Vol 17 (2020) - Issue 5

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Debt Restructuring: The Developing Role of the Court in Cross Class Cramdowns

Synopsis
It has long been recognised that there is a need for a mechanism to facilitate a restructuring where a class (or classes) of creditors dissent. The courts have acknowledged that such a mechanism is undoubtedly valuable to promote business rescue. Chapter 11 of the US Bankruptcy Code has long provided for a cross class cramdown where there are dissenting creditors in certain circumstances. In the UK, it seems that the economic effects of the COVID-19 economic slowdown have been undeniably instrumental in persuading the government to finally place business rescue high on their priority list. As a result, apart from the transient measures aimed at containing the economic consequences of COVID-19, the Corporate Insolvency and Governance Bill 2020 ('CIGB') proposes the muchawaited restructuring proposal that allows creation of a plan to rescue a company and facilitate a cross class cramdown of dissenting creditors ('Cross Class Plan'), if certain conditions are met. This was not possible using a single mechanism under the existing insolvency and company law and the previous Scheme of Arrangement mechanism contained in Part 26 (Part 26 only allowed for restructurings where the dissenting creditors were only within a class).

The Cross Class Plan proposals are therefore a welcome development. However, it is likely that the provisions that enable a cross class cramdown will require further court interpretation before the mechanism can be considered mature and a 'ready-to-go' option in the insolvency practitioner's tool kit. Before understanding the court's changed role under the Cross Class Plan provisions, it is important to understand the objective and rationale of the court's role in protecting dissenting creditors in such plans.