Restructuring Options

Posted on 16 February 2021

Are there changes that could be made to the debt, shareholder and creditor profile of your business that could improve performance? If so, you may want to review the available options. These options have been significantly enhanced by some recent important legislative changes; more information on these changes can be found here.

We have summarised below some of the most commonly used restructuring procedures.

A debt for equity swap (consensual restructuring)

This is a reorganisation of a company in which a creditor converts indebtedness owed to it by a company into one or more classes of that company's share capital. It requires the unanimous consent of affected stakeholders.

A debt for equity swap is often used when a company is in distress but its creditors (especially its principal bankers) consider that the fortunes of the company can be turned around. The motivation for the creditor is that with a lower debt repayment profile, the company will trade more profitably and the creditor will achieve a better return via equity than it would as a creditor going down the insolvency route.

Scheme of Arrangement (part 26)

A scheme is typically used for restructurings that are more complex. A company can effect almost any internal reorganisation, merger or demerger using a scheme of arrangement, subject to the necessary approvals. A plan that is approved by the necessary majorities, and sanctioned by the court, binds all creditors (whether secured or unsecured) whether or not they are in favour. Creditors vote in classes. The requisite majority is required from each class to get the plan approved. Directors remain in control.

Scheme of Arrangement (part 26A) (sometimes referred to as "Restructuring Plan")

This is a new tool introduced in 2020 by legislation. The scheme is very similar to a Part 26 scheme. Importantly however the plan can be approved even if one or more class dissents (providing that relevant conditions are met). The availability of this "cross class cram down" is likely to result in the Restructuring Plan option being favoured over Part 26 Schemes.

Part A1 Moratorium

This is a new tool introduced by legislation in 2020. It is designed to allow distressed companies a short breathing space from enforcement action by creditors while the company looks to put a rescue plan in place. Debt owed to banks that falls due during the moratorium must continue to be paid for the moratorium to remain in force.

The moratorium can be obtained through a simple court filing without creditor consent but can only endure for a maximum of 40 business days without such consent or a court order. Directors remain in control however; an insolvency practitioner oversees the functioning of the moratorium.

CVA

This tool can be used to restructure terms between the company and its unsecured creditors only. The plan may be for debts to be compromised, deferred or a combination of the two. Dissenting creditors can be crammed down if the requisite majorities are obtained. The procedure is less formal than a scheme and has no court involvement. The directors remain in control.

The procedure has been widely used in the retail sector to compromise rent payable to landlords. However, it is anticipated that going forward, the CVA is likely to have a wider application and take up than just retail.

Pre-pack administration

This is a procedure whereby a buyer for the business and assets of a company is identified (and sale terms agreed) pre appointment of administrators and the sale is then completed immediately upon the appointment of the administrators. Because the company is typically only in administration for no more than a matter of hours, this is a particularly useful technique to use if mitigation of business interruption to trading is critical.

If you would like to talk to us about options for restructuring your business, please contact Paul McLoughlin or Laura Chandler.

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