High Court Confirms the Viability of Creditor-Led Restructuring Plans

The Part 26A Restructuring Plan (“RP”) is a relatively new addition to the English insolvency regime; despite this, the flexibility it provides to both distressed companies and their creditors has made it an important and attractive option. The recent administration of GoodBox Co Labs Limited (“GoodBox”) only further highlights this flexibility, providing ground-breaking precedent for creditor‑led RPs and the necessity of company consent. While the RP has overwhelmingly been used by large companies since its introduction, this case also serves as an important reminder of its intended applicability to smaller restructurings.

Background to the Case

GoodBox is a developer and provider of contactless payment technology allowing for easier donations to charitable organisations. The users of its technology, which include the British Red Cross and the Natural History Museum, have raised well over £10 million and made it an important source of income for the charity sector in the UK. However, with charities hit by the COVID-19 pandemic, GoodBox’s finances deteriorated, and it entered administration in June 2022.

The administrators of GoodBox produced an estimated outcome statement as part of their proposals; this showed a creditor deficiency of over £10 million or over £15 million on an administration sale and restructuring or liquidation, respectively. Additionally, as the administration progressed, the anticipated administration sale price almost halved to £375,000, and the administration funding, which was to be paid in full prior to other claims, more than doubled to £475,000. As a result, NGI, the administration creditor, would not be paid in full, and all other creditors would receive nothing. This outcome was the “relevant alternative”, the counterfactual used for the purposes of the proposed RP to show that it would provide an outcome at least as good as the most likely alternative.

The Proposed Restructuring Plan

Unusually, the RP in this case was proposed by a consortium of investors led by existing creditor NGI, rather than the administrators acting for the company. The RP allowed for an injection of new funding and the availability of a debt facility in the form of a syndicated three-year term loan. Trade creditors would be paid in full. The other key class of creditors were the “Convertible Loan Holders”, consisting primarily of the British Business Bank and Q-Invest Limited, with £9 million lent between them during a financing round as part of the Government Future Fund. Under the RP, this debt would be converted into equity as was supposedly intended under the original convertible loan financing.

The RP, proposed by NGI, was not actively supported by the administrators and was opposed and voted against by the Convertible Loan Holders. Despite this, the conditions for a cross-class cram‑down were met. These were that none of the members of the dissenting class would be worse off than they would be under the relevant alternative; given the relevant alternative would leave all creditors beside NGI with nothing, this was easily established. Secondly, the plan had to be sanctioned by a number representing 75% in value of a class of creditors who would receive payment or have a genuine economic interest in the company under the relevant alternative. The Administration Creditors (58% of this comprising NGI) were such a class.

The other “jurisdictional requirements”, including the correct constitution and identification of the creditor classes and proper convention of the relevant meetings and votes, were also found to be satisfied.

Information Requirements

There was a question as to the potential lack of financial detail put forward in the RP’s explanatory statement. This was likely due to both time pressure and NGI’s inherent lack of detailed company information as a creditor. However, the statement identified relevant risks and concerns, and was transparent as to the limitations of the information it provided. It was therefore up to the relevant creditor classes voting on the plan to raise objections in this regard. As no member of any class made that complaint, either at the meeting or later to the court, the explanatory statement, having complied with other requirements of the Companies Act 2006, was satisfactory.

This is an important point; as identified by the judge himself, it is often for this reason “a creditor promoted scheme will not get off the ground”.[1] It is also worth noting that the information provided by the administrators regarding the relevant alternative was also flawed, a potential factor in the judge’s decision.

Consent of the Company

With these key requirements established, the issue remained as to whether the company (through its relevant officeholder) must consent and agree to enter into a proposed RP. The judge cited extensively from the case of Re Savoy Hotel Limited, which had considered a similar issue but in relation to a scheme of arrangement under, as it was then, the Companies Act of 1948.[2] It was therefore held that “the position remains that the consent of the Company to join in the Scheme is a requirement under Part 26A of the 2006 Act”.[3]

This conclusion presented a possible barrier given the continued lack of active support from GoodBox’s administrators. To overcome this, the judge therefore directed the administrators to provide the necessary company consent. Five reasons were given for this decision:

1. Even though no formal application was made for directions, they were nevertheless appropriate. This was due to the administrators being prepared to proceed (again, they did not actively oppose the RP) and the relevant materials being before the court. It was noted that the lack of a formal application would likely be fatal in most cases.
2. None of the concerns raised by the administrators, bar one exception, related to classes of creditors and whether the RP should be sanctioned. None of these presented a barrier to the RP being sanctioned.
3. The exception noted above related to the situation of GoodBox’s employees. Under the RP, there was no Transfer of Undertakings (Protection of Employment) (“TUPE”) protection, while the relevant alternative involved employees being transferred under TUPE. However, this protection did not extend beyond the completion of the proposed sale, and therefore it alone could not be a reason to not direct the administrators to consent to the RP.
4. There were no interests of the company beyond those of its shareholders and creditors. As these were protected and considered under the RP, there was no further justification for the administrators refusing their consent.
5. Finally, it was important that the administrators did not actively oppose the RP. This perhaps implies that, were administrators to be in active opposition to a creditor-proposed RP, this could be a potential bar to directing that the company give its consent.

The decision of the judge to direct the administrators to give the requisite company consent confirms that a creditor-initiated RP can succeed, even without the active support of the company or its relevant officeholders.

Key Takeaways

Restructuring activity is expected to increase while general economic conditions remain challenging. The GoodBox case provides an important reminder of the flexibility of the Part 26A Restructuring Plan, giving guidance on both requisite levels of financial information and confirmation that the RP can be proposed by a creditor rather than the company.

The case is not only a boon for the UK charity sector, who maintains an important source of income in the form of GoodBox’s services, but also the wider UK insolvency regime. The RP no longer need be the reserve of large-scale restructurings and offers a genuine alternative to pre-pack administrations and other insolvency procedures. Its relevance in the UK restructuring and insolvency toolbox has undoubtedly increased. The success of a creditor-led RP is another significant innovation.

Kyle Howard, trainee solicitor in Morrison Foerster’s London office, contributed to the drafting of this client alert.

[1] Para. 72.

[2] Re Savoy Hotel Limited [1981] 1 Ch 251.

[3] Para. 61.