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Introduced as part of the Corporate Insolvency Governance Act (CIGA) 2020, Restructuring Plans represent the biggest change to the insolvency industry in decades.
A Restructuring Plan functions as a formal payment plan entered into by an indebted company and its creditors. The indebted company is given the opportunity to negotiate the terms of its existing debts, liabilities, and lease agreements, with the intention being for a compromise to be reached regarding the repayment of money owed. The company’s creditors will be asked to vote on the proposals, which if agreed by the requisite number, will become legally binding on all parties.
In many ways, a Restructuring Plan can be compared to the more well-known Company Voluntary Arrangement (CVA); however, the Restructuring Plan has one major feature which sets it apart from its well-established alternative – that of ‘cross-class cram down.’
What is cross-class cram down?
To understand cross-class cram down – and why this is important for landlords in particular – it is first necessary to understand how the voting process works during a proposed Restructuring Plan.
As part of the voting process, creditors will be separated into different ‘classes.’ Creditors in each class will have certain characteristics in common or will hold the same economic interests in the indebted company. Each class of creditor will then be asked to vote on the proposed terms of the Restructuring Plan; if at least 75% (in value) of creditors from a class votes in favour, they will be said to have approved the plan.
It is at this point where a Restructuring Plan differs from a CVA. With a Restructuring Plan, so long as at least one class of creditor gives their approval to the proposal, the Plan can be authorised by the court even if there are classes of creditors who have voted against its implementation. This mechanism is known as ‘cross-class cram down’ as dissenting creditors’ votes are ‘crammed down’ and subsequently forced to accept the undesirable terms of the Restructuring Plan.
Cross-class cram down is an extremely powerful feature of the Restructuring Plan, and its existence will, in many instances, be the deciding factor in whether a company chooses to propose a Restructuring Plan or opt for the more well-known CVA.
What does this mean for landlords?
When it comes to the implementation of cross-class cram down within a Restructuring Plan, landlords have argued that they have been unfairly prejudiced in a number of high-profile cases. But why is this the case?
Well, landlords are typically amongst the largest creditors when a struggling company finds itself turning to a formal insolvency arrangement. In an alternative process – such as a CVA – a minimum of 75% (by value) of all creditors must give their consent for the CVA to be approved. This means that landlords, whose claims represent a sizeable portion of the company’s total liabilities, have much more power when it comes to approving any such proposal.
In a Restructuring Plan, however, it is possible for landlords to be overruled by much smaller value creditors should that creditor class vote in favour of the proposals. The approval of a Restructuring Plan may not only limit how much of the accrued arrears can be recovered, but it is also possible that the terms on any remaining time on the lease have been renegotiated as part of the Restructuring Plan.
Once a company has entered into a formal insolvency process, it becomes binding on all creditors, even those who voted against it. This consequently restricts any further action landlords may want to take against their tenants to recover the money they are owed. If a landlord has reason to suspect their tenants may be insolvent – or may soon become insolvent – it would be prudent of them to use every mechanism at their disposal to recover debts and minimise further losses before the tenant enters into a formal insolvency process.
Shaun Barton is a partner at Company Closure and boasts a wealth of experience in helping directors of distressed companies understand their options.
