Part 1 (A) – Introduction
When a judge disregards creditor arguments and approves a borrower’s restructuring plan, provided it is fair and transparent, this is referred to as a “cram down.” If a court approves the reorganization plan but not the conditions, the court may compel creditors to accept the terms.
For many years, firms in the United States and the United Kingdom have used company voluntary arrangements (CVAs) under the English Insolvency Act 1986, as well as Chapter 11 bankruptcy proceedings in the United States and the United Kingdom, to reorganize debt payments. It was announced on June 26, 2020, that the Corporation Bankruptcy and Governing Act 2020 (the UK Act) would come into effect, bringing the most major improvements to UK bankruptcy law in more than a decade. (Mokal, 2020) The UK Act makes changes to the country’s bankruptcy and restructuring legislation, both in the long and short term.
Chapter 11 bankruptcy is an extremely effective strategy for resolving the debts of failing businesses. The broad effective system allows for breathing room while a debtor drafts a new reorganization proposal, and the ability to pack disputing classes of lenders together with planning authorization means that reorganizations can proceed even when impacted creditor classes disagree on everything. Finally, the United States Bankruptcy Court’s expansive jurisdiction implies that identical proceedings apply to non-US businesses, even those with only a tangential connection to the United States. (Payne, 2018) Non-US governments have reassessed their bankruptcy laws in light of Chapter 11’s widespread success in avoiding liquidation and encouraging major restructurings that protect value and jobs, and they desire to emulate some of Chapter 11’s best features.
Prior to the adoption of the UK Act, the absence of a cross-class cram-down strategy was generally viewed as a shortcoming of the UK reorganization toolbox. As a result, a number of effective arrangements have been devised, the most famous of which being the combination of a plan and “pre-packaged” administration in order to achieve a senior creditor-led reorganization despite non-shareholder participation. If such systems are in existence, any restructuring will be more expensive. In many ways, the new “restructuring plan,” which the UK Act added to the Companies Act 2006 through the addition of a new section, is similar to Chapter 11, but there are important differences.
Part 1 (B) – The US regime Cramdown
An official procedure that allows debtors and creditors to collaborate in order to design a reorganization plan to solve the debtor’s financial troubles, Chapter 11 bankruptcy, is defined as follows: Therefore, the fundamental goal of Chapter 11 is to restructure the borrower’s debt in order to construct a financially viable economic framework for the borrower. Instead of the assets of the debtor being liquidated, Chapter 11 does not require them to be liquidated. A restructuring of current assets, the vast majority of which are in the form of debt, is what this is, more or less. (Mokal, 2020) The chapter 11 plan that has been approved becomes a legally binding contract that governs both the borrowers and lenders’ rights and responsibilities.
A Chapter 11 reorganization is predicated on the assumption that a debtor’s worth as an operational business outweighs the debtor’s worth as a liquidation entity (i.e., through a Chapter 7 bankruptcy). Consequently, chapter 11 bankruptcy is frequently used when the continuing of a debtor’s business is more valuable than the liquidation and piecemeal sale of the debtor’s assets. This is most common when the debtor’s financial issues are triggered by transient circumstances such as weak cash flow or diminishing demand, as opposed to long-term circumstances. A bankruptcy court will only approve the plan under Chapter 11 if creditors believe they would receive at least as much money in liquidation as they would under the plan. Even if an opposing category votes against it, a Chapter 11 cram-down validates the concept of organization. (Payne, 2018) The proposal is “fair and equitable” if it receives support from at least one inhibited class, does not segregate, and meets all other confirmation requirements.
When it comes to “fair and equal” treatment in the eyes of the court, the United States Bankruptcy Code explains what that means; in principle, a plan is considered fair and equitable to a class of dissident creditors if it does the following:
“Secured lenders, if (1) the holders of these claims keep the liens safeguarding their claims (if the debtor keeps or transfers the collateral), and (b) every bearer of an assertion in the category obtains deferred payments made equal to the legal amount of such secured claims, or (2) liens are connected to the proceeds of any sale made completely free of liens, or (3) the plan allows secured creditors to recognize their claim’s “incontrovertible equal.”
Debt holders if (1) each member of the class obtains or retains property equal to their permitted claim, or (2) no junior class of lenders or equitable receives an allocation under the plan (the “absolute top concern” criterion); or (2) if either (1) any authorized fixed liquidation preferences are deducted from dividends, or (2) no younger equity categories maintain an interest or receive a payout under the plan (the “absolute priority” criterion).
Part 2(A) – The UK regime Cramdown
The new method’s cross-class cramdown mechanics will limit the ability of “holdout” or “ransom” lenders to sabotage a real reform proposal supported by the majority of lenders with a financial stake in a company. (Payne, 2018) Additionally, it facilitates shareholding adjustments without the approval of affected shareholders as part of a restructuring program.
Classes that disagree may be combined only if the “relevant alternative” will leave them worse off. If the restructuring plan is not approved, the “relevant alternative” is defined as whatever the court determines is the corporation’s most likely outcome. Again, this gives substantial discretion to the court in defining the threshold for evaluating the “no worse off” test. (Mokal, 2020) However, we believe that the applicable comparator technique that courts have used to evaluate the class composition of schemes will serve as a starting point. This will bring the concept of valuation back into the debate.
Under the UK restructuring plan, a settlement or solution must be provided between the corporation and its creditors or shareholders. Additionally, the restructuring strategy enables both “out of the money” and “in the money” borrowings to be restructured inside the existing business structure without requiring a pre-packaged administration sale of the firm and/or subsidiaries. Even if no one in the class approves of the idea, If all of the following conditions are met, the court may grant approval: According to the court’s findings, no member of the disagreeing classes will be worse off and off underneath the plan than they would have been if the appropriate option had occurred and the strategy had been approved by a large percentage of creditors or (as applicable) representatives present and voting (in person or over the phone) who would receive the money or have a real economic interest in the company if indeed the applicable solution occurred, according to the court’s findings.
If the restructuring plan is not accepted by the court, the term “relevant alternative” refers to the worst-case situation again for the company and its shareholders. The courts have the authority to make this decision, and it is expected that the appropriate comparator test used to analyze group makeup in schemes of organization will be a good place to start.
If the grounds for granting a cram-down plan are met, a court may sanction a cram-down plan that is backed by a minor group of creditors but rejected by a senior class of lenders. (Mokal, 2020) As previously stated, the high ranking class is also safeguarded due to judicial scrutiny of the plan’s fairness to determine whether the seniors group will receive value that is equivalent to or better than what they might have earned under the proper option.
Part 2(B) – Evaluation
In a Chapter 11 case, when a petition is filed in bankruptcy proceedings, the insolvency court gains extensive authority over the creditor, as well as over the properties and obligations of the corporation. In addition to normal asset dispositions, the accrual of post-petition loans, the provision of additional security, and the creation and adoption of a strategy all require the approval of the insolvency court.
In the majority of Chapter 11 cases, the debtor submits a reorganization (or, in some circumstances, liquidation) plan to the court, which approves it, so allowing the bankrupt’s rights and interests to be settled and discharged. The bankruptcy court will assess whether a reorganization plan is legal, practicable, reasonable, in good faith, and fair and equitable to dissident creditor groupings while evaluating it.
When a debtor applies for Chapter 11, the “automatic stay” kicks in, preventing creditors from taking any action against the debtor or his or her property, regardless of where it is located (the so-called “extraterritorial effect” of Chapter 11). For example, the debtor or its creditors can file a Chapter 11 petition. The debtor has the exclusive right to propose a reconstruction plan for the first 120 days of the case, which the court may extend for up to 18 months if necessary (or shorten for cause). (Payne, 2018) A competing plan may not be filed during the exclusivity period. If the debtor fails to submit a plan before the exclusivity period expires, any interested party (including the debtor) may do so, with the court deciding which one is best.
Chapter 11 eligibility requirements are well-established and strictly enforced, and they apply to businesses with a US domicile, a US place of business, or a US property (even of negligible value). Indeed, this standard has been decreased to the point that simply maintaining a bank account in the United States satisfies the requirement for establishing jurisdiction over a foreign debtor. (Mokal, 2020) On the other hand, bankruptcy courts are constrained in their authority. Domestic banks and insurance corporations in the United States are often ineligible to be debtors under the US Bankruptcy Code due to increased federal and state monitoring.
A debtor does not need to be insolvent or meet any other criteria before filing a unilateral complaint under the U.S.Bankruptcy Code. In order to sue the debtor involuntarily, creditors must meet a number of criteria. At least two or three lenders must file an involuntary petition if the debtor has 12 or more creditors. Additionally, these three creditors must have claims against the borrower totaling at least USD 15,765 that are greater than any lien on the debtor’s property, and the claims must be founded on responsibility and cannot be the subject of genuine dispute regarding obligation or quantity. (Payne, 2018)Lastly, the petitioning lenders must demonstrate that the borrower is unable to repay its debts as they mature, a condition referred to as “cash-flow insolvency.”
A firm, its creditors, or its members in the United Kingdom may propose a restructuring plan without going to court under the terms of the UK Act. In the United Kingdom, on the other hand, the approval processes for restructuring plans are judicially assessed, and twice, court proceedings are required as part of the permitting process. During the initial court hearing, the judge must approve the course design and the scheduling of reorganization plan sessions. If a majority of creditors or members approve the plan at the requisite meetings, the court will determine whether authorizing the plan is a proper exercise of its authority during the subsequent court case. The court will determine if the creditors’ and members’ classes were properly defined, whether the court is authorized to adopt the plan, and whether it is reasonable. Once adopted, the plan becomes enforceable against all creditors and members, regardless of whether they voted individually or collectively. While the breadth of a restructuring plan is frequently vast, unlike a scheme of arrangement, which can be offered by either a financially suffering or financially sound business, a restructuring plan must satisfy certain financial hardship criteria. To commence, the business must have encountered or be likely to encounter financial difficulties that jeopardize its ability to continue as a going concern. Second, the plan must present a compromise or agreement between the firm and its creditors or members in order to settle, ease, avert, or minimize the company’s financial difficulties (or any class of either). As long as those conditions are followed, the new restructuring plan may be used to reorganize the debtor’s liabilities.
After all is said and done, the restructuring plan for the United Kingdom Act is a great addition to the international reorganization environment. As shown by a side-by-side comparison of minor and major differences between Chapter 11 and the UK transformation strategy, the minor and major differences appear to indicate that if parties are familiar with the procedures, there may be compelling reasons why the UK restructuring plan works when Chapter 11 does not, and vice versa. (Mokal, 2020) This may not become apparent until the rebuilding process for the United Kingdom Act gets underway. The decision on which venue is most appropriate for debtors and creditors will be made in the next few months and years. They will need to consult with legal specialists who can help them think through and assess the advantages and disadvantages of each of these possibilities.
Bibliography
Books
Miller Jr, W. W. (1982). Bankruptcy Code Cramdown under Chapter 11: New Threat to Shareholder Interests. BUL Rev., 62, 1059.
Klee, K. N. (1979). All you ever wanted to know about cram down under the new bankruptcy code. Am. Bankr. LJ, 53, 133.
Broude, R. F. (1984). Cramdown and Chapter 11 of the Bankruptcy Code: The settlement imperative. The Business Lawyer, 441-454.
Journals
Mokal, R. (2020). The Court’s Discretion in Relation to the Part 26A Cram Down.
Payne, J. (2018). The role of the court in debt restructuring. The Cambridge Law Journal, 77(1), 124-150.
Mokal, R. (2020). The Two Conditions for the Part 26A Cram Down.
Reviews Papers
Payne, J. (2018). Debt Restructuring in the UK. European Company and Financial Law Review, 15(3), 449-471.
Bolton, P. (2003). Toward a statutory approach to sovereign debt restructuring: lessons from corporate bankruptcy practice around the world. IMF Staff papers, 50(1), 41-71.
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