Creditor-led restructuring plans: Leeds leads the way

Terms of the Plan

NGI acted as the agent of a group of existing shareholders of GoodBox, defined in the Plan as the “Rescue Funders”. The Rescue Funders are a series of high net worth individuals who provided c.£800,000 of funding to finance the costs of the Plan together with indemnifying trading losses of GoodBox during its trading administration. The Rescue Funders also agreed to make a debt facility available to the Company post-sanctioning to allow it to continue to trade and to pay certain trade and administration creditors under the Plan (as discussed below).

Under the terms of the Plan, the Rescue Funders’ funding was converted into an 85% shareholding in GoodBox (pro rata to their contribution to the underlying funding).

The Plan contained four key classes of stakeholders:

1. The Convertible Loan Holders

In 2021, GoodBox participated in a round of the Government-backed “Future Funding” scheme. The Future Funding scheme was set up in the aftermath of the COVID-19 pandemic to support investment into British businesses. In effect, the British Business Bank agreed to invest into potentially high-growth companies on the proviso that its investment was matched by an independent investor. In the case of GoodBox, the British Business Bank invested alongside Q Invest Limited. The debt funding provided by British Business Bank and Q Invest was convertible to shares on the occurrence of certain events (an exit, listing or substantial equity raise).

Under the terms of the Plan, the debts owing to each of the Convertible Loan Holders would be adjudicated by the independent Plan Administrators and, subject to the outcome of that adjudication, converted into shares in GoodBox. The total equity allotted to the Convertible Loan Holders is up to 14% of the equity in GoodBox.

2. Trade Creditors

The Plan allowed for all trade creditors of GoodBox (as at the date of the stakeholder meeting(s) to consider the Plan) to be paid in full within 6 months of the sanctioning of the Plan, subject to adjudication of each creditor’s claims by the independent Plan Administrators.

3. Administration Expense Creditors

The Plan also allowed for full payment of any claims which would rank as expense claims in the administration of GoodBox pursuant to Schedule B1 of the Insolvency Act 1986. Again, any claims would be paid within 6 months, subject to adjudication by the independent Plan Administrators.

4. Historic Shareholders

All existing members of GoodBox would retain an equity interest in the company, sharing 1% of the equity in the restructured company pro rata to their previous shareholding.

As part of the implementation of the Plan, in addition to the debt facility provided by the Rescue Funders, the company would adopt new articles of association and put in place a new shareholders agreement. GoodBox’s corporate governance had been stymied by entrenched provisions in the company’s articles, a breakdown in relationships between senior management and shareholders and a lack of engagement by other members. The new articles and shareholders agreement implemented as part of the Plan aim to make the decision making and operations of GoodBox more efficient and effective.

The Plan Meetings

NGI’s application to convene meetings of stakeholders to consider and vote on the proposed Plan was filed in the Leeds High Court and heard by His Honour Judge Davis-White KC (HHJ Davis-White) on 21 December 2022. At that hearing HHJ Davis-White KC ordered meetings of stakeholders to be convened on 10 January 2023, 11 Business Days after the hearing. This represents one of the shortest periods between a convening hearing and plan meetings in any proposed Part 26A restructuring plan. In allowing this short timetable the Court had in mind the following factors:

1. GoodBox was continuing to trade at a loss, with the Administrators also continuing to accrue fees/costs and the costs associated with the Plan also rising. The Rescue Funders had put in place significant funding to facilitate the proposal of the Plan and support GoodBox through its administration but funding was stretched and could not continue indefinitely.
2. Since the company’s entry into administration, NGI had sought to engage with key parties interested in the Plan; in particular, the FCA and Convertible Loan Holders. Those key parties were kept up-to-date with developments as to the formulation of the Plan (and the ongoing administration) and were invited to discuss the Plan with NGI. The Court was satisfied that given the ongoing dialogue with the various stakeholder classes, there would not be prejudice to them in convening the meetings at short notice.
3. No stakeholder attended the convening hearing nor submitted any representations to the Court in respect of the proposed timing of the meetings. The proposed timetable to the sanctioning of the Plan had been clearly set out in Practice Statement Letters preceding the convening hearing.

The meetings were held at the offices of the proposed Plan Administrators on a hybrid basis to allow overseas creditors and members to participate via Teams. At the meetings the requisite majorities of Trade Creditors, Administration Creditors and Historic Shareholder classes voted for the Plan, with the Convertible Loan Holders voting against (only the British Business Bank and a minority creditor voted).  Despite representing to the Court that they were neutral as to the outcome of the Plan, the Administrators in fact voted against it in their capacity as Administration Creditors (see below).

Sanctioning of the Plan

Because the Convertible Loan Holders voted against the Plan, the Court was required to determine whether it was appropriate to utilise the cross-class cram down provisions of Part 26A. In order to do so, the Court had to consider what the “relevant alternative” to the sanctioning of the Plan would be. The Administrators submitted to the Court that, owing to the cash position of the company and continued trading losses, if the Plan were not sanctioned then the business and assets of GoodBox would need to be immediately sold. The Administrators had received an offer of £375,000 for the business and assets and therefore that sale was the most likely “relevant alternative” to the Plan being sanctioned.  The Administrators also referred the Court to potential value in intellectual property rights that were proposed to be excluded from the sale, but were unable to provide the Court with any evidence of its value.

The funding provided by the Rescue Funders was secured by way of a debenture in favour of NGI (as security agent). If the business and assets of GoodBox were sold for £375,000 then the entire of the sale proceeds would be applied to satisfy NGI’s debt and/or other administration expense creditors. Therefore, the Convertible Loan Holders were in no worse a position under the terms of the Plan, where they would receive shares which stood to increase in value, versus the “relevant alternative” in which they would have an unsecured claim in the administration of GoodBox but the Administrators were unlikely to be able to realise any other value for creditors. This, combined with the fact that the remaining classes of stakeholders voted in favour of the Plan, led the Court to utilise the cross-class cram down to sanction the Plan.

HHJ Davis-White found that consent of the company was required under Part 26A. However, the Judge determined that he could apply the Court’s discretion to direct the Administrators to consent to the sanctioning of the Plan. This is discussed in further detail below.

Key thoughts

The fact that GoodBox was in administration, the FCA-regulated nature of the business and the need to utilise the cross-class cram down all added complexity to the Plan. However, the most significant legal and practical points to have arisen from the Plan are:

1. The first creditor-led plan

The Plan was the first time a creditor has proposed a successful Part 26A restructuring plan. In fact, it also appears that no creditor-led scheme of arrangement has been successfully sanctioned to date.

There were several practical reasons why the Plan was proposed by NGI, rather than the Administrators. The Administrators’ position was that they did not have the necessary funding to successfully implement a restructuring plan. NGI’s view was that the Plan would restructure the balance sheet and resolve the structural issues which were preventing the business from obtaining the equity financing it needed to successfully grow. It was determined that this could be achieved to greater effect through a restructure of the existing GoodBox entity, rather than a pre-pack sale of the assets of the company to a new SPV.

Whether a creditor-led restructuring plan will be appropriate in other cases will be highly fact sensitive.

In cases where the company is not already in administration, it may be challenging, particularly for unsecured creditors. They are unlikely to have sufficient financial information to put forward a credible plan which, if it involves a cross-class cram down, will need detail on the relevant alternative. From a financial perspective, given the uncertainty of outcome, proposing a plan may also be seen as throwing good money after bad if the company in question were to ultimately collapse into insolvency in any event.  Finally, there are also debtor consent issues to consider (see below).

In most cases where the company is in administration, we would expect the restructuring plan to be proposed by the insolvency office holder, rather than creditors, although to the extent creditor funding is required, it may be a combination of the two.

It will be interesting to observe going forward whether Part 26A can further develop into a useful “tool” in the arsenal of creditors of distressed businesses, particularly in circumstances where relations between stakeholders and insolvency office holders have become strained and no clear resolution can be agreed upon.  In these circumstances, we could see disgruntled creditors putting forward restructuring plans as an alternative to the office holders’ proposals.  In this regard, it should be noted that in GoodBox, the Administrators confirmed at the convening hearing that to the extent consent was required under paragraph 43(6) of Schedule B1 to the Insolvency Act 1986, they would give it.  HHJ Davis-White confirmed his view that as a restructuring plan involves a Court application against a company in administration, the administration moratorium would apply, but the point was not argued.

2. Expedited timetable

There were 11 Business Days between the order for the convening of meetings of stakeholders and the meetings taking place. There were 3 further Business Days to sanctioning of the Plan. This appears to be the shortest timetable seen under Part 26A to date. The rationale of HHJ Davis-White in agreeing such an expedited timetable was twofold: (1) all parties agreed that the business could not sustain its trading arrangement and that if there was no clear resolution in respect of the Plan in short order the business would need to be sold; and (2) NGI had been engaging with the most significant stakeholders of GoodBox for several months before the application to convene meetings was made. It could not be said that those stakeholders whose votes would carry the Plan were unaware of the terms being proposed or had not had ample opportunity to raise concerns directly with NGI or the Administrators.

As noted above, hybrid meetings were used to allow stakeholders to vote on the Plan. This was primarily because of a number of stakeholders being based overseas and the meetings taking place so soon over the festive holiday period. Whilst hybrid meetings should not be seen as a “default” position for plan meetings, the case of GoodBox further demonstrates the Court’s willingness to permit the use of technology to allow engagement by stakeholders and as a possible avenue to expedite proceedings where there is a justification for doing so.

This is a further case confirming that any party proposing a restructuring plan should be open in its dialogue with stakeholders (whether they are supportive of the plan or not) and, as soon as practicable, identifies those stakeholders whose engagement is critical to the success of a restructuring plan.

3. Lack of company consent

The Plan carried with it certain commercial risks due to the uncertainty of continued relationships with suppliers and the future FCA regulation of the business. These risks were articulated to stakeholders in the Explanatory Statement sent in advance of the plan meetings. The Administrators purportedly took a neutral stance during the proceedings but submitted that because of these commercial risks, they were unable to support the Plan. It should also be noted that the Administrators voted against the Plan as a member of the Administration Creditor class (in respect of their unpaid remuneration).

The Administrators submitted that the Plan could not be sanctioned without the consent of the company. In the case of GoodBox, that consent could only be given by the Administrators themselves as the powers of the directors had been suspended upon the Administrators’ appointment. The Administrators, despite their apparent neutral stance, did not give that consent on behalf of GoodBox. The Administrators relied on Re Savoy Hotels Ltd and argued that the wording of Part 26 (as it applies to schemes of arrangement) and Part 26A are so similar that Parliament must have intended their effects to be the same as they apply to the company in question and that therefore consent of the company was required before a plan could be sanctioned. HHJ Davis-White considered two points in this regard: (1) can any distinction be drawn between Part 26 and Part 26A such that a restructuring plan could be sanctioned without consent of the company; (2) if it can’t then could the Court, exercising its discretion, direct the Administrators to give consent?

Applying Re Savoy Hotel Ltd, HHJ Davis-White found that consent of the company was required to sanction a restructuring plan. The wording of Part 26A is analogous to Part 26 and the similarity in the drafting was taken to be intentional by Parliament. Therefore, to suggest that consent of the company was not required under Part 26A or that the Court has a general discretion to direct companies to consent to a restructuring plan risked undermining the established case law applicable to schemes of arrangement.

However, in the specific circumstances, the HHJ Davis-White was willing to direct the Administrators, as officers of the Court, to give consent on behalf of GoodBox to the sanctioning of the Plan. The Administrators had been clear that they were willing to act on any such direction. In making the direction HHJ Davis-White stated that the Administrators “had not identified any other interest of [GoodBox] above and beyond those of its shareholders and creditors, all of whom [are] protected and considered under the terms of the [Plan]”. This, in the view of HHJ Davis-White, meant that there was no interests remaining to be protected which might justify the Administrators refusing to give consent for GoodBox.

Given the clear judgment that Re Savoy Hotel Ltd cannot be circumnavigated by the use of a restructuring plan, it is difficult to see how a restructuring plan could be sanctioned without the consent of a solvent company, acting by its directors. This may well continue to be a barrier to the sanction of creditor-led restructuring plans, in particular where the company is not subject to a formal insolvency procedure.

4. First restructuring plan sanctioned outside of London

This is the first instance of a restructuring plan being sanctioned in the regional Business and Property Courts.

The filing of the Plan in Leeds was integral to ensuring the expedited timetable was attained, due to the availability at the time of judges in Leeds versus the High Court in London. It is understandable that the initial ‘test cases’ for Part 26A were heard in London and the capital will likely remain the default seat for high-value restructuring plans in many cases. However, the successful sanctioning of this ground-breaking plan shows the regional Business and Property Courts are willing and able to hear applications for restructuring plans. Given the potential costs savings of using regional advisers in regional Courts and the ever-increasing backlogs within the Court system it can be hoped that more practitioners and stakeholders will consider the use of the regional Courts in restructuring plans, as their proposal and implementation continues to become more widespread.

5. Office Holder considerations

Shortly after the application to convene the meetings to consider the Plan was filed the Administrators filed an application for directions that they be at liberty to pursue the alternative sale. This application was made on short notice with very limited evidence filed in support. The Administrators’ application was initially adjourned to allow the Plan to be progressed and it was ultimately dismissed upon the Plan being sanctioned, with adverse costs consequences for the Administrators. Any future office holder considering making an application to pursue an alternative route from that proposed under any restructuring plan should consider the potential costs consequences if the application is not successful.

Even if they do not wish to pursue an alternative, careful consideration should be given to the position the office holders wish to take on any creditor proposal for a restructuring plan. If the office holders support (or simply consent) to the plan and it provides for a cross class cram down, could this expose them to potential claims from the stakeholders crammed down, on the basis they have not been treated fairly? Here, office holders will need to carefully balance their responsibilities to pursue the statutory objectives against their duties to perform their function for the benefit of creditors “as a whole”.  The Court generally expects its office holders to exercise commercial judgment and provided all relevant evidence is before the Court at the convening and sanction hearings, an additional directions application by office holders might be considered unnecessary. Aggrieved creditors would, of course, have the right to make representations at the convening and sanctioning hearing. In the case of GoodBox, the Court was prepared to give a direction to the Administrators, but identified procedural defects in the Administrators’ approach and HHJ Davis-White made it clear that normally, he would expect there to be a formal application with proper evidence and the absence of the same “is likely to be fatal in most if not all cases”.

Finally, whether or not the plan is proposed by a creditor, the possibility of a company in administration being returned to solvency through a restructuring plan may bring back into focus the primary statutory objective, being a rescue of the company as a going concern.  Whilst GoodBox relied on creditors to fund the expenses of the Plan, there will be other cases where there is cash available to administrators to trade a company in administration for a short time whilst the administrators pursue a restructuring plan, which may result in a better outcome for the stakeholders as a whole than the relevant alternative. The GoodBox restructuring plan has demonstrated that the process can be completed in an accelerated timetable where there is a genuine urgency to do so.  It has also demonstrated that office holders need to be careful should they seek to pursue an alternative that would not rescue the company and where there is a viable proposal for a restructuring plan (or another mechanism such as a scheme of arrangement or CVA) that would.