We've recently seen the financial impact of high levels of redress claims on consumer credit businesses. In several examples, the quantum and value of such claims has contributed significantly to the failure of businesses. You can, therefore, see why it might be attractive to a board, secured lenders and other investors to cram down redress creditors using the new Restructuring Plan.
How would this be perceived, however, and would it ever be allowed to happen? Looking at elements of the judgement passed down on the DeepOcean case, I discuss how relevant this new tool could be for a consumer finance business, where there may be significant numbers of redress creditors involved.
At this stage, there are more questions than answers, but looking at the Restructuring Plan and cross class cram down (CCCD) mechanism through a consumer credit lens is an interesting and useful exercise.
The Restructuring Plan was enacted through the Corporate Insolvency and Governance Act (CIGA), introduced in June 2020. This is modelled on the existing Scheme of Arrangement procedure but with a new ability to ‘cram down’ across classes of creditors. Previously, a single class of creditors could block a scheme from being agreed.
Under the new CCCD provision, the court now has jurisdiction to sanction a Restructuring Plan, which fails to obtain its required 75% threshold if the following two conditions are met:
The court is satisfied that, if the Restructuring Plan were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the “relevant alternative”; and
At least one class of creditor who would receive a payment or have a genuine economic interest in the company in the event of the “relevant alternative” voted in favour of the Restructuring Plan by the requisite statutory majority (ie 75%).
This new Restructuring Plan has so far been used to restructure companies such as Virgin Atlantic (September 2020), Pizza Express (October 2020) and Smile Telecoms (April 2021).
In January 2021, three UK subsidiaries of DeepOcean Group used the Restructuring Plan, notably using the cross class cram down feature for the first time.
Judge Trower confirmed in his judgement in the DeepOcean case that the court would be alert to any artificiality in the creation of classes. For example, where creditor classes were created in such a way that Condition B of the CCCD provision would be met.
While this may not necessarily be an issue in a consumer credit scenario, it's worth considering some practicalities should a redress creditor class ever need to be defined.
The Restructuring Plan companies and their advisors must consider how eligible redress creditors would be identified and whether their claims are provable. There may well be grey areas that would need resolving. For example, would individuals who submitted a redress claim after the Restructuring Plan date be excluded?
If the plan company believes there is a prospect of a significant volume of redress creditors yet to claim, the Restructuring Plan may not actually achieve the purpose of putting the business on a more sound footing if a further wave of creditors’ claims, not bound by the Restructuring Plan, is on the horizon.
The judge would also look at the relative sophistication of a class of creditors. Given that most redress creditors would be relatively unsophisticated and unfamiliar with financial or restructuring terms, a judge would look carefully at how appropriate it may be to cram them down, especially as the court retains ultimate discretion. I discuss this further below.
The ability to engage properly with a class of redress creditors is also important. In the DeepOcean judgement, the court considered the relatively low turnout of trade creditors at the meetings (between 25% and 30%), compared to 100% of finance creditors.
The court was not surprised or worried about this, taking the pragmatic approach when considering who the trade creditors were. However, the judge noted that whether a dissenting class was fairly represented and had been able to engage properly (as opposed to choosing not to do so) was a material consideration in whether to apply CCCD.
How would these criteria be practically applied and demonstrated for redress creditors when the likely turnout might be much lower than 25%?
To meet Condition A of the CCCD provision, it's necessary to identify what the ‘relevant alternative’ is.
CIGA stipulates that this is ‘whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned…’. This is a new concept (historical practice in Schemes of Arrangement has defaulted to a liquidation scenario as the basis for the counter-factual comparator), and so there is limited legal precedent.
In DeepOcean, the ‘relevant alternative’ was not particularly difficult to prove and was agreed to be the liquidation of the plan companies. However, Judge Trower noted that there may be cases in which identification of the relevant alternative difficult, making it harder to determine whether Condition A would be met.
Once the plan company has set out the relevant alternative, the next challenge is to model the estimated outcome in that relevant alternative. In a consumer credit firm, this modelling is likely to be complex and will require a deep knowledge of the sector.
Until you start collecting the loan book, it's difficult to know how consumers are going to respond in an administration, for example. The uncertainty is further compounded by the involvement of claims management companies and the number of redress claims that will be generated and must be processed by the firm – all at a considerable expense – leaving less cash to distribute.
We have real-life data from multiple consumer credit scenarios that allows us to model what likely outcomes might be. Our experience from multiple consumer credit administrations gives us insight into the key drivers behind a successful consumer loan book collection, which ultimately drives the return to creditors.
There are many variables that can give rise to a wide range of different possible outcomes. Given this wide range, it raises questions about how difficult it may be to prove a relevant alternative to the court, allowing Condition A could be met.
When considering Condition A of the CCCD mechanism, it is a requirement that the dissenting class wouldn't be ‘any worse off’ than they would be in the event of the ‘relevant alternative’.
In the DeepOcean sanction hearing, Judge Trower noted that ‘any worse off’ was an ambiguous phrase. The judge took the view that it should relate to all aspects of the liability to the creditor, not simply the financial return.
For example, the speed of recovery and the security of any covenant to pay would also be relevant. The court must be satisfied that the dissenting class wouldn't be worse off ‘all things considered.’
In a consumer credit scenario, it's fair to assume that the security of any covenant wouldn't be as relevant to a group of redress creditors. However, the timing of any payment may be very significant given the profile of a redress creditor, reliant on cashflow.
It's worth considering that this could go some way to balancing out the uncertainty presented by a wide range of outcomes from any alternate comparator analysis.
It's important to note that the wording of the CCCD provision is that the court may sanction a plan. The court retains "an absolute discretion over whether or not to sanction a Restructuring Plan ". While Conditions A and B are prerequisites for approval, the court may still refuse to sanction a Restructuring Plan on the basis that it wouldn't be "just and equitable" to do so.
A judge would look carefully at how appropriate it may be to use the CCCD provision in a consumer credit scenario and assess on a case-by-case whether it could be viewed as ‘just and equitable’.
The opinion of the Financial Conduct Authority (FCA) will also be relevant. The regulator will always have the interests of the consumer and the customer journey at the fore, so any proposal, whether a Scheme of Arrangement or Restructuring Plan, will be looked at very carefully by the FCA in terms of the outcomes and protections for the consumer.
Provident Financial, the consumer credit group is currently pursuing a Scheme of Arrangement that is designed to set up a £50 million fund to make distributions to redress creditors. On 22 April 2021, a court gave permission for the group to hold a single class creditor meeting on 19 July 2021.
The FCA was represented at the convening hearing by counsel, and in addition has written a letter of concern regarding the Scheme in which it, among other things, indicates that it does not support the Scheme.
There was an acknowledgement that the FCA’s arguments are more relevant for sanction hearing, and this is something that will be watched very closely, not just for this case but for the broader implications.
Time will tell whether the Restructuring Plan and CCCD provision will be useful for consumer credit firms. The outcome of the Provident restructuring is likely to be illustrative and should provide further clarity as will further cases as the law and practice develops.
For more information, contact Andy Charters.