1489313 - Hogan Lovells FIS Horizons 2021 update - Flipbook - Page 23
Financial Institutions Horizons
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As with a scheme, the court will convene
creditor and member class meetings to vote on
the plan, provided it is satisfied that the classes
have been properly constituted and that there
are no jurisdiction issues. However, unlike
a scheme, the company can apply to court
to exclude any class of creditor or member
from participating in the meetings where it
can be shown that the class has no genuine
economic interest in the company. This creates
the possibility for the rights of creditors who
are out of the money to be altered (or even
eliminated) without them being allowed to vote
on the plan. The ability to exclude out of the
money creditors together with the cross-class
cram-down (on which see below) are two of the
key features of the plan that are not available
in the scheme process. Excluding creditors will
no doubt give rise to disputes as to the nature
and value of excluded creditors’ interests and
it will be interesting to see whether companies
use this ability to exclude - yet bind - out of the
money classes or whether they will rely on the
court’s ability to cram down dissenting classes.
•
The plan will be treated as having been
approved by a class if at least 75% of that
class present and voting votes in favor.
In an important difference from the scheme of
arrangement, there is no 50% numerosity test
which may make it easier for large debt holders
to push through a restructuring using a plan
rather than a scheme.
•
Once the class meetings have been held,
the plan must be presented to the court for
sanction. As with a scheme, where all classes
have voted in favor of the plan, the court
will sanction the plan provided procedural
requirements have been met, each class was
fairly represented at the class meetings and
the court is satisfied that the scheme will have
effect in relevant jurisdictions and is “fair”.
•
However, in the much-advertised “crossclass cram-down” process, the court can still
sanction a plan if not all classes have voted in
favor of it if:
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– The court is satisfied that none of the
creditors or members of the class would
be any worse off under the plan than
they would have been under the relevant
alternative, and
– the plan has been approved by at least one
class of creditors or members which would
receive a payment, or have a “genuine
economic interest in the company”, in the
event of the relevant alternative.
•
The “relevant alternative” is whatever the
court considers would be most likely to occur
if the plan were not sanctioned. This will
be fact-dependent – it could be a sale, an
administration, a liquidation or even a different
restructuring proposal. This is likely to be a key
battleground as different creditors may want to
argue different relevant alternatives to suit their
commercial objectives. Valuation evidence to
determine whether creditors are worse off or not
in the relevant alternative will be essential where
a company is seeking to use the cross-class
cram-down in a disputed plan process.
•
Unlike certain other jurisdictions, such as the
U.S., there is no absolute priority rule and so it
is possible for junior creditors to impose a plan
on dissenting senior creditors, provided the
court is satisfied that the senior creditors are
no worse off under the plan than they would
have been in the relevant alternative. This is
what some people are calling the “cram-up” as
opposed to the “cram-down”.
The absence of a “cross-class cram-down”
mechanism has long been seen as a weakness in
the scheme process. Having a new process that
allows a company to cram down not only a minority
of dissenting creditors in a class but also entire
creditor classes, both secured and unsecured,
should open up many more possibilities for a
company to effect a deep and lasting restructuring
of its capital and balance sheet.
