Has HMRC made Part 26A Restructuring Plans viable for the SME market?

Introduced in the Corporate Insolvency and Governance Act (CIGA) 2020, Part 26A Restructuring Plans can be deployed by companies to avoid insolvency.

Laura Keegan, senior associate in our banking and restructuring team, explains more.

What are Part 26A Restructuring Plans? 

Part 26A Restructuring Plans were brought in without huge amounts of fanfare in June 2020. The basic premise was that greater flexibility needed to be afforded to companies looking to restructure their debts.

The existing regimes required either that all classes of creditors approved the plan under Part 26 Companies Act 2006 or a 75% majority in value of creditors approve a Company Voluntary Arrangement (CVA).

In practice, this often meant that a single class or even a single creditor could prevent a company’s restructuring , whether or not the proposed plan would benefit some or all of the other creditors of the company.

Part 26A was intended to introduce a more adaptable solution – allowing the company, via the court, to “force” the creditors to accept a particular scheme, where the class of dissenting creditor would not have received a distribution in the relevant alternative insolvency process.

Why were Part 26A Restructuring Plans typically not suitable for SMEs?

As the case law has developed over the course of the last 5 years, many felt that the plans were being put beyond the reach of the SME market. The process involved significant outlay to prepare the plan with an experienced insolvency practitioner.

Given the flexibility that the plans were intended to provide in respect of a solution, the Court was required to closely scrutinise both the composition of the classes of creditors at a convening hearing and then consider how the plan would interplay with the relevant alternative at a sanction hearing, should it be required to exercise its cross-class cramdown powers.

The end result was that the professional fees associated with the formulation and approval of the plan were significant, and there was no guarantee that the plan would be approved.

The position was further complicated by the approach taken by HMRC in early cases such as Prezzo, Houst and Great Annual Savings; it was made clear that there was a policy approach that they would vote against any plan which negatively affected their status as secondary preferential creditor in any relevant alternative process.

What’s changed?

The good news is that HMRC has significantly shifted its approach to these plans, which could make them more viable from an SME perspective.

The recent sanctioning of Part 26A plans in relation to both the Enzen  and The Outside Clinic shows welcome shifts in the approach to plan approval by HMRC and the Court.

HMRC no longer seems to prioritise rigorous compliance with the procedural rules, in favour of being more willing to accommodate non-standard procedural approaches, if the overall plan could be justified economically.

The Court has also shown that it is prepared to take a more commercially oriented approach that weighs the rescue benefits against minor procedural lapses.

What remains from all cases, however, is that consistent monitoring and early engagement with professionals and stakeholders significantly widens a company’s options in difficult economic situations.

For more information on Part 26A Restructuring Plans, or anything related to insolvency law, contact Laura using [email protected] or 0191 211 7970.