The government has announced that it will legislate to update the UK restructuring system and corporate governance regime relevant to companies in distress with the aim of ensuring that the UK's insolvency system retains its preeminent status.
The proposals will have a significant impact on the UK restructuring and insolvency framework with a move away from creditor-led processes to debtor-led restructuring proceedings in a similar manner to the US Chapter 11 regime.
This article tells you what you need to know about the proposed reforms, their potential impact and the path to implementation.
New Restructuring Tools
The government's proposal for a new restructuring tool draws heavily from the current scheme of arrangement legislation but with some important distinctions.
The new "flexible restructuring plan" will allow a debtor to bind all creditors, including dissenting junior creditors, through a cross-class cram down provision which is comparable to the rubric contained in US Chapter 11. In effect, this means that if at least one class of impaired creditors vote in favour and the 'absolute priority rule' is followed (a dissenting class of creditors must be satisfied in full before a more junior class receive any distribution) then the court can approve the plan. However, the court will have the power to sanction a restructuring even if the absolute priority rule is not applied, provided that it is necessary to achieve the aims of the restructuring and it is fair and equitable to do so. At least 75% (by value) of each class of creditors and shareholders will be required to vote in favour of the plan in order for it to be approved. There will be no majority in number test but a 'connected creditor' rule will apply meaning that more than half the creditors by value voting in favour of the restructuring must be "unconnected" pursuant to the definition in the Insolvency Act 1986. The overall process will resemble a scheme of arrangement, with a court hearing at which classes of creditors and shareholders will be determined following which there will be a vote on the proposal. Ultimately, however, it will be at the court's discretion to whether to confirm a plan and make it binding on creditors and shareholders. Procedurally this seems to make sense although market participants argue that this level of flexibility could create uncertainty which investors should be concerned about. Restructuring Moratorium