What is Part 26A?
Part 26A was introduced into the Companies Act 2006 by the Corporate Insolvency and Governance Act 2020 (“CIGA”). The provisions, commonly known as “Part 26A Restructuring”, set out a scheme which enables companies in financial distress to enter into an arrangement with its creditors and/or its members with a view to carrying on business.
The procedure is only available to companies that have encountered or are likely to encounter financial difficulties likely to affect their ability to carry on business as a going concern. There is no statutory guidance as to the scope and extent of “financial difficulties” and this can in certain circumstances be given a broad interpretation.
In general terms, the requirement for approval of a Part 26A Restructuring plan is for a 75% majority in value of each voting class. The scheme benefits from a “cross-class cram down” which allows the Court to sanction the plan even if a dissenting group in a class of creditors or members results in the plan not being agreed by 75% in value of that class. This can be beneficial in circumstances where a large investor might be looking to act obstructively. In such circumstances, the Court must be satisfied that:
- None of the members of the dissenting class would be worse off than under the relevant alternative; and
- At least 75% by value of a class of creditor or members, which would receive a payment or have a genuine economic interest if the relevant alternative was pursued, had still voted in favour of the plan.
There is often an initial direction (“convening”) hearing at which the Court considers the various proposed voting classes of creditors and members and directs that a meeting of creditors or classes of creditors takes place (or members). If the requisite majorities are obtained at the meeting of creditors or members, at a further hearing the Court may exercise its discretion to sanction the plan. There is no additional requirement for a majority in number, which differs from an ordinary Scheme of Arrangement.
Re CB&I UK Ltd [2023] EWHC 2987 (Ch)
In this case a claim under Part 26A had been issued on 24 September 2023. A convening hearing took place on 28 September 2023 at which the Court ordered that the meeting be convened for the purposes of the proposed plan and that a sanction hearing was to be listed on an expedited basis in November 2023, with a time estimate of four days and one day of pre-reading.
A number of creditors of CB & I, who had appeared at the convening hearing, opposed the restructuring plan. One of these opposing creditors (Reficar), which claimed around $1 billion under an arbitration award, argued that it had not been given enough information about the proposed plan and was therefore not in a position to make submissions at the convening hearing, particularly as to the timetable that should be directed. It asserted that under the proposed plan it would receive virtually nothing.
As such, Reficar made an application to the Court to extend the length of the sanction hearing to afford it sufficient time to properly consider and explore the valuation evidence produced by the Company. This was resisted by CB & I on the basis that the restructuring was urgent.
Ultimately, the Court was persuaded to grant the application and extend the length of the sanction hearing from four to six days, even though this would result in the sanction hearing being adjourned for three months. In doing so, the Judge stated as follows:
- In matters of this nature elaborate and lengthy trials should be avoided, and the Court should be astute to the possible tactic of opposing creditors turning cases of this kind into an overelaborate procedure, which would effectively become unworkable.
- The above being said, the cramdown power introduced by Part 26A brings into sharper focus the valuation of distressed businesses and the relevant alternative to the restructuring plan going ahead.
- Accordingly, a balance needs to be struck between the above two points.
- As it stood, the impact of the proposed plan was that CB & I was seeking to effectively write off the debt that was owed to Reficar. In those circumstances, Reficar should be entitled to put its case forward and should be entitled to explore the proposed plan properly and fully.
- Counsel for Reficar had suggested a possible relevant alternative, which required careful consideration.
- As a consequence of the difficult issues and matters at stake, including complex points of valuation, a lengthier sanctions hearing was required,
- The Court rejected CB & I’s submissions that allowing timetables of such length in these types of applications would be a “death warrant” for Part 26A Restructuring Plans, which would enable creditors to kill off plans that needed to be approved urgently.
Our comment
The Judge in this case was quite clear to set out that the main basis for the Court revisiting the timetable was the fact that the parties were in a much better position at the hearing of the application to properly consider whether the length of the previously listed sanction hearing was sufficient. It held that fairness ran two ways, between a company wanting the plan to be approved urgently and an opposing creditor who would be impacted by the plan being approved. The court was also, naturally, alive to the significant value of the liability due to Reficar.
The decision may be of concern to companies looking to enter into Part 26A Restructuring Plans; however, given the number of intricate and complex issues to be determined in this case, it seems unlikely that it will open the flood gates for similar decisions in more straightforward matters. It also emphasises the importance of early engagement with creditors.
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