New Case Highlights the Focus on Restructuring in RPs

Wednesday 1st March, 2023

The High Court in Leeds has recently used its cross-class cram-down powers to sanction a Part 26A restructuring plan for The Good Box Co Labs Ltd (“GoodBox”) in the first instance of the approval of a creditor-proposed restructuring plan.

This restructuring plan is particularly interesting as not only does it provide additional guidance as to when a court will exercise its cross-class cram-down powers under Part 26A, but it was also the first plan to be proposed by a creditor opposed to an application made by a company’s administrators to sell its business and assets.

Facts

GoodBox is a provider of bespoke payment terminals for the benefit of charities and fundraisers and is regulated by the Financial Conduct Authority as a small payment institution. GoodBox entered administration in June 2022 by order of the court and on the application of NGI Systems & Solutions Limited (“NGI”), a shareholder, key technology supplier and creditor. Following their appointment, GoodBox’s administrators (the “Administrators”) indicated in their proposals that their primary intention was to pursue the rescue of GoodBox as a going concern by way of a CVA or restructuring plan. During the administration, NGI provided GoodBox with secured funding of £475,000 to enable it to continue trading with a view to pursuing this objective. However, GoodBox’s financial position started to deteriorate further and the Administrators applied to court for directions that they should sell GoodBox’s business and assets (the “Administrators’ Application”).

However, NGI considered that a restructuring plan would still produce the best outcome and, in December 2022, it brought an application to formally oppose the Administrators’ Application on the basis that it was working on a restructuring plan proposal which would result in the rescue of GoodBox as a going concern. The court granted NGI standing to propose a meeting of GoodBox’s creditors for the purposes of considering and voting on the restructuring plan.

The main terms of the plan included:

  1. additional funding to be provided by a group of rescue funders, including NGI, who would be allocated 85% of the new equity in GoodBox pro rata to their contribution to the funding;
  2. GoodBox’s convertible loan note holders (the “CLNHs”) to receive 14% of the new equity in GoodBox in exchange for their debt;
  3. trade creditors and administration creditors to be paid in full within six months of the sanctioning of the plan using the new funding (and subject to adjudication of their claims);
  4. existing shareholders to be diluted to receive 1% of the new equity in GoodBox pro rata to their previous shareholding; and
  5. a new set of articles of association and shareholders agreement to be implemented to make the decision-making and operations of GoodBox more efficient and effective.

The proposed restructuring plan was approved with the requisite majorities by all classes, save for the class of CLNHs who voted unanimously against it. The Administrators had also voted against the plan in their capacity as administration creditors, although they did not actively oppose it at the sanction hearing. In light of the result of the voting, NGI applied for court sanction of the plan, requesting that the court use its cross-class cram-down powers pursuant to section 901G of the Companies Act 2006.

Decision

The court sanctioned the plan, brought the administration to an end and dismissed the Administrators’ Application, notwithstanding the fact that the CLNHs had voted against the plan. In sanctioning the plan, the court followed the approach to cross-class cram-down set out in Re Amicus Finance [2021] EWHC 3036 (Ch), focusing on the following key points:

Did the court have jurisdiction to sanction the plan?

In addressing this issue, the court held that the consent of GoodBox was a necessary condition for the court to have jurisdiction to sanction the plan. As the Administrators would not voluntarily approve the plan, the court directed them to do so, concluding that the concerns raised by the Administrators were not sufficient to prevent the court from sanctioning the restructuring plan and noting that the Administrators had otherwise sought to remain neutral in their capacity as officeholders and were willing to act on any such direction from the court.

Were the threshold conditions for cross-class cram-down met?

The court is not prevented from sanctioning a plan in the event that a particular class did not vote in favour of the plan if two conditions are met:

  1. First, the court must be satisfied that, if the 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”. In this case, the “relevant alternative” would be a sale of the business and assets (minus the intellectual property) for £375,000. The administration would then come to an end and GoodBox would move into liquidation. In that situation, NGI would obtain repayment of some of its secured lending in the administration and the CLNHs would get nothing, whereas under the restructuring plan the CLNHs would obtain an equity stake in GoodBox which could potentially increase in value. As a result, the court concluded that the CLNHs would be no worse off if the restructuring plan were sanctioned.
  2. Second, the plan must be agreed by a number representing 75% in value of a class of creditors present and voting at the relevant meeting summoned who would receive payment or who have a genuine economic interest in the company in the event of the relevant alternative. This condition was met as the administration creditors were such a class.

Was the plan fair as between the different classes?

The court concluded that the plan was fair as between the different classes and, therefore, it was appropriate to override the wishes of the CLNHs. The payment of trade creditors in full, as compared with the position of the CLNHs, was justified as the goodwill of those trade creditors would be crucial to the continued trading of GoodBox and their debts as a whole were considerably smaller. In addition, although NGI would receive its trade debt back, it was providing significant ongoing funding for GoodBox, it was converting its secured debt arising as administration debt into equity and it was agreeing to revised terms of business with GoodBox.

Comment

Although it will likely continue to be unusual for a restructuring plan to be proposed by a third party, in particular as creditors will usually have insufficient financial information to put forward a credible plan, this decision is helpful evidence that the court can and will direct a company (or its officeholders on its behalf) to give its approval for a restructuring plan to take effect where appropriate.

Whether a creditor-proposed restructuring plan will be appropriate in other cases will be highly dependent on the facts in question and it is certainly unusual for a creditor to be as close to and as plugged into a debtor, and as supportive of a plan proposal, as NGI was here. On the one hand, the restructuring plan could be seen as an effective new tool for certain creditors to have at their disposal. However, on the other hand, a creditor seeking to propose a plan could ultimately be throwing good money after bad if that company eventually enters an insolvency process in any case.

The full judgment for NGI Systems & Solutions Ltd v The Good Box Co Labs Ltd [2023] EWHC 274 (Ch) can be found here.

Should you have any questions or require any advice in relation to a restructuring matter, please contact Brett Israel or Eleanor Mill of our Business Restructuring Group.