Restructuring Plans: Discretion, Distribution of Benefits and Bargaining
Sep 9, 2024
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Georgina Peters, a South Square Barrister with a focus on restructuring plans, joins Sarah Paterson, a Professor of Law at LSE, to unpack the complexities of judicial discretion in corporate restructuring. They dive into the significance of cram-down jurisdiction and its effects on debt management. The discussion highlights the necessity for fair benefit distribution and the challenges dissenting creditors face in restructuring processes, alongside critical insights on bargaining dynamics and legal scrutiny that accompany approval decisions.
The English courts possess substantial discretion under Part 26A to impose restructuring plans through cram down, highlighting the importance of creditor engagement.
Recent cases show that while creditor engagement is significant, courts may favor substantive outcomes of restructuring plans over procedural negotiation shortcomings.
Deep dives
The Role of Court's Discretion in Restructuring Plans
The English courts hold significant discretion when sanctioning restructuring plans under Part 26A of the Companies Act 2006, particularly in their ability to exercise cross-class cram down powers. Cram down allows courts to impose a restructuring plan on dissenting creditors if they believe a fair commercial bargain has not been reached, which emphasizes the need for the company to demonstrate that it has attempted bargaining. Past cases, such as Fitness First, illustrate that judges have noted a lack of prior engagement with certain creditors and questioned whether there should be evidence of such engagement before proceeding with cram down. The importance of demonstrating a genuine negotiation process highlights the balance courts must maintain between facilitating efficient restructurings and ensuring dissenting creditors are adequately considered.
Engagement and Fair Value Allocation
Recent discussions on how courts view the engagement of creditors during restructuring plans have revealed that lack of meaningful engagement may not hinder court approval of a plan. For instance, in both the Fitness First and Virgin Active cases, courts ultimately sanctioned restructuring plans despite acknowledging complaints about insufficient discussions with landlords. This indicates that while creditor engagement is important, courts may still prioritize the substantive outcomes of the plan over procedural shortcomings in negotiations. The ongoing challenge for companies lies in the need to articulate a fair allocation of plan benefits to ensure that dissenting creditors receive a reasonable share without relying solely on claims of being out of the money in an insolvency scenario.
Implications for Future Bargaining Frameworks
The evolution of Part 26A restructuring processes poses crucial questions about the adequacy of existing frameworks for creditor engagement and bargaining. Current discussions suggest a need for a more structured bargaining environment to improve negotiations, drawing comparisons to Chapter 11 processes, which offer more robust mechanisms for engagement. The absence of certain protections, such as an automatic stay, adds complexity, as companies often face time pressures that can limit pre-launch negotiations. These factors together contribute to ongoing debates regarding whether restructuring plans should require demonstrable efforts to bargain prior to court consideration and how best to allocate benefits fairly among all creditor classes.
South Square Barrister Georgina Peters and Sarah Paterson, Professor of Law at LSE, discuss the court’s discretion when sanctioning a restructuring plan.
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