Experts welcome UK government report on success of CIGA’s restructuring plan

Andrew Robertson of Pinsent Masons said: “We are pleased to see the government’s interim report on the impact of CIGA confirms that restructuring plans are intended for use in the mid-market.” CIGA was introduced during the 2020 Covid-19 lockdown and contained a range of temporary measures to support businesses affected by trading restrictions linked to the pandemic response. 

CIGA also introduced three permanent measures to help companies recover in the longer term: restructuring plans under the 2006 Companies Act and the standalone moratorium and the restriction on contractual termination clauses – both under the 1986 Insolvency Act. The report, published by the Insolvency Service earlier this week, found that stakeholders have broadly welcomed the permanent CIGA measures, which were “seen to be assisting the rescue of companies as going concerns.” 

The report said restructuring plans have succeeded in building on existing case law governing ‘schemes of arrangement’. It said the plans appeared to have resulted in job losses being avoided and have been used successfully in cases where previously a scheme on its own would not have been effective due to the ability to cram down and bind dissenting classes of creditors. The report paid tribute to the high quality of UK judges adjudicating on restructuring plans, adding that the absence of numerosity requirements – the need for a majority in number of creditors as well as a 75% majority in value – when approving a plan was a positive development.

Restructuring plans are, however, still not being used widely enough in the small to medium-sized enterprise (SME) market, according to the report. It said that courts and stakeholders could be “more pragmatic” about the documentation required for simpler cases, which could be dealt with in a single hearing by the Insolvency and Companies Court (ICC), rather than the High Court. The report also suggested the development of standardised forms or a template restructuring plan similar to those used for company voluntary arrangements.

The Insolvency Service also said the costs of challenging a restructuring plan hindered protection for dissenting creditors. It added that valuation evidence was often seen as excessively costly and suggested that it might be possible for a “single joint independent expert” to be appointed by the court to lower the burden on stakeholders involved in the process. Reviewers also called for new rules to be introduced to ensure greater transparency and more disclosure options, after some stakeholders complained of not having adequate access to information.

Steven Cotee of Pinsent Masons said “more should be done” to encourage the use of restructuring plans in the mid-market, following “the successful implementation of a plan in the case of Amicus Finance.” In 2021, the UK High Court approved Amicus Finance’s restructuring plan, applying cross-class cram-down powers which allowed the dissenting votes of some of its creditors to be overridden.

Cottee added: “The suggested move towards standardised documentation, a single hearing in front of an ICC judge and the use of a joint expert on valuation evidence would all be positive steps. Such reforms would further promote the use of this powerful tool, which has already been shown can be used effectively to restructure SMEs.”

The report concluded that CIGA’s permanent moratorium measure has been used successfully and is more user-friendly than the small companies CVA moratorium, which has since been repealed. Reviewers said that, because the moratorium is a debtor in possession process, the functions of a monitor differ from other insolvency practitioner (IP) roles, adding that the “uncertainty created by this sense of newness” was a possible reason why the measure has not yet been fully engaged with by the IP profession.

Contributors to the report criticised the eligibility criteria for moratoriums, which exclude companies that are party to a capital market arrangement where they have incurred a debt of at least £10 million. The report also raised “significant concerns” that the measure also alters pre-existing priorities in a subsequent insolvency, which may have unintended consequences. Suggested improvements to moratoriums included clarification of the definition of financial services, after some stakeholders expressed confusion over whether debts which arise from hire purchase or conditional leasing should receive a payment holiday.

Reviewers concluded that termination clauses were a “positive addition to the powers available to insolvency practitioners and companies who have entered a formal insolvency procedure”, but said it remains too early to assess whether they meet the Insolvency Service’s policy objectives. The government said it expects all three permanent CIGA measures will be used increasingly now that its pandemic support package for businesses has come to an end.