Schemes of Arrangement, CVAs, Restructuring Plans and the Moratorium

Introduction

 Normal administration- existing management is displaced- in this proceedings

existing management not displaced- mechanisms seek to rescue teh company by
reorganising/restructuring the company's debt
1. Creditors can agree to delay debt, new debt plan or swap debt- therefore
communication with creditors is key in these arrangements
 Different from informal rescue, which is a private contractual agreement to restructure
the debt- contrast measures seek to create mechanism- statutory majority creditors can
bind dissenting minority to bind the creditors- thus formal legal mechanisms
 of these arrangements provide a stand on claims in the period whilst the
negotiating/restructuring would take place- no statutory moratorium in process of
negotiation
1. No SOA moratorium- however now have a general restructuring moratorium
since 2020- effectively moratorium although not specifically tailored to SOA
 When looking at restructuring deals- essence is negotiation about who gets what- ie
who writes down the debt and to what extent- this depends on the leaders of both the
creditors and the rescued company
 No displacement of management so business can carry on as normal without issues
that rise if the company goes into formal procedure such as insolvency or
administration

Schemes of Arrangement

 Under the companies act - Schemes are not limited to insolvency situations- A
scheme of arrangement is a comprise/arrangement between company and creditors or
company and its members-
 A scheme of arrangement: s.895 CA 2006- Compromise of rights is narrower of two
things to do under SOA- Courts draw distinction between compromise and an
arrangement
1. Re T & N Ltd (No 3) [2007] 1 BCLC 563- Arrangements are not limited to
situations of dispute and need not to contain a compromise- arrangements can
be sanctioned to not include compromise (thus can be distinguished)- thus
arrangement is interpreted widely and be applied in a range of contexts- ie
merger of companies
 Essential element of Scheme is there must be an element of give and take (s.895)-
Re Savoy Hotel [1981] Ch. 531- Need a give or take to show an arrangement- some
swap of obligations- in Savoy Hotel the Scheme was sanctioned as it changed
relationship contract between company and its members- swap of obligations
present
1. Not necessary that the company and its members or company and its creditors
rights must be changed- must show some sort of obligations going in both
directions
 Any company liable for winding up under the IA 1986 may be subject to scheme of
arrangement (s.895(2) CA 2006- Includes if English law governs relationship of
creditors
 
A SOA between company and creditors comes int effect when sanctioned by court -
when sanctioned notice on the company registrar- Company or any creditor can
apply for a SOA
 Three legal stages for court approval l (see e.g. Chadwick J, Re My Travel Group
Plc [2005] 2 BCLC 123, at [8].
1. Application to Court for a meeting of creditors to be summoned (s.896 CA
2006).
2. The scheme proposals must be put to the meeting(s) to be approved by
statutory majority of creditors
3. If (1) and (2) are satisfied, a further application to the court must be made to
sanction the arrangement.)
 Each stage seeks to achieve a policy purpose- see handout In Re Hawk Insurance
[2001] EWCA Civ 241, at [11]
 Who should be consulted when entering into a SOA?
1. Company does not have to include all creditors in scheme- can select certain
creditors and exclude others- Re Bluebrook Ltd [2009] EWHC 2114- Company
entitled to enter into SOA with one group of lenders and exclude another group
of lenders (junior creditors)
2. Not necessary to consult classes of creditors that are not affected in the scheme-
either they are not affected or have no economic interest in company
a. If they are affected- they have to be in the scheme- however- if affected
they can be exlcdued by law as in reality they have no economci interest
in the company
b. Re Tea Corporation Ltd [1904] 1 Ch 12 38- Shareholders had technical
interest in scheme but had no economic interest in realty as assets of
company could not generate return in liquidation- so cannot hold the
company hostage /hold up process of negotiation- not efficient in
commercial reality

The Meeting of Creditors

 Courts have broad power to order meetings of creditor or members for a scheme-
Court may order a meeting of the creditors and members or any class thereof
(s.896(1))
 Who is a creditor?- Re Lehman Brothers International (Europe)(in administration)
[2009] EWCA Civ 1161- Requires the person as a pecuniary claim against the
company which once payable- will have to be sacrificed for the debts of the company
1. Debts that rae not yet payable included- contingent creditors included
regardless whether claim prove liquidation or not
 Holders of security can be banned by the majority of the secured creidtros can bind
the minority of secured creditors- this can include dismantling teh security-
reducing the share in security etc- but this requires certain class of creditors
 Different meetings with different class of creditors to approve the scheme- Class
meetings is where creditors have different interests- separate meetings of different
interest groups should be convened at the consent of all the class creditors- ensuring
that SOA caters for different classes of creditors and are adequately protected in the
scheme
 To be convened as a class- have to prove groups of creditors gave different interests
 Classes of creditors- looks to whetehr creditros have sufficent community interest
so that the interests can be consdiered together
 1. Sovereign Life Assurance co v Dodd [1899] 2 QB 573; Re Hawk Insurance Co
Ltd [2002] BCC 300.- Group of creditors will be considered a class where the
rights are not so dissimilar as to make it impossible to consult together
2. Re Hawk Insurance Co Ltd [2002] BCC 300.- Court asks whether single
scheme or is it a linked agreements with different creditors- then different
agreements with different creditors- need to be formed in a class. Have to look
at the commercial reality and details of the scheme. If their interest are
fundamentally different and rights- different class of creditors that it is not
reasonable that they can consult together. Court said that they are not different
class as all have same rights to wind up in liquidation and all are sophisticated
in commercial reality- remains fact specific but still a restrictive approach-
policy that more classes can frustrate the scheme and the purpose of it
 Not necessary to give creditors notice if their value of the claim is worthless-
economic reality test

Approval of the Scheme

 Need 75% of the company's debt with the majority of those that turned up- Court
needs to see that statutory requirements fulfilled before it approves the scheme
 Court has wide discretion to withhold consent to scheme- if it finds that it is not fair
for creditors even if the formal requirements are met- eg if majority taking unfair
example of the minority then it may withhold consent to sanction it

Effect of a Scheme Duly Sanctioned

 Once sanctioned the scheme is binding on the company, creditors and the
administrator or liquidator (if any) (s.899(3) CA 2006). Creditors outside of the
scheme retain full rights (Re Marconi Corp Plc [2003] EWHC 1083- cannot touch
the rights of these creditors
 Schemes are flexible- companies free to negotiate details of scheme and who they
negotiate with- key role of the court is to watch out for oppression of minorities and
that unfair advantage not taken

Case Study of a Scheme of Arrangement- Re Bluebrook Ltd (2009)

Company Voluntary Arrangements

 Similar objective to Scheme- meant to be short term procedure to create a quick

restructuring with companies without complex debt and capital problems- same
advantages of scheme but used for simpler cases with simple restructuring problems
 See Slides
 The CVA: ss. 1, 2 IA 1986, Insolvency Rules 2016 rr. r 2.2-2.4 & r. 2.6
 Meaning of ‘creditor’: Re Cancol Ltd [1996] 1 BCLC 100.
 Approval of CVA: IA 1986, s.4; Insolvency Rules 2016 r. 15.34(3)
 Effect of a CVA: IA 1986 s.5; Re TBL Realisations Ltd [2005] 2 BCLC 74
 creidtors reciveing notice of the proposed CVA can vote to approve or not ot approve-
creditor maintains broad meaning- majority approval 75% in value of creditor voting.
 If CVA is approved- it is binding on all creditors and those given notice of it and
those who have not
 Creditors can challenge CVA on grounds of unfair prejudice- and procedural issues-
will compare CVA as to what the creditor would have otherwise got- must show
significant disadvantage in comparison

Restructuring Plans

 New Rescue procedure introduced in the Corporate Governance and Insolvency Act
2020. Rules set out in Part 26A Companies Act 2006 s.901A – s.901K.
 Restructuring plans are similar to SOA- debtor in possession procedure and court
plays significant role of convening/approving a plan
1. Court convening meetings (s901C CA 2006) and approving the plan (s. 901F
CA 2006).
 The Restrturing plan marks a slight shift to more debtor friendly regime in UK
Restructuring/Rescue Rules
 Restructuring Plans place more limits on individual rights of particular creditors than
Schemes and intention is to facilitate restructuring for the debtors- indiivudal creidtors
more limited than under SOA
1. Key difference of RP to SOA is that RPs can be used to effect cross-class
cramdowns
2. Process intends one group of creditors t cramdown on the otehr group without
that groups consent- key issue is when the courts will sanction a cross class
cramdown, in which they have broad discretion
3. Courts on this issue have to balance protection of minorities with the class
cramdown to effect a plan- broadly courts take a more commercial approach
than legal approach- no set legal rules so look to policy issues
 Key objective of restructuring plan was to address defencies with SOA- ie lack of
cross class cramdown
1. In SOA, creditors divided into classes and each class has to approve the
Scheme for the court to sanction it (which is 75% in each class)
 RP similar to SOA- Company proposes compromise arrangement with
creditors/members- premise same as the Scheme.
1. As the premise is the same, many principles of SOA will apply to RP too- Re
Virgin Atlantic Airways Ltd [2020] EWHC2376)- 'It is clear that the court has a
general discretion to sanction a RP under Part 26A. It is also envisgaed that the
 authorities under Part 26 (SOA) may, where appropriate, assist the court in
deciding how to exercise its discretion under Part26A'
2. For the scheme- the companny is free to decide creditros whom it wants to
eneter into a plan with- no obligation with a plan to include all of the creditors-
can incdue some and exclude others- Re Hong Kong Airlines Ltd [2022]
EWHC 3210, [8])- Remaining 17million of debt outside of the plan was not an
issue to the court
 RP can only be used where company is 'likely to encounter financial difficulties
which may affect its ability to carry on business as a going concern'- does not have to
be insolvent but has to be in financial difficulty
1. SOA does not require financial difficulty and not only focused in insolvency
context
2. The purpose of the plan must be to “eliminate, reduce or prevent, or mitigate
the effect of any of the financial difficulties” (s.901A(3)(b)).
3. What constitutes as financial difficulty- the courts take a commercial approach
 RP process is the same as SOA process: Three Stages: Each with their own policy
goal (see notes on SOA)
1. (1) Apply to the Court for a meeting of Creditors
2. (2) Meeting of Creditors
3. (3) Apply again to sanction it

(1) Application to Court for Meetings

 Series of negotiations proceed this- Applications to the court to convene a meeting of

creditors or members can be made by the company, a creditor, a liquidator or an
administrator (s.901C (2) CA 2006)
 All creditors affected by proposed RP have right to the right to attend a meeting
(s.901C(3) CA 2006) but those with “no genuine economic interest” in the company
can be excluded by the court (s.901C(4) CA 2006)
 All those attending a meeting must be given a statement explaining the effect of the
proposed RP
1. The statement must also set out any material interests that the directors have in
the plan and the effects on those interests of the RP (in so far as the different
from the effects on other creditors or members) (s.901D(1) & (2) CA 2006).
 When creditors in meeting of classes- should approve the plan- however the approval
rules in RP is different in SOA: 75% of value in creditors (compare to SOA where it
was 75% in number too)- single rule in RP than double majority rule

(2) Court Sanction for the RP

 An application for approval of a plan may be made by the company, a creditor, a

liquidator or an administrator (s.901F(3) CA 2006).
 An RP sanctioned by the court is binding “on all creditors or the class of creditors or
on the members or class of members (as the case may be), and, on the company or, in
the case of a company in the course of being wound up, the liquidator and
contributories of the company.” (s 901F (5) CA 2006)
Cross class Cramdowns

 The introduction of the CCC marks shift towards pro-debtor approach than previously
was the case- which raises a minority creditor issue
 In SOA- dividing creditors into classes with simialr interests- not sufficent minority
protection- key risk is undesirable wealth transfer/abuse in groups through using CCC
 Court faced with CCC application will have to desire if the scheme is desirabel or
whether it is the best commercial option that affects the minority- enhanced need for
minority protection- however the whole set-up recognizes that some groups will have
to be crammed down
 Approach in RP is different to EU and US insolvency plans- in EU Restructuring
Directive- the way balance is approached focuses on questions of relative priority-
seeks to protect the relative value of the interest of the cramdown class- class
cramdown- relative values of the group than those who go below them
a. US- dissenting class cramdown against its will should be paid fully before
lower ranking group is paid- absolute priority approach- fully paid before
anyone below gets paid anything
 RP in UK takes different approach- focuses on issue of whtehr members of dissenting
class will be worse off in event of the plan compared to what they would be under
relevant alternatives- 'no worse off' principle when comes to protecting minority
 No worse off principle- Section 901G CA 2006 provides that 'the court may sanction
an RP where a class has not voted to approve the plan if two conditions are met
(s.901G(2)). Those conditions, set out in s. 901G (3) & (5), are:
A. “That the court is satisfied that, if the compromise or arrangement were to
be sanctioned under s.901F, none of the members of the dissenting class
would be any worse off than they would be in the event of the relevant
alternative” (Cramdown class not consenting no worse off than under
relevant alternative)
B. “That the compromise or arrangement has been agreed by a number
representing 75% in value of a class of creditors or (as the case may be) of
members, present and voting either in person or by proxy at the meeting
summoned under s.901C, who would receive a payment, or have a genuine
economic interest in the company, in the event of the relevant alternative.”
 The 'relevant alternative'- concerns what court considers hwat is most likely to occur
if the compromise is not sanctioned- can be a range of things that can happen to a
company
1. The test is one of the ‘balance of probabilities’ (Re Amicus Finance Plc [2021]
EWHC 3036)- Debt restructuring- class challenged exercise of court's
discretion- Court said that what the relevant alternative would be on the
'balance of probabilities'- ie most likely outcome that follows if the RP not
approved
2. In a SOA- courts reluctant to depart from views of creditors expressed in teh
vote of their class meeting- under SOA strong deference to views expressed by
creditors- cannot have same approach in RP as requried to override wishes of
one or more creditors- approach differs
3. Courts will be looking to issues of valuation- is the best value secured through
restructuring plan v next alternative- therefore flexible and commercially
driven test- does draw court into commercial decision making in which they
may not be best to determine- will place reliance on evidence presented to them
 4. Re Virgin Active Holdings Ltd, Virgin Active Ltd and Virgin Active Health
Clubs Ltd [2021] EWHC 1246- Conercned companies in Virgin Active group,
RP was to enable the companies to continue in existence and trade profitability
by reducing unsecured debt in company. Plan included eliminating arreasr
owed to landlords in different contexts- in retrun Landlords will be paid a feee
but still lose out of dislaiming a lease. Other landlords would not lose out as
they would keep their full claims, others crammed out. Possibility that if the
plan succeeded, shares increase and benefit shareholders. One group of
landlords did not sgree to the plan and cross-class cramdown was sort
i. Dissenting Landlords argued that not fair if shareholders enjoy benefits
of the plan- argued shareholders should be lower down in insolvency
situation getting higher benefits, as lower down in creditor priority
(relevant in EU and US contexts)
ii. Court said that the company contended that relevant alternative scenario
that must be assessed would be administration followed by a sale-
therefore the RP argued more favorable- saying no worse than what
would happen if there was administration/rapid sale
iii. Court noted that the importance of protecting dissenting creditors- but
was careful not to undermine point of Part 26 which was to allow cross-
class cramdown
iv. On facts, court determined that no worse off principle was satisfied- no
evidence before the court to suggest that the valuations were inaccurate
or unreasonable- no evidence that the cramdown landlords would get no
more in administration scenario- were not secured so could get left
behind to a pre-pack administration. Landlords left with claim against
insolvent company- would not get any more under that process
v. Court reiterated that the Landlords were out of the money anyway-
creditors with remaining economic interests in the company to decide
the restructuring process- creditor out of the money anyway cannot hold
up the RP/process
 Re DeepOcean 1 UK Ltd [2021] BCC 483- 'No worse off' broad concept that takes
into acocunt impact of the liability to the creditor, with reference to anticipated returns
to the company- therefore broad test looking to the plan of the company
1. Noted in principle that it would not be a sufficient objection to. a plan if you
treat creditors with no economic interest in a different manner
 Court will look at two factors for no-worse off principle- Court will look at:
1. Whether the proposed compromise with assenting class is a real compromise or
whether it is a manipulation of classes- so privileging one over the other
2. Is the dissenting class recieving a share of the enterprise value which is
proportionate to the compromise that other groups are taking- however this can
be contentious but two questions are related
 Re Hurricane Energy- Court did not feel that the conditions for a CCC were met-
court refsued to sanction scheme which would have effect of dissenting shareholders
with small interest in company where realistic possibility that in the medium term the
company may recover
1. Relevant alternative was more beneficial to the CCC proposed- Hurricane was
oil company and raised 230m dollars in covertiable bonds to finance exporation
of new area. Maturity 5 years after they were issued- company disovered that
oil-wells were significantly less porfitable than they thought- would be able to
pay interest on bonds but not enough to pay bonds in full on maturity date
 2. The company proposed restructuring plan- extending the maturity and reduce
capital to 230m to 50m so bondholders take significant hit but would issue new
shares ion the company- debt for equity swap. Shareholders, existing
shareholders- had 100% previously to 5% equity- plan opposed by numerous
shareholders
3. Court looked at relevant alternative- plan was not providing benefits to
shareholders- value never going to recover for shareholders. Court found that
realistic prospect that company might return to profitable trading- could meet
obligations to bondholders and on the basis there is a rleevant reaosnable
alternative- ie company carries on- cannot argue that the dissenting class would
be no worse off- as they would retain 100% of their ownership and carry on
trading- no worse off test not met so refused to sanction proposed restructuring-
showing that it is a commercial issue
 No worse off is very subjective- subjectively that the creditor dissenting will always
feel as if they are worse off- open ended and requires courts to make commercial
judgements
 Re Houst Ltd [2022] EWHC 1941- Company was property management company
involved in short term holiday lets- business impacted by pandemic- evidence was
that company was cash flow and balance sheet insolvent
1. Proposed RP where returns to solvency as means to capital injection and
writing down certain debts- key creditors involved were bank, bondholder and
company connected creditor- various liabilities to customers/employees- which
would be paid in full
2. Relevant alternative was likely pre-pack administration- HMRC opposed the
planned restructuring- as a result it was not approved by the majority- it applie
for the Court for CCC to help sanction plan
3. No worse off principle- court accepted that under the plan HMRC would get
20% return, but in Prepack at 15%. HMRC reason for opposing plan was
strange- not willing to compromise as being a secondary secured creditor,
accepted that they would be better off under the plan but opposed it anyway

Restructuring Moratorium

 Designed to address issues/hold ups derailing negotiated restructuring deals- therefore

provide breathing space for creditors of financially distressed companies to allow for
a restructuring deal
 The rules applicable to the moratorium are set out in Part 1A Insolvency Act 1986.
 Directors remain in charge of company- continue running company but subject to
appointment of monitor to oversee the moratorium
 This is a free standing moratorium- not linked to an insolvency procedure- however
the RM will often be linked to an insolvency based concept- ie RM for a scheme,
CVA or RP- or a negotiated settlement with creditors outside of insolvency
 RM has similar scope to administration moratorium- prevents enforcement of
security, commencement of winding up proceedings or any other proceeding to
prevent rescue
 Where no restructuring deal to be done, genuine requirement- companies cannot use
the moratorium, if the company is already subject to formal insolvency procedure-
cannot apply for the moratorium
 Two routes to applying for a RM
 1. Out of Court- The moratorium is available out of court by the directors filling
relevant documents with the court provided the company is not subject to a
winding up petition or an overseas company (s.A3 IA 1986)- relevant
documents:
a. (a) a notice that the directors wish to obtain a moratorium,
b. (c) a statement from the proposed monitor that the company is an eligible
company,
c. (d) a statement from the directors that, in their view, the company is, or is
likely to become, unable to pay its debts, and
2. In respect of Court- The court may grant a moratorium to a company that is
subject to a winding up application (s.A4 IA 1986)- Court will only approve if
satisfied moratorium will lead to better result for creditors than if it was wound
up
 The moratorium lasts for 20 days initially (s.A9(2) IA 1986) but can be extended by
the directors without creditor consent for a further 20 days (s. A10 IA 1986) or, for a
longer period, with creditor consent (s. A11 IA 1986), or by the court on an application
by the directors (s.A12 IA 1986).
 The moratorium can be ended by the monitor (s.A38 IA 1986), by the Court (s.A42 &
A44 IA 1986) or by the company entering into an insolvency procedure or the coming
into force of a compromise or arrangement between the company and its creditors (s
A16 IA 1986).
 Monitor must certify that purpose of moratorium can still be achieved- if cannot be
achieved then moratorium ends
 The monitor role is to oversee the moratorium and that it is used in the correct manner
and not being abused- directors left in charge therefore need to best run the company
but still need to keep in check of self intrest restructuring deals
1. The primary duty is to monitor the affairs of the company during the moratorium
period and form a view as to whether a rescue of the company remains likely
(s.A35 IA 1986).
2. Monitor must file to the court to end the moratorium under specific cases- see
handout

Effect of the Moratorium

 The effects of the moratorium are similar to the administration moratorium and the
relevant legal provisions are set out in very similar, if not the same, language as we
have seen in Sched B1- see , s.A21 IA 1986 (Restrictions on enforcement and Legal
Proceedings) and para 43 (Sched B1 IA 1986)
 As similar language- the case law relating to application to administration moratorium
can be applied
 A company subject to the moratorium also obtains a ‘payment holiday’ in respect of
pre-moratorium debts, but certain debts are excluded. These are (s A18(3) IA 1986):
(See Handout)