Reorg has seen a proliferation in middle market and SME restructuring plans over the past 12 months. Debtors and active creditors have begun using the tool, taking advantage of the cross-class cramdown power and optimizing costs by drafting documents in-house and using more affordable barristers and regional law firms. However, research by the Insolvency Service indicates that costs remain too high.
In June last year, the U.K. Insolvency Service published an
interim report examining the effectiveness of the Part 26A Restructuring Plan. One of the key findings was that restructuring plans are seen as too costly and time-consuming for use in the SME market. Up to this point, Reorg had only seen companies with large and complex capital structures using the tool.
“It is difficult to see restructuring plans becoming commonplace in the SME sector due to the expense,” the report concluded.
The Insolvency Service estimates, perhaps rather optimistically, the cost for a straightforward SME restructuring plan to be around £100,000 to £150,000. Alternatively, the typical cost of a Company Voluntary Arrangement, or CVA, is likely to be significantly lower, in the range of £25,000 to £35,000. This lower cost, however, may be a “false economy” if the CVA is subsequently challenged in court.
Costs can rise dramatically if the proposal is challenged in court since the legal costs of the challenger are typically – but not always – footed by the plan company if they have been of assistance to the court. Challenges require additional barristers, instructing solicitors and further evidence that can be particularly onerous for small companies.
Nonetheless, since the Insolvency Service’s interim report was published, some small and very small companies have found a way to make the restructuring plan work, attracted by the power to cram down dissenting creditors and shareholders.
Last year,
Houst Ltd. broke new ground when it became the first small company to use a restructuring plan outside of administration and wielded the cramdown power against HMRC. It followed the 2021 case of
Amicus Finance, which was the first company to use a restructuring plan to exit administration.
In a follow up
report in November, the Insolvency Service noted that 90% of respondents believe the restructuring plan is still too expensive for use by SMEs. The Insolvency Service said it may be feasible to allow a restructuring plan to be sanctioned at a single hearing or for the convening stage to be dealt with on paper, out-of-court. However, for now the two-hearing structure remains.
Earlier this month, the High Court in Leeds sanctioned a restructuring plan for
GoodBox, which provides digital payment services to charities. The plan is the first to be heard by a court outside of London, and the first where the application was made by a creditor rather than the plan company or an administrator. NGI, the creditor behind the application, aimed to keep costs down. One way it did this was by drafting as much of the plan documentation itself as possible.
To date, Reorg has heard of one further SME that has proposed a restructuring plan. U.K.-based aerospace engineering company
Nasmyth Group launched a Part 26A restructuring plan earlier this month, as
reported. The group has £19.5 million of debt.
A summary of the SME plans we have seen is below:
GoodBox
“When we began, we weren’t even aware that Part 26A existed,” Tibor Barna, NGI’s founding partner, told Reorg. “We simply assumed there must be a common sense way to restructure the debt and equity to allow the company to be rescued. We kept as much of the work in house as possible to keep costs down.”
NGI proposed a debt for equity swap, whereby existing shareholders would be diluted by 99% by new money investors led by NGI. Convertible noteholders would also be equitized.
Armed with a copy of the practice statement letter from
Amicus Finance’ 2021 restructuring plan, and the explanatory statement from
Steinhoff’s 2020 scheme of arrangement, NGI set about drafting its own versions.
In the end NGI drafted: the restructuring plan itself, three versions of the practice statement letter, the explanatory statement, all the witness statements, part of the debt facility agreement and the shareholder agreement.
NGI went through three law firms before settling on Walker Morris. Barna says he found other firms to be risk averse about the relative newness of Part 26A and the fact that this was an application by a creditor.
NGI said the total cost of the plan was about £250,000. They believe this would have been closer to £300,000 had they not done so much of the work in-house. This was still significantly higher than anticipated due to the opposition of the administrators.
“What completely derailed the costs was the opposition of the administrators,” Barna said. “This carried over to the British Business Bank [a creditor] which together created an enormous overhead and resistance. In the end we simply had to fight it through, preparing more than a dozen witness statements and over 1000 pages of evidence.”
GoodBox was
heard by the High Court in Leeds, and is the first restructuring plan to date heard outside of London. This was not originally NGI’s intention, but the decision was made easier by the greater availability for listing hearings in the Leeds High Court, which is much less congested than the High Court in London. Since NGI had agreed to meet the costs of the administration, they also had an interest in getting the company trading again as quickly as possible.
An additional benefit is that regional law firms and barristers are less expensive than their counterparts in London. The barristers’ fees for the restructuring plan amounted to £4,320.
NGI also acted as the de facto information agent for the plan, removing another external cost. NGI is now considering consulting other SMEs who are looking to make use of a restructuring plan.
NGI was advised by Walker Morris. GoodBox was advised by Carrick Read.
| GoodBox |
| Relevant Documents |
Facts |
Notable Features |
Class Features |
Sanctions Date |
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Restructuring Plan
Explanatory Statement
First Practice Statement Letter |
The company was placed in administration by one of its creditors NGI. The company will issue new shares subscribed by new investors, which will dilute existing shareholders by 99%. New investors led by NGI will provide around £800,000 of new money and will be issued 85% of the shares in the new structure. Convertible noteholders will be equitized and will hold 14% of the shares in the new structure. Trade creditors and NGI’s secured debt will be repaid in full. |
First P26A application made by a creditor under s901C(2)(b) Companies Act, 2006. First plan sanctioned without plan company’s consent due to opposition of administrators. Court considered Re Savoy Hotel Ltd. [1981] 3 WLR 441 in which the court held that it had no jurisdiction to sanction a scheme of arrangement without the company's consent. However, the court considered that this case likely turns on its own facts and puts greater weight on the effect of the plan and the level of support. A written judgment is pending. |
Four class structures comprising: administration creditors, convertible noteholders, trade creditors, and existing shareholders. |
Jan. 16, 2023. |
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Houst
Last year,
Houst Ltd., which provides a hosting and management platform for Airbnb and other sites, became the first SME outside of administration to use a restructuring plan. Kunal Gadhvi, partner at Irwin Mitchell described the case as “the first true use of an RP for an SME business.”
Houst’s plan involved a quasi “cram-up,” where cross-class cramdown is used by junior creditors to impose a proposal on more senior creditors. The judge considered whether it would be reasonable to ask the company to start again and negotiate with HMRC, who were to be crammed down. However, he found that it would be “highly undesirable, where the costs and delay in requiring it to do so would impose a disproportionate burden on … a small to medium enterprise.” The court therefore took a pragmatic approach so as to not render the restructuring plan useless for small companies.
Nevertheless, the court did take the unusual step, after the sanction hearing, of requesting further information from the company before agreeing to sanction the plan. The Insolvency service noted in the November report that this appears to be evidence of the judiciary acting in a way to support restructuring plans whenever possible but also to protect the interests of creditors: “Rather than relying upon the usual adversarial approach to hearings, the court appears to be adopting a form of inquisitorial approach in order to ensure justice is done and that the dissenting creditor is not disadvantaged.”
Houst was advised by Irwin Mitchell.
| Houst |
| Relevant Documents |
Facts |
Notable Features |
Class Features |
Sanctions Date |
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| Restructuring Plan |
The company had been affected by Covid-19 and proposed a simple compromise to £5.2 million of debts owed to its two “in the money” creditors (a bank and HMRC) as well as an injection of new money by shareholders. |
Houst’s plan is an example of quasi “cram-up,” where cross-class cramdown is used by junior creditors to impose a proposal on more senior creditors. Here, although the crammed-down party, HMRC, would technically rank behind the senior secured creditor (Clydesdale Bank) in an administration, HMRC would have received a higher financial dividend. The judgment is significant for middle-market companies that may have previously considered the financial costs of a restructuring plan to be too high. |
The group proposed six plan creditors and member groups. |
July 22, 2022. |
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Amicus Finance
Amicus, a provider of short-term property finance, was the first small company to use a restructuring plan and the first promoted by insolvency office holders. Administrators to the company, in place since 2018, used the plan to effect a rescue of the group as a going concern.
The plan comprised around £32 million of debt. It was also the first time cramdown had been used against a secured creditor.
| Amicus Finance |
| Relevant Documents |
Facts |
Notable Features |
Class Features |
Sanctions Date |
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| Restructuring Plan |
Amicus had been in administration since 2018. The proposal included a straightforward compromise of secured debts, new money and waterfall payments to unsecured creditors. |
Amicus was the first plan proposed by an insolvency office holder to rescue the company as a going concern, the first to cram down a secured creditor, and the first by an SME. |
Five classes were proposed: administration creditors, senior secured creditors, junior secured creditors, preferential creditors, and unsecured creditors. |
Aug. 19, 2021. |
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--Connor Lovell