought to restructure debt governed by both German and Luxembourg law. The court was satisfied that Project Lietzenburger had genuinely shifted its centre of main interests to England, where it conducted its administration, and expert evidence indicated that such shift did not breach Luxembourg law and would be recognised in Germany.

Dealing with HMRC

HMRC enjoys an elevated status in insolvency as a secondary preferential creditor in relation to certain taxes. Notwithstanding the courts’ power to exercise CCCD, the views of HMRC are crucial to the success of a proposed plan. This was clearly demonstrated in 2023, when HMRC successfully opposed the restructuring plans proposed by Nasmyth and Great Annual Savings and the court refused to cram down HMRC’s debt.

Following this, in November 2023, HMRC issued guidance on when it will offer support, what information it expects to receive, and how it makes decisions. This means that plan companies now have clearer parameters in which to work if they want the support of HMRC. This was shown in the Revolution Bars plan, where HMRC voted in favour of payment terms being extended by the restructuring plan.

First sanctioned plan overturned

This year, the Court of Appeal in England and Wales has, for the first time, overturned a decision sanctioning a plan. The Adler plan had crammed down dissenting classes of creditors.

The Adler Group, a German real estate group, and its subsidiaries proposed a restructuring plan which modified six series of unsecured notes governed by German law. The plan amended the notes but preserved the existing maturity dates of the notes – with the exception of the 2024 notes – which ranged from 2024 to 2029, with the 2029 notes to be paid last after the earlier dated notes.

The 2029 noteholders voted against the plan and, at the first hearing, the High Court exercised its discretion to use CCCD to sanction the plan. A group of the 2029 noteholders then appealed the decision on eight grounds.

One of the core grounds for appeal was that the plan unfairly departed from the so-called pari passu principle, that creditors are treated equally, without justification. In order for the court to exercise CCCD, the court must be satisfied, amongst other things, that none of the members of the dissenting class would be any worse off than in the “relevant alternative”. In Adler’s case the relevant alternative was a combination of formal insolvency proceedings in England and Germany. However, importantly under each of those procedures, the noteholders would rank equally. The Court of Appeal found that the plan had departed in a material respect and without justification, from the pari passu principle by adhering to a sequential payment of the different series of notes and, therefore, overturned the plan.

Following the Court of Appeal decision in Adler, companies and their advisers should be careful to replicate in a proposed plan the ranking of creditors in the relevant alternative – unless there is a good reason to deviate from this. This was shown in the Cineworld case, which followed Adler, where the court found that the request by two landlords to exclude them from the plan would put them in a better position than other creditors and breach the pari passu principle, and, therefore, rejected the application.  The Court of Appeal also confirmed that in cases where CCCD is being exercised, the test that the court must apply is what a fair distribution should look like. This is different to the long standing “honest and intelligent person” test applied in schemes of arrangement.

Use of litigation by dissenting creditors

A number of plans have been challenged by creditors this year, where procedural orders have been sought by the creditors to support their opposition to plans. It means companies proposing plans should prepare themselves for potential litigation.

Consort Healthcare (Tameside) plc is the first PFI project company to attempt to impose a restructuring plan on the NHS. The plan, which sought to amend a 2007 PFI agreement between Consort and the NHS, was opposed by an NHS Trust. For the first time in relation to a restructuring plan, the NHS Trust sought security for costs in respect of its costs to challenge the proposed plan. While the court recognised that there are some differences between ordinary adversarial litigation and restructuring plans, it held that the threshold conditions had been satisfied and awarded the NHS Trust 50% of the security sought.

The impact of this decision on contested restructuring plans going forwards has still to be seen, although the judge in the case was not convinced that the decision would open the floodgates and that dissenting creditors would routinely seek security for costs in order to frustrate restructuring plans. We understand that in Consort’s case, the plan company could not comply with the order and the plan has been put on hold.

In the plans proposed by both clothing retailer Superdry and engineering and construction group McDermott, creditors opposing these plans sought disclosure under the Civil Procedure Rules.

Following an application by a landlord creditor who was represented at the convening hearing, the court granted orders for specific disclosure of some categories of information in the Superdry plan, such as a report showing the estimated recoveries in the relevant alterative that had been referenced in a witness statement. However, the court held that it would be disproportionate and burdensome for the plan company to provide underlying granular data to cash flow forecasts.

When considering the specific disclosure request in the McDermott plan proceedings, the judge found that where there is an information imbalance, it is important for the plan company to provide access to reasonable amounts of information so that opposing creditors can properly present their case and that such information should be provided in a timely manner. The court took a pragmatic approach, finding that it would be too onerous for the plan company to provide the information requested and, therefore, did not make an order for specific disclosure.

These decisions are a reminder that those proposing plans should ensure that adequate information is provided in a timely manner; and, for opposing creditors, that information requests cannot be unduly burdensome on the plan company.

Co-written by Yazmin Meadows of Pinsent Masons.