New company rescue procedure up and running
Plan basis
The procedure for approving a new reconstruction plan closely follows that for schemes of arrangement. Basing it on an established procedure helps companies, their lawyers and the courts implement the new process smoothly, as they can adapt familiar documents and take guidance from existing case law.
Familiar ground
Like a scheme of arrangement, a reconstruction plan proposal must be put to the creditors/shareholders. A court order will set out what meetings are to be held to approve the proposal. After the meetings have been held, another court hearing determines whether the proposal can be implemented. Tip. During the pandemic, closed shareholder meetings (where shareholders can vote remotely, but not participate) are permitted. This does not apply to creditors’ meetings, but these can be held remotely to avoid spreading coronavirus. The quality of the information provided and opportunities to raise queries in advance of the “meetings” is therefore crucial.
Insolvency alternative
The new reconstruction plan is designed for companies in, or likely to encounter, serious financial difficulties. Schemes of arrangement, on the other hand, are often used by solvent companies to reorganise their share capital as part of a merger or takeover. Tip. The reconstruction plan offers companies capable of rescue that chance. If your company is facing financial difficulties and you want to avoid insolvency, take advice on whether a plan could yield a better result for your creditors and save the company.
Dissenting creditors/shareholders
The reconstruction plan needs to be approved by 75% in value of the relevant creditors/shareholders to progress to the next stage (court sanction). The second key feature of the new procedure is that the court can bind dissenting creditors/shareholders, even if this 75% threshold has not been met. This “cross-class cram down” (CCCD) enables a plan that would benefit the company or creditors as a whole to go ahead, even if some creditors/shareholders do not support it. A CCCD can be imposed if the dissenting creditors/shareholders would not be worse off under the scheme than without it. This mechanism means that disgruntled parties cannot stand in the way of a proposal that would ultimately be better for the company and its stakeholders.
New plan in action
The first reconstruction plan to come before the court concerned Virgin Atlantic Airways Ltd. Due to the effects of the pandemic on the industry, the airline was at imminent risk of collapse unless it reduced its debts and received an injection of funds. The meetings were held virtually because of the pandemic and the plan was approved by almost all the relevant creditors. The proposal and process followed met all relevant statutory criteria, so the court had a straightforward task in sanctioning the plan. Tip. Although this first case concerned a large company, there is no lower limit on the size of company that can use the new procedure.