What is a Part 26A Restructuring Plan?

If your business is facing an insolvency or restructuring proposal, you may be a party to a Part 26A restructuring plan. Likewise, if you are a creditor to a company facing insolvency or restructuring, you may want to familiarise yourself with a Part 26A restructuring plan. This article will explain in simple terms what a Part 26A plan is and when it is relevant. 

Part 26A Plans

Part 26A Plans are a relatively new restructuring tool available to certain companies in England and Wales. The Plans are based on ‘schemes of arrangement’, which were, until recently, the predominant restructuring process available to a company and its creditors in England and Wales. However, to better understand a Part 26A plan, you may find it helpful to understand where it sits within England and Wales’s larger insolvency and restructuring regime. 

Restructuring vs Insolvency 

In plain terms, insolvency proceedings arise when a company is unlikely to continue trading. As a result, the directors or a court initiate a wind-up process that sells all the company’s assets to repay its creditors. Once the assets have been sold, the company ceases to exist. 

On the other hand, restructuring proceedings are available to companies that, according to the court or its creditors, have a chance of “continuing as a going concern.” That is to say, once the company can amend the terms of their existing debt and other financial liabilities, it can continue to trade. This allows creditors to exercise their rights against the company. Nevertheless, restructuring proceedings can still result in the court or its shareholders winding up the company. 

Part 26A Plans

Courts prefer creditors to work together to make a decision during restructuring proceedings. Hence, a Part 26A plan is a restructuring process that companies and their creditors can use to refinance and reorganise the company’s debts to continue trading. Additionally, a company and its creditors can use a Part 26A Plan to maximise the proceeds available to creditors if they must eventually wind-up the company. 

A court must sanction a Part 26A Plan. Therefore, the costs and fees associated with a Part 26A Plan are more extensive than other restructuring or refinancing options. 

Which Companies Are Eligible for Part 26A Plans?

A Part 26A plan is only available to companies seeking to reduce the ability of a company facing serious financial difficulty to “continue as a going concern”.

The law does not define financial difficulty. However, in practice, a company is in financial difficulty when it cannot meet its present or future debt obligations. 

What is the Process Under a Part 26A Plan?

A court must approve a Part 26A Plan to have any effect. Since a court is involved in the process, all parties involved in the Part 26A Plan must follow several formal steps. 

1. Initiate the Process

The parties who can apply to the court to initiate a Part 26A process include:

• the company via its directors; 
• the company’s shareholders; 
• any creditors, including any lenders or trade creditors; and
• any administrator or liquidator that has been appointed over the company.

2. Conduct a Convening Hearing 

If the court is satisfied with the application, it will notify all the relevant parties that it is convening a meeting. The court has the power to stay proceedings any creditors may initiate in the interim period before the convening hearing. If the court grants a stay order, creditors cannot try and start separate proceedings, such as a claim against the company or a winding-up petition. In this sense, the purpose of a stay is to expedite the restructuring process and maximise the outcome for all the stakeholders.

3. Class Composition and Negotiations

Different creditors will have different rights and interests. However, the law recognises that sometimes these rights and interests can diverge so much that the law should place creditors in separate classes when negotiating the outcome of a restructuring process. 

The court also has the power to restrict voting only to those creditors with a genuine economic interest in the company. This means that if there is no possible chance that the company can repay a class of creditors, the court can exclude them from the voting process. 

4. Sanctioning the Decision 

Each class of creditors must approve a proposed plan by 75%. The law measures the value of the creditor’s claim against the company as a portion of the total claims of all the creditors in that class. For instance, if creditors in a class each own 25% of the claim’s value, at least three creditors would need to vote for the plan.

If each class of creditors agrees to the process, the court can approve the Part 26A Plan. If the court approves the Part 26A Plan, it becomes legally binding on all parties. 

The court also has the power to force a class of creditors to agree to the terms of the Part 26A Plan, even if the class has not obtained 75% support. This is called a cross-class cram-down. The court can exercise this power if:

• the dissenting class would not be worse off under the terms of the Part 26A Plan than ‘in the alternative’; and
• at least one other class of creditors that stands to be repaid under the Plan’s terms approves the Plan. 

Key Takeaways 

Restructuring processes are complex and time-consuming processes. However, in many cases, if all the stakeholders can agree to and implement a restructuring process, they can rescue a company from insolvency. A Part 26A Plan is a relatively new form of restructuring proceedings. A creditor, shareholder, or appointed insolvency practitioner can apply to the court to initiate a Part 26A Plan if the company in question is adequately distressed. With the help of a court, the creditors can sort themselves by class. Provided 75% of each creditor class agrees to the Plan’s terms, the court has the power to make it legally binding on all parties involved.

If you need help restructuring your business, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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