IFT research outlines how small and mid-market businesses have approached Part 26A Restructuring Plans, how practice has evolved and next steps

Part 26A Restructuring Plans (RPs) represent a flexible, company-led tool. In the nearly six years since their introduction RPs have become an important UK mechanism for corporate rescue and a key part of the UK’s international competitiveness as a restructuring centre.

However, questions remain about whether RPs are accessible to small and medium-sized enterprises (SMEs).  The legal process, cost and timetable can be difficult to manage, and most RPs to date have been pursued by larger businesses – often with an international footprint – reinforcing the UK’s position as a restructuring centre but leaving the SME market underserved.

The focus of this IFT research is on the RPs pursued and/or completed to date by small mid-market companies, across sizes and sectors. Drawing on case law analysis, the report traces how these businesses have approached practical issues including funding an RP, meeting evidential requirements and engagement with creditors.

It identifies how market practice has evolved – helping courts to sanction RPs in the small and mid-market, even as wider RP case law has developed.

Developments include increasing sophistication of practice and early signs of standardisation in some smaller and mid-market RPs, including:

• Greater clarity from decided cases on funding and treatment of equity – including when courts will support additional benefits for major creditors, owners or shareholders who provide new money or other support to enable the restructuring.
• A degree of flexibility in relation to evidence depending on the size, nature of the business and the degree of challenge.
• The beginnings of template approaches to certain RP documents in the SME space.
• Evolution of negotiating positions and Plan returns across different key creditors for SME plans, such as HMRC and landlords.

Taken together, the SME and mid-market RP cases to date show how practitioners are seeking to manage process costs and what approaches are likely to be acceptable to the courts.

Nevertheless, the paper highlights that barriers remain. Based on market feedback, case analysis and survey data, it highlights that cost (real and perceived) and the need for sufficient liquidity to bridge the court timetable limit wider SME take-up, especially at the smaller end.

Whilst recognising the role of market practice in addressing some of these challenges to enable some use of RPs, the paper concludes that case law and perception has reached a stage where consideration should be given to policy and legislative change, to support wider use of this turnaround tool for smaller companies and those with a simpler debt structure.

“As a champion for turnaround excellence and innovation, The IFT has tracked the development of new restructuring tools and encouraged debate and engagement across the market – drawing on the expertise of turnaround professionals, key advisers and lawyers. The UK has proven itself as a leading centre for restructuring through major cases, under pinned by the ambition and commitment to build market practice and options for stressed businesses. Now, with a strong bank of cases, it is time to explore whether considering the legislative framework could create a more accessible pathway for smaller and mid-market businesses. That will be crucial during an ongoing challenging economic period for smaller companies across all sectors – to protect enterprise value and safeguard jobs.” Milly Camley, CEO, The Institute for Turnaround (IFT)

 The full report is available here and the summary conclusions here.