The idea of Restructuring Plans being used as a restructuring tool for SMEs has long been discussed in the Restructuring market. The Revolution Bars RP was a move in the right direction but recent cases such as Thames Water, Petrofac and now Waldorf Production suggest that the RP might be following the route of the Scheme of Arrangement before it, becoming a tool reserved for the largest and most complex restructurings.

Here we consider if that is the case or if there is still an opportunity to leverage the power and flexibility of the RP to help smaller companies.

Overview of Waldorf decision

Waldorf Production UK plc had proposed a Restructuring Plan to its bondholders and unsecured creditors. The bondholders would extend maturity while unsecured creditors (including HMRC) would be compromised in return for a minimal cash payment and future upside sharing.

How fair is fair?

It is right that Restructuring Plans need to be fair and need to be seen to be fair. They are a powerful restructuring tool to reshape a business without the negative impact and connotations of a formal insolvency. It is key for this that the Courts are not a mere rubber stamp placing the onus on creditors to incur costs in challenging and protecting their position.

By not engaging with unsecured creditors Waldorf presented them with a fait accompli, with no opportunity to engage on and shape the proposal to reflect the balance of power and the practical realities of the relevant alternative.

It’s good to talk?

At the same time adding the requirement to engage with all creditors might introduce an insurmountable burden on the ability of smaller companies to pursue an RP. Where there are clear and substantial creditors this may facilitate engagement. The court in Waldorf noted the special position of HMRC and it is HMRC that has led the charge in shaping the parameters of Restructuring Plans.

However, where should the line be drawn in the requirement for consultation and negotiation? Where an RP is aimed at resolving broad unsecured liabilities in a trading business, it may not be easy to identify who the company should engage with to act “fairly”. Early engagement with a broad base of creditors might jeopardize the business that the RP seeks to protect and add stress to the business, accelerating cashflow and shortening the runway needed to deliver the plan.

An RP is necessarily a complex process and will not always be the right tool for the job. Without specific assets or a status (regulatory or otherwise) that warrant protection from a formal insolvency, a prepack will often be the more practical and cost effective restructuring tool for smaller businesses.

The Courts in considering RPs have generally been careful to set boundaries for how an RP can go and have used cases where the company may have gone too far to impose guardrails. It is to be hoped that in responding to a total absence of engagement with unsecured creditors that the Courts do not take RPs out of the reach of companies that might benefit from them.

KeyFacts Energy: Waldorf Production UK country profile