It is difficult to predict what 2023 might hold for businesses in the UK. Given the difficult economic environment, many will already be facing a challenging start to the year. Although the challenges of the pandemic (such as lock downs) have gone, others have materialised. Energy price hikes and inflation rises continue to make trading conditions tough.
At some point in 2023 affected businesses may have to restructure, and others may need to enter a formal process. We consider what the restructuring landscape might look like and whether 2023 will be the year that the restructuring plan (RP) comes into its own.
Liquidations, Administrations and Company Voluntary Arrangements (CVAs)
Statistics posted by the Insolvency Service last year showed that there were an increasing number of liquidations in 2022. In our experience, this reflects what we have seen in the market, with smaller businesses being the first to be affected – a trend that we expect to continue into the early part of 2023.
We also anticipate that administration will continue to be valuable, especially in the mid-market and we are starting to see an uptick in numbers.
Although in 2022 there were not the same number of high-profile retail and hospitality CVAs as there were at the height of the pandemic, that does not mean that CVAs have fallen out of favour. CVAs remain a useful and flexible tool and given the pressures on that sector, we may well see a rise in the number of CVAs again.
However, will (and why) might RPs come to the rescue in 2023.
During 2022 there were a number of RPs (although not as many as 2021) but early signs suggest that we are likely to see more during 2023.
As a restructuring tool RPs offer an option to companies that enable them to restructure in circumstances where a CVA or scheme would not have worked, using the cross-class cram down mechanism. Perhaps for this reason alone, it will become the restructuring tool of choice for many in 2023.
Deep Ocean was the first RP where the court sanctioned a plan that crammed down creditors, and since then we have seen it used in other RPs, perhaps most notably Houst,where it was used to cram down HMRC.
In this report (Report) published at the end of last year, the RP was cited by stakeholders as being a success. Given that the “policy objective of enabling companies with viable businesses that are struggling to meet debt obligations, to restructure with limited disruption to their operations has been met”, the success of RPs will surely continue this year.
However, as the Report notes, there is still perception that an RP is too costly and time-consuming to be an option for all companies. Will that limit its appeal?
We have already seen two SME RPs sanctioned, Amicus Finance and Houst, and more SME RPs are rumoured.
Furthermore, for the first time an RP is being considered by one of the regional courts. Until now, all RPs have been dealt with in London. We are waiting to see what the outcome of that decision will be. However, if it encourages practitioners to use their local court and local counsel, that alone might help address concern over costs and open the door to more SME RPs in 2023.
The Report includes a case study on Houst in the context of challenging the suggestion that RPs are not appropriate for use by SMEs, making it worthy of a read.
The Report also notes the pragmatic approach taken by the judge in Houst offering encouragement to those unfamiliar with RPs to jump on the band wagon:
“…..the court took the unusual step, after the sanction hearing, to require further information from the company before agreeing to sanction. This appears to be evidence of the judiciary acting in a way to support RPs whenever possible but also to protect the interests of creditors.”
The stage is certainly set for 2023 being “the year of the RP” – with an increasing body of case law, the pragmatic approach taken by the judiciary to date and the cross-class cram down mechanism in its favour.
And if suggestions in the Report to deal with simple cases by having one hearing or dealing with the convening hearing on paper and for applications to be dealt with by the ICC Judges are taken forward, and with the regional courts getting to grips with RPs, the building blocks are surely there to make RPs more accessible to the lower mid-market as well as the larger corporates in 2023.