After the British government announced an easing of COVID-19 restrictions and moving the country to a position of “living with COVID,” the full extent of the pandemic’s damage to UK businesses will come sharply into focus during the next 12-24 months. Many SMEs are already in a fight for survival, having been battered by rising input costs, increased borrowing and the curtailment of support measures.
Our Red Flag Alert research shows 2.5 million companies were in “significant” financial distress last year. That is up 47% from the same period in 2020, when 1.7 million companies had minor county court judgments (CCJs) for debts of up to £5,000 – our definition of “significant” distress. In pre-lockdown 2019, there were 1.5 million companies in such a position. To put this into perspective, there are about 5.6 million companies in the UK.
We are clearly facing a crisis that particularly affects small and medium-sized businesses, the backbone of our economy and a major source of employment. The scale of the problem means all restructuring professionals must look for pragmatic and positive remedies to rescue jobs and enable viable businesses to survive.
Fortunately we have a new tool at our disposal in the form of the Restructuring Plan, introduced by Article 26A of the 2020 Corporate Insolvency and Governance Act. The new rules offer companies an alternative to Company Voluntary Arrangements (CVAs) or Schemes of Arrangement, by allowing a court to overrule creditors objecting to a proposed Restructuring Plan in a “cram down,” a feature of Chapter 11 proceedings in the US.
In August last year, the High Court sanctioned a Restructuring Plan for Amicus Finance plc, a provider of short-term finance mainly to property companies, which had been in administration since December 2018.
The ruling was significant because it was a test case for the new Restructuring Plan rules in a number of key areas: it was the first plan to have been submitted by an incumbent administrator, to involve a mid-market company and the ruling entailed the High Court sanctioning the cram down of a secured creditor. It demonstrated that a company, even one in administration, can be rescued as a going concern.
Sir Alastair Norris released his detailed judgment of the court’s Amicus Finance Restructuring Plan approval in late November, in which he charted a pragmatic and considered course for examining Restructuring Plan submissions. What emerges from the judgment is that courts have the ability to look favourably on plans which benefit all classes of creditors and will approve them against the wishes of an objecting class of creditor, if it presents the best outcome.
The Restructuring Plan process is not a licence for creditors or members to delve into the minutiae of the respective company’s affairs, the judgment shows. In the Amicus Finance case, such an approach taken by one creditor was roundly rejected. The corollary of this is that creditors and other stakeholders need sufficient details of the plan to make an informed decision on whether to lend it their support. The onus lies on communicating and explaining a rescue plan that is robust from its outset because of the risk that the company concerned will fail before the plan secures approval.
For mid-sized companies in financial difficulty or anticipating problems, the precedent of the Restructuring Plan for Amicus Finance opens another interesting avenue as they look ahead to an uncertain economic environment. Perhaps hundreds of businesses can be saved through this process and with it the livelihoods of thousands of people. That is something positive to look forward to in 2022 and beyond.
Mark Fry is National Head of Advisory and Restructuring at BTG Advisory, part of Begbies Traynor Group plc. He was the appointed joint administrator of Amicus Finance.