9Questions is our Q&A series featuring key decision-makers in leveraged finance and distressed debt — explore the full collection here.

Reports of the Restructuring Plan's death are greatly exaggerated. Five years since its establishment, the UK RP has swung between being hailed as a sponsor-friendly alternative to Chapter 11 and being written off after a run of contentious cases — culminating in the Court of Appeal’s decision to set aside Petrofac’s sanction last summer.

A sprouting of alternative restructuring mechanisms in continental Europe and the enduring appeal of Chapter 11 for lenders led some initially to wonder: “Whither RP?”

To answer, 9fin spoke to Sarah Paterson, professor of law at the London School of Economics and senior consultant at Slaughter and May, and Ed Couzens, a restructuring partner at the firm.

According to Paterson, the RP is an extremely useful tool with sui generis features distinct from Chapter 11. She has written extensively on the RP's conceptual foundations and fairness framework, while Couzens has advised on a range of RPs and cross border restructurings.

Together, they set out why they think the RP remains a flexible, and still highly relevant, option for distressed companies and their creditors.

1. Sarah, how has your academic background and your experience working with practitioners and policymakers shaped the way you approached thought leadership in this space?

Sarah Paterson: A significant part of the attraction to academia was that there was a great deal that I wanted to say about the field that could be said more freely as an academic, whereas one necessarily has to be more circumspect in practice.

In relation to the RP, which has been one of my areas of focus in recent years, when it was put in place we knew what we didn't want to do, but I am not sure that we had worked out precisely what we wanted instead.

We had a clear idea that we didn't want to follow the US absolute priority rule (“APR”) and that we didn't want to adopt US valuation standards, which can lead to very expensive fights over largely theoretical numbers.

However, the experience of the last few years has demonstrated that we did not necessarily have a firm idea of the conceptual foundation of the tool i.e. what it should be trying to achieve.

That is the kind of conversation to which academics can make a meaningful contribution. For me, it has been helpful to be able to draw on practical experience when making those contributions, because so much of what happens in restructuring takes place outside the courtroom, around the deal table.

2. With Chapter 11 well-established in the US, and the introduction of processes like StaRUG in Europe, what does the UK need to do to remain a jurisdiction of choice for complex cross-border restructurings?

Ed Couzens: One of the primary advantages of the RP remains its flexibility. Although the Court of Appeal’s decision to set aside the sanction of Petrofac’s RP attracted negative press, it remains an incredibly powerful and flexible tool and adverse decisions should not be regarded as its death knell. 

With any procedure, sometimes there will be new issues to navigate.  When a case is not implemented, this provides a good opportunity to identify and draw on the lessons learned, and use that practical experience to harness the flexibility of the RP in future cases.

Among other things, the ability for shareholders to retain equity in certain circumstances where creditor classes are compromised under an RP remains attractive particularly where more rigid APRs in other jurisdictions may preclude this treatment.

Paterson: Many other jurisdictions follow the APR, or a modified version of it. For example, “gifting” and the “new value” exceptions to the APR have featured in US jurisprudence for a long time. But these are very unstable concepts because they can produce results that are difficult to justify. 

Indeed, they have largely fallen out of favour in the US. If we embrace a new way of thinking about the RP, that isn't about distributing firm value down a waterfall but is premised on jointly creating a surplus and sharing it fairly, then we will have a tool that is very different and more fit for purpose for the 21st century.

3. So is there a better sense now of how to use the RP based on all the case law that appeared last year?

Couzens: We know that there are parameters around how RPs can and should be used. These have developed over time and through a range of cases and are continuing to develop; importantly, this approach allows the tool to be used appropriately in a range of circumstances.

The choice of a flexible rather than a prescriptive approach is in keeping with the development of the UK’s scheme of arrangement, a tool which has been, and remains, popular. It means that the RP can be used in a whole host of scenarios to deliver comprehensive financial or operational restructurings, address specific liabilities and facilitate the injection of rescue finance.

As a firm, we have been involved in a number of creative uses of the tool including last year’s “pre-packaged RP” in the case of Poundland.

This also allows the RP to be usefully deployed even where the UK may not initially appear to be the most obvious jurisdiction in which to restructure.

A good example is US-based Fossil Group, which recently changed the governing law of some of its debt, and incorporated a UK plan company, in order to use the RP to target specific liabilities.

Over the years numerous European businesses have used the scheme of arrangement to restructure and that trend has continued, including in the case of European firms using the RP despite European jurisdictions now having their own restructuring tools.

4. Do you think the UK risks becoming too expensive for mid-market firms as evidential expectations rise?

Paterson: The courts are alive to the need to moderate their requirements according to the size and complexity of the case, as they have shown in some cases in which the RP has been used by SMEs.

However, restructuring is very difficult for a small or a medium sized company, because shedding liabilities is not something that can be done easily.  Providing a means to “wash off” significant liabilities cheaply, with no forum for opposition and without the supervision of an insolvency office-holder, would not be good for credit markets.

It would not be good for healthy companies raising capital. That problem, which lies at the heart of restructuring for small businesses, is a hard nut to crack. That is why the vast majority of small businesses do not restructure when they run into trouble: there is not enough cash to create a runway.

One of the reasons why the connected party prepack remains a popular tool is that it is a relatively quick and cheap process.

In my view, that is why the government has not introduced a prohibition, notwithstanding successive reviews, albeit that parameters around its use were introduced in 2020 through enhanced requirements for independent “pre-pack reports”. Without connected party pre-packs, it may be that we would see more efforts to use restructuring tools by small and medium sized companies.

5. As fairness becomes the centre of gravity in recent cases, how do you think restructuring plans are evolving?

Paterson: We should be thinking about RPs in a different way than the approach adopted in some other jurisdictions. The point of the RP is to implement a deal that should have been achievable commercially, but where somebody has held out unreasonably against a deal.

Whereas an APR deal, by definition, is rarely achievable consensually because it involves writing off liabilities in their entirety, which no affected stakeholder will willingly accept.

I know many people do not agree with me on this, but I think there should be a premium on the consensual deal. The point of a restructuring tool is to remove the hold-out power that stakeholders have, to encourage them to negotiate.

Most of the time if a cram down power does its job there should be no need to use it. The fact that the power exists incentivises everybody around the table to do a deal.

Of course, everyone is going to try and give away as little as they can. If you are selling something, you try to sell it for more than you think it is worth and if you are buying, you try to buy it for less than you think it is worth. In a restructuring, you try to give away less than you are willing to sacrifice.

The role of the law is to encourage stakeholders to reveal what they are actually willing to share rather than holding out for more than they genuinely think they should achieve. Someone somehow has to broker that deal. The law adjusts the bargaining power to make that deal possible.

My primary objection to the so-called out-of-the-money approach is that it does the opposite. That approach, adopted in Virgin Active and some subsequent cases, assumed it was fair to provide only a de minimis payment to out of the money creditors, in exchange for the compromise of their claims.

That potentially incentivises others to go straight to court, because if the out of the money approach means they can keep everything it doesn't incentivise those creditors to voluntarily share part of the upside. Why would you share if you know you can keep it all?

Couzens: The point around how much people are willing to put on the table is interesting. The incentives differ considerably compared with 15 or 20 years ago. The uptick in distressed debt trading means that, even within smaller capital stacks, there can be very different incentives driving behaviour.

Creditors may have bought in at vastly different prices or they may have cross-holdings that could influence behaviours. Trying to work out a common interest, even within a specific group, for that group then to negotiate with others is sometimes very challenging.

Paterson: That is undoubtedly a position that has become progressively more complex over the last 20 years. Almost no one has a complete picture of what everybody's incentives are.

In a way I am nostalgic for the restructurings of the 1990s, when we sat around a conference table for a week, emotions ran high and much pizza was eaten, but after a week a deal had been thrashed out.

6. Do you think stakeholders are becoming more creative in framing the “relevant alternative” to shape outcomes?

Paterson: Most of the time, the plan company will assert that if a deal cannot be reached consensually, and an RP is pursued, the relevant alternative will be some form of insolvency in which the IP will try and sell what they can.

The key question is whether the plan is the best plan available: if this plan fails, will the company immediately move to insolvency, or will it renegotiate another plan?

I originally took the view that an option open to a dissenting stakeholder could be to assert that the relevant alternative is actually a different plan. That is becoming very hard to do successfully.

The courts require a level of specificity that is difficult for opposing creditors to meet. Critically, the courts also want to see a plan that is implementable, which is very challenging when senior creditors confirm that they would not support an alternative plan.

Ultimately the judge must identify the relevant alternative – what is most likely to occur absent the RP? Unless opposing stakeholders can show a solid plan, that would garner the requisite support, they are likely to face an uphill struggle to challenge the company’s relevant alternative successfully.

Couzens: There is certainly more of a focus on the nuances of the relevant alternative now than there was perhaps eight or nine years ago, in a scheme context, when the counterfactual was likely to be an insolvency process and the court’s exercise of discretion was not seeking to cram down on dissenting classes.

Now, even where high levels of support are expected, more thought is given to what would play out in that scenario. For example, at what point would the appointment likely be made and what strategy would the insolvency office-holder be likely to adopt?

7. What’s your view on the “plan benefits reports”?

Paterson: Post-Petrofac there have been several cases in which the plan company has engaged advisors to produce a report which seeks to quantify the contribution made and benefit received by each stakeholder class in order to demonstrate fair allocation.

These reports could risk muddying the waters. The court has made clear that, in some circumstances, it wants to be shown some way of sharing the upside but it hasn't asked for a mathematical calculation. The upside is hugely unpredictable and businesses may fail after a restructuring.

There is no way of avoiding working out the value break, because you need to work out who is taking the most risk in pursuing the restructuring. Those taking the most risk should logically receive the most reward.

However, the market can work out what proportion of any potential upside each stakeholder class should be entitled to, without the need to attempt to quantify all contributions and benefits –some of which will not be easy to quantify accurately.

8. How do you see the rise of LMEs in Europe — and do you expect them to become more aggressive?

Paterson: An LME which genuinely de-leverages the balance sheet is a helpful tool. However, if the LME simply buys time - and adds more debt - then there could be cause for concern. 

The concern is that we will have a large number of very over-leveraged companies struggling to meet debt service obligations, or with unsustainable amounts of interest accruing, that may fall over eventually with greater debt and less chance of rescue. These situations have implications for employees, communities, and society.

There is very little choice in the US because of the APR; no sponsor is likely to proactively restructure a private equity portfolio company if they will lose their shares. So, the only real choice in that situation may be an LME. In the UK we are not in that position.

We are developing a tool in the RP that makes it perfectly possible for the sponsor to keep their shares and to de-leverage the firm. If we do not continue to develop and utilise that tool, and instead resort solely to LMEs that simply buy time , that will be a missed opportunity.

One reason why LMEs appear to be growing in popularity, particularly post-Petrofac, might stem from perceptions of litigation risk. The RP creates a forum for dispute, at court hearings, whereas to challenge an LME a dissentient stakeholder must positively launch litigation.

However, litigation has been launched in multiple jurisdictions in relation to LMEs. Having seen how litigation has played out in the US, the LME seems to be no less uncertain than an RP.

While there is a natural forum for opposition to an RP, it is important to bear in mind that an opposing creditor will likely have to pay at least their own costs and so is unlikely to be motivated to challenge the RP unless there is a significant gulf between its position and the terms of the RP.

Couzens: It is important that LMEs are not seen as a single category of potential deals as they vary considerably in terms of their purposes, terms and outcomes.  We regularly advise on situations where documents enable the debtor to raise finance on either a contractually or structurally senior basis.

When used thoughtfully and appropriately, these options provide a very helpful avenue to address liquidity issues and potentially delever. This is sometimes what a debtor might need rather than a full-blown restructuring. 

We have already seen examples of these strategies being used creatively in Europe and, particularly with the rise of private capital, I would expect them to continue to form part of the menu of options which companies evaluate as part of refinancing or restructuring discussions.

9. What is the piece of advice you provide to your students who are looking to become restructuring lawyers in the upcoming years?

Paterson: I tell my students not to underestimate the power of “slog”. This is an industry full of very bright, very talented people and it can feel daunting to be trying to make your way in it.

But I tell my students that if they ever have moments of doubt, they should focus on the fact that slog gets you a very long way. Indeed, when I retire I am going to write one of those airport books about never underestimating the power of slog!