Restructuring Primer: Part 26A Restructuring Plan Features Cross-Class Cramdown, No Numerosity Test Requirement for Debtor Financial Difficulties; Virgin Atlantic, Pizza Express Successful Users

Virgin Atlantic Airways and Pizza Express were the first groups to utilize the brand new Part 26A Restructuring Plan, introduced into English legislation earlier this year. The new tool sits alongside the traditional Part 26 Scheme of Arrangement in the Companies Act, and both tools remain available to debtors.

Much like the traditional scheme, the plan is a court-led implementation tool, which features a convening hearing, a creditors’ voting stage and a sanction hearing. The proponent of the plan will usually be the debtor company and will propose the classes of creditor that are to vote on the scheme.

The plan can be used as an implementation tool to bind creditors to amendments to the terms of debt documentation, subject to certain voting thresholds, fairness tests and court sanction being obtained. Once effective, the amendments that the plan purports to put in place will be binding on the debtor and all plan creditors, regardless of whether they consented. The plan will be used to implement restructurings where contractual prescribed creditor consent levels for amendments cannot be reached.

Pre-Plan Steps

During the process, the debtor’s directors remain in control of its business and there is no automatic moratorium on enforcement. Debtors will however seek to engage with key stakeholders prior to using the process in order to garner early support and prevent creditors taking separate actions against the debtor. This is usually done by way of “lockup agreement” to which creditors will often be incentivized to sign up by the payment of consent fees, thus preventing them from disposing of their debt holdings and binding them to voting in favor of a proposed plan.

As well as consent fees, key stakeholders may form ad hoc groups in order to meaningfully negotiate the terms of a refinancing with the debtor. These groups may provide interim financing to the debtor and may be paid, sometimes highly lucrative working fees for undertaking the negotiations.

Virgin used the plan to implement certain arrangements that form part of a broader recapitalization plan worth about £1.2 billion over the next 18 months. Pizza Express used the plan to cut its total debt to £319 million from £735 million as well as to implement an equitization of its existing senior secured noteholders.

The Virgin plan provided some useful guidance to industry practitioners as to how a debtor may demonstrate that it is in “financial difficulties” in order to be able to use the plan. Further, the Pizza Express plan was structured in such a way to allow for certain dissenting classes of junior noteholders to be “crammed down” if they did not approve the plan. In practice however, the Pizza Express noteholders did vote in favor of the plan, so the cram-down tools, discussed below, were not tested.

New Restructuring Plan Features
 

• The introduction of “cross-class cramdown” - Traditional schemes dictate that in order for a scheme to be sanctioned, every voting class must approve the scheme, passing the scheme hurdle of 75% by value and 50% by number of voting creditors. Cross-class cramdown means that, subject to certain fairness tests, a dissenting class of creditor can be crammed down, meaning that the plan will be binding on them despite their not giving consent.

• The deletion of the numerosity hurdle - Traditional schemes require that the hurdle for consent for each class is 75% by value of voting creditors as well as a 50% by number. The plan has done away with the latter numerosity test.

• Requirement for financial difficulty - The new plan can only be used by debtors who are facing financial difficulties. The traditional scheme was accessible by all debtors, regardless of their solvency status.

The plan relies on the vast majority of existing jurisprudence for traditional schemes and it is expected that courts will follow the numerous precedents already established by schemes.

However, precedent on the new features, such as cross-class cramdown and exactly what constitutes financial difficulty, will need to be created by the courts.

Part 26A Process

Like the existing scheme process, the plan features two court stages - a convening hearing followed by a sanction hearing. The restructuring plan is modeled broadly on the existing English scheme of arrangement with some important changes, as shown below:
 

• The voting threshold under the plan will be 75% by value in each class to vote in favor (the same as under the existing English scheme regime), however there is be no numerosity test;

• A new connected-party test is introduced, being more than half of the total value of unconnected creditors (in each class) to vote in favor. This is similar to the existing test for company voluntary arrangements (drawn from section 249 of the Insolvency Act 1986 (IA));

• The plan allows the cross-class cramdown of dissenting creditors so that if one creditor class votes in favor of the plan and the absolute priority rule is followed, the court can sanction the plan;

• The court can be able to sanction the plan if (i) doing so is necessary to achieve the aims of the restructuring, and (ii) it is just and equitable to do so in all the circumstances to the extent the absolute priority rule is not met;

• A “next best alternative for creditors” test can be used in order to assess whether the absolute priority rule has been met. In order to provide additional protection, at least one impaired creditor class must approve the plan; and

• The proposals will not extend as far as allowing “super priority” rescue financing as is common in U.S. chapter 11 proceedings.

The process closely resembles the existing English schemes of arrangement:
 

• At a first hearing, the court will examine the classes of creditors and shareholders as defined by the company. Creditors and shareholders may challenge class formation if they think the company’s classes do not accurately reflect the rights and interests of different classes. If satisfied, the court will confirm that a vote on the proposal may be conducted on a specified date ahead of a second hearing.

• A second hearing will then be required if the requisite voting thresholds have been met and the rules for imposing a cross-class cram down have been complied with. The court will consider whether the necessary requirements have been met and will make a decision to confirm the restructuring plan and make it binding on affected creditors and shareholders.

Necessary information will need to be provided to creditors in order for them to make a decision on whether or not to support the proposal. This may take the form of something like the explanatory statement used in schemes. If no challenges are brought and no counter-proposals are submitted or permitted by the court then creditors and shareholders will vote on the proposal, with electronic voting and communication being encouraged.

As the provisions in the plan closely resemble existing English schemes, the jurisprudence on class composition for schemes that has been built up over many years will be used to guide the court in its examination.

Existing Scheme vs Restructuring Plan