The ‘Super Scheme’ That Could Save Your Company from Insolvency

In June 2020, the government announced the biggest changes to the United Kingdom’s insolvency laws that the country has seen for decades. In the midst of a global pandemic with businesses facing tough decisions in a declining economic climate, the UK Corporate Insolvency and Governance Act (CIGA) has been welcomed by many business leaders as a ‘super scheme’.

Primarily aimed at combating the fallout of coronavirus and an ever-mounting casualty list of insolvent businesses, the super scheme offers company directors new ways to effectively restructure their business through the courts. The ultimate goal is to provide struggling businesses with flexible ways to reorganise, survive and eventually become profitable again. The scheme has been described as a debtor-friendly scheme.

This is new territory in terms of insolvency law, but the super scheme has already proven effective for Virgin Atlantic and their recent restructuring plan. In this article, we ask our practitioners at Irwin Insolvency to explain in more detail how the super scheme works and how it can save your company from insolvency.

What Is the UK Corporate Insolvency and Governance Act?

To clarify, the term ‘super scheme’ is by no means an official one. This is simply the name that’s been given by business insiders, commentators and insolvency experts for a specific section of the UK Corporate Insolvency and Governance Act.

The act was ratified and passed with royal assent on 25 June 2020 and has already been upheld in the English High Courts, namely through the case of Virgin Atlantic who used the act to restructure and refinance.

So what is the aim of the act? The Government describes the UK Corporate Insolvency and Governance Act 2020 in the following way:

‘The measures introduced by the act will relieve the burden on business during the coronavirus (COVID-19) outbreak and allow them to focus all their efforts on continuing to operate.’

The act is aimed at struggling businesses that are failing to keep up with repayments due to COVID-19 restrictions, lockdowns or a loss of business as a result of the pandemic. The idea is to give businesses new flexibility when dealing with creditors, and repayments or refinancing, with many commentators describing it as debtor-friendly restructuring.

The act has thus far brought about significant changes to insolvency law, as well as providing businesses with a number of different tools they can implement to save themselves from insolvency. The main options that the act has provided businesses with are the following:

  • Companies automatically have more time to file accounts with Companies House.
  • Companies have access to the new ‘Standalone Moratorium’, providing them with space to reorganise and restructure without pressure from creditors or courts.
  • Companies can implement a new Restructuring Plan (the super scheme), which is overseen by the courts.

What Is the ‘Standalone Moratorium’?

The Standalone Moratorium is an important part of the act, as it gives companies much-needed breathing space during what is a time of great uncertainty and crisis. The moratorium is directly aimed at slowing down traditional insolvency procedures, as it gives companies extra time to make decisions.

The Standalone Moratorium ensures that creditors can no longer chase the money that is owed to them. At the same time, no insolvency or other legal processes can be started while the moratorium is in place. This protects the company while they make their next move, and can prove invaluable when attempting to save a business from insolvency.

The moratorium has to be implemented and overseen by an insolvency practitioner, who is known as ‘The Monitor’ throughout the proceedings. The moratorium is at first 20 days long, but this can be extended by a further 20 days giving a total of 40 days.

During this time the insolvency practitioner can establish the best steps towards saving the company from insolvency. This then brings us to the new super scheme, a restructuring plan that insolvency practitioners now have the option to implement, since the act was approved.

What Is the ‘Super Scheme’ Restructuring Plan?

The super scheme is more officially known as the ‘Restructuring Plan’. This is the most important element of the UK Corporate Insolvency and Governance Act 2020, as it’s the element that can save your company from insolvency.

The Restructuring Plan has to be overseen by a court, and it allows for a flexible restructuring of a company with the goal being to save the company from insolvency. The Restructuring Plan has some precedent in the form of a scheme of arrangement, which has been available since the Companies Act 2006.

Like a scheme of arrangement, the Restructuring Plan is essentially a compromise between the creditors and the company in debt. The compromise puts into effect a restructuring plan that saves the business and allows creditors to eventually get their money back.

But while a scheme of arrangement requires 75 per cent of creditors to assent and is heavily weighted in favour of the creditors, the Restructuring Plan is different. The so-called super scheme allows for what’s known as a ‘cross-class cram-down’, which allows courts to impose a restructure without the consent of creditors.

What Is a Cross-Class Cram-Down?

The cross-class cram-down is what gives the act its flexibility, and it’s what makes this an unprecedented tool for insolvency practitioners. Previously, dissenting stakeholders could block restructuring efforts if they felt they would get a worse deal out of it.

The cross-class cram-down however, allows courts to ‘cram-down’ on these dissenting stakeholders and push through a restructuring plan regardless. This ensures that minority stakeholders can no longer hold up the restructuring of an insolvent company, provided the courts deem this to be a fair move that can ensure the survival of the company.

This tool gives insolvent companies much more leverage than they previously had with their creditors, which is why the super scheme has been dubbed to be debtor-friendly, rather than creditor-friendly.

Who Can Implement a Super Scheme Restructuring Plan?

Company directors, shareholders and creditors are able to initiate proceedings through an insolvency practitioner. However given this is a debtor-friendly scheme, it’s unlikely that creditors are going to deliberately implement this sort of restructuring, as it’s unlikely to be in their interests to do this.

Any company that’s facing insolvency or has become insolvent is able to begin the process of restructuring through this new act. This also gives the company the capacity to attempt restructuring before they enter insolvency, which again gives this an excellent level of flexibility when it comes to improving a business position.

The super scheme has to be approved and overseen by the courts before any restructuring plan can be put into effect and any practical value gained from it. As the Virgin Atlantic case in September 2020 demonstrated, courts have already legitimised the act going forward.

Is the Super Scheme the Future for Insolvent Companies?

The new act and super scheme is certainly proving to be an exciting tool in the world of insolvency. Given the impact of coronavirus on the economy, the added flexibility and the debtor-friendly nature of the scheme have been welcomed – this gives businesses that would ordinarily be trading well in a pandemic-free world some chance at levelling the playing field.

The fact that courts have already used the scheme shows it’s here to stay and has in this respect become part of English Common Law. However, there will still be opportunities in the future for creditors to have their say and to challenge the act in court.

The biggest grievance amongst creditors will be their loss of power in any restructuring process. Previously, creditors could hold up proceedings and have more weight in the process – this is surely valid if the company in question owes your company a lot of money. Now, creditors will have to fight harder to get their money back. Is that really fair if they’ve provided credit in good faith?

Doubtless though, for companies facing insolvency this is the biggest, most dramatic change in insolvency law for decades. For an insolvent company, there is now a unique opportunity to take control of the situation and to restructure on their own terms, rather than on the terms of their creditors.

As always, it’s highly advisable to speak to a professional insolvency practitioner before making any decisions. There are also many other, traditional routes that companies facing insolvency can take. Every situation is different, and there may be insolvency proceedings that are better suited to your financial needs than the new super scheme.

Contact Irwin Insolvency Today for Your Free Consultation

These are tough and trying times for businesses, but with professional support and guidance you can save your company from insolvency.

The expert team at Irwin Insolvency has decades of experience restructuring companies and leading businesses out of insolvency and into profitability. We are up to date on ever-changing insolvency laws and are prepared to help you save your business.

If your business is struggling financially, don’t hesitate to contact Irwin Insolvency today for your free, no-obligation consultation.

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