While more traditional insolvency procedures — e.g. Company Voluntary Arrangements (CVA), “pre-pack” Administrations and Schemes of Arrangements — are sometimes the best way forward, they can have disadvantages. Winding a company up isn’t always in the best interests of the creditors, any more than the debtor, but there has often been little choice.
However, in 2020 a new approach was introduced — Restructuring Plans. These have so far been mainly used for large businesses, but recent cases have suggested they may also be suitable for SMEs.
What Is a Restructuring Plan?
Restructuring Plans can be used in the case of any company at risk of being wound up under the Insolvency Act 1986. It must be suffering financial difficulties likely to affect its ability to continue as a going concern, in which case a Plan can be put in place to reduce the effects of those difficulties.
The Plan is a court-approved agreement between debtor and creditors to restructure the debts in order to make it more likely that they can be paid without liquidating the company owing the money. This may be done by reducing the amount to be paid or extending the time to pay. Alternatively, it can authorise a “debt for equity” swap, whereby the debts are converted into shares.
In order to be adopted, the creditors must vote for it. They’re divided into creditor classes, and there must be a majority of 75% by value in each class for the Plan to be adopted.
Restructuring Plans — Good or Bad?
In the right circumstances, a Restructuring Plan can be an ideal solution for all parties. Compared with the alternatives, it allows more flexibility than a CVA to compromise on the amount owed, while unlike a “pre-pack” it allows the company to survive.
The big disadvantage is currently the cost, partly because of extra due diligence required and partly because it requires two court appearances. This is why it’s been mainly used by large businesses, but recent successful cases involving property management firm Houst and Amicus Finance suggest that Restructuring Plans may also be suitable for SMEs.
Restructuring Plan or Private Negotiation?
Like any arrangement where creditors offer the debtor a compromise, the point of a Restructuring Plan is that creditors can recover as much of the owed money as is practical. At the same time, it allows the debtor a chance to recover and continue trading, perhaps returning to the status of a valued customer in the future.
A formal structure like this is needed in the case of multiple creditors, but a similar approach can be used informally on a one-to-one basis. Give me a call to find out how I can help you negotiate with debtors who are trying to pay so that there are no losers, just winners on both sides.
