A new tool in the Goodbox?
The end of 2022 and the start of 2023 has seen a steady uptick in restructuring activity, not only for companies with complex capital structures but also small-to-medium sized enterprises seeking to take advantage of powerful restructuring tools (such as the UK’s Part 26A Restructuring Plan or Super Scheme).
The case of Goodbox Co Labs Limited (in administration) (Goodbox) is the first example of an individual creditor unilaterally seeking to access the Super Scheme.
The Restructuring Plan proposed by Goodbox’s principal shareholder, NGI Systems Limited (NGI), offered a going concern rescue alternative to creditors that was different to the outcome which Goodbox’s administrators were proposing to effect: namely a sale of the business and assets of the company in administration and the corresponding application of such sale proceeds to discharge the costs and expenses of the administrations and, thereafter, a payment of a dividend to creditors in an insolvent administration process.
The case could open up an avenue we have been exploring for some time: the possibility of creditors on the receiving end of a proposal they feel does not adequately value their claim or share any surplus to not only “vote with their feet” in seeking to object to proposed treatment but to provide an alternative plan altogether. In doing so, it offers a direct route (subject to careful planning) for creditors to propose a rival Restructuring Plan (which may offer comparable or potentially greater outcomes to all affected stakeholders) than a sponsor or company backed Super Scheme.
Background to the promotion of the Goodbox Restructuring Plan
The Company was founded as a start up in 2016 and is regulated by the Financial Conduct Authority in the fintech space, with its purpose to develop contactless payment technologies and services aimed at the charity sector. NGI was the principal key technology supplier of Goodbox since its inception (and in that capacity a creditor), and also a shareholder in Goodbox.
In 2021, Goodbox sought to, amongst other things, put in place a revised business plan and stabilise its cashflow position including obtaining debt finance support via the UK government’s future fund. Such funding was in an amount of approximately GBP9.1 million, which was made available in the form of a convertible debt instrument (Convertible Note).
Part of the proceeds of the Convertible Note were used by Goodbox to obtain a perpetual software licence for its ‘Hercules’ payment platform from Q Invest Limited (Q Invest). Such software, according to the administrators proposals, lacked the functionality outlined in the contract with Q Invest and, as a result of such investment and the failure of the technology, left Goodbox with a large balance sheet liability.
Goodbox was placed into administration in June 2022 by application of NGI. Jeremy Frost and Patrick Wadsted, licensed insolvency practitioners of the Frost group, became the joint administrators. The order was sought on the basis that Goodbox was unable to access further funding because of ongoing shareholder disputes blocking further investment into the business by NGI.
However, NGI considered that there was a route to an exit from administration that avoided a sale of the business and assets by the joint administrators of Goodbox. To prevent a diminution in value, NGI sought to prevent the assets of Goodbox being disposed of by way of a “pre-packaged” administration sale (Business Administration Disposal) – whilst at the same time developing a strawman for a Restructuring Plan.
In exchange, NGI put in place contractual funding arrangements to fund the trading losses of the administration, and buy time for it to develop its own restructuring proposals that NGI considered would lead to the fulfilment of a ‘going concern’ rescue of Goodbox.1
Applications were made by NGI (firstly on 2 December 2022) to formally oppose the Business Administration Disposal on the basis that NGI was seeking to promulgate a Restructuring Plan proposal which, if successfully approved by affected creditors and sanctioned by the court, would result in the rescue of the company as a going concern (but which could not be implemented if the Business Administration Disposal) were effected.
It appears that the Court was minded to permit the delay of the Business Administration Disposal. It granted NGI, in its capacity as a creditor or shareholder of the company, standing to make an application pursuant to section 901C(2)(b) of the Companies Act 2006. In short, NGI was permitted to propose a meeting of Goodbox’s creditors or any class of its creditor or members, for the purposes of considering and voting on a proposed compromise pursuant to the wider Restructuring Plan provisions set out in Part 26A of the Companies Act 2006 (NGI Goodbox Restructuring Plan).
NGI’s Restructuring Plan Proposal
As a consequence of the NGI Goodbox Restructuring Plan being creditor led by NGI, the suite of court and creditor documentation including the explanatory statement was prepared and submitted, in this case, by NGI.
The NGI Goodbox Restructuring Plan was proposed by NGI to prevent the Business Administration Disposal and permit the rescue of Goodbox as a going concern and achieve a ‘purpose one’ outcome of the administration of Goodbox.
The plan’s principal features appear to be:
(a) Additional “rescue funding” to be made available to Goodbox by certain new lenders (Rescue Funders) – including NGI. This was to implemented by way of a new secured syndicated term loan facility with a 36 month maturity (New Debt Facility);
(b) Rescue Funders to be allocated 85% of the new equity in Goodbox in exchange for providing the New Debt Facility;
(c) All existing shareholders or creditors of Goodbox according to the explanatory statement to be offered the opportunity to participate in the New Debt Facility;
(d) The Convertible Note to be exchanged for equity in the post-restructured shareholding of Goodbox and holders of the Convertible Notes to receive 14% of the equity;
(e) Trade creditors of Goodbox to be paid in full, utilising funding made available by the New Debt Facility following adjudication of their claims, with a potential funding delay of up to 6 months;
(f) Existing shareholders of the Company diluted to receive 1% of the post-restructured shares in Goodbox;
(g) Entry into new articles of association, new shareholders agreement post-sanction of the NGI Goodbox Restructuring Plan to provide new governance arrangements going forward;
(h) Continuation of supply of technology engineering and engineering services of NGI to Goodbox pursuant to modified supplier cost reduction agreement;
(i) A condition precedent of the NGI Goodbox Restructuring Plan agreement to permit certain differential treatment for historic accrued creditor claims of NGI; and
(j) Plan Administrators (separate to the joint administrators) to be appointed to oversee the Restructuring Plan and enter into (on behalf of creditors and existing shareholders) the relevant documentation to give effect to the NGI Goodbox Restructuring Plan.
Class Breakdown
In the case of Goodbox, Malcolm Davis-White, KC, sitting as a high court judge, ordered that the NGI Goodbox Restructuring Plan should have the following four classes, with meetings held on January 10:
- Class 1: holders of the Convertible Notes. Such creditors voted unanimously against the Super Scheme.
- Class 2: administration creditors. NGI, as creditor, were represented in this class and represented 96.62% of the debt which voted to approve the Super Scheme.
- Class 3: trade creditors. 96.62% of trade creditors voted to approve the Super Scheme.
- Class 4: existing shareholders. 96.36% of existing shareholders voted to approve the Super Scheme.
As readers will doubtless be aware, one of the significant advantages of a Super Scheme (as opposed to an ordinary scheme for example) is the ability to bind creditors in other classes (either because they are “out of the money” or by cramming down dissenting creditors of another class). Dissenting classes are only able to crammed down if they would be no worse off than in the “relevant alternative”. The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the Restructuring Plan were not sanctioned. In this case, the most likely outcome being the resumption of the Business Administration Disposal.
The Outcome
While hearing counter-arguments from the joint administrators, the Court was nonetheless prepared to sanction the NGI Goodbox Restructuring Plan.
Subject to completion of the requisite contractual steps set out in the NGI Goodbox Restructuring Plan, it appears that Goodbox has essentially been able to address profit / loss and balance sheet issues using the Restructuring Plan process – with the result that it is likely that a rescue of Goodbox is able to fulfilled and the administration terminated.
A Solution for Different Situations & Stakeholders?
The Restructuring Plan process is a powerful debtor-in-possession driven solution. However, as seen in the case of Goodbox, it can also be driven forward (in the right circumstances) by creditors.
Further, as the case law and need for Restructuring Plans has continued to evolve, many previously uncertain aspects of the process – particularly as a tool for small and mid-market companies – have been and continue to be clarified. This was demonstrated last year in the case of Houst where the Restructuring Plan proposal successfully implemented in that case was used to secure the business a debt package of circa GBP10 million.2 In that case, and indeed the case of Goodbox, the Court appears to be moving towards a pragmatic, commercially driven / results oriented approach to permitting the use of Restructuring Plans that stand to benefit the greatest number of stakeholders or materially improve recoveries.
Similarly, the promotion of a successful Restructuring Plan by the joint administrators of Amicus also demonstrates that there will, in the right circumstances, be strong and continued use of the Restructuring Plan as an alternative to long-tail administration processes or pre-pack administrations.
Whether the creditor-led usage of a Restructuring Plan can be replicated by creditors in other situations remains to be seen – for example, by junior creditors who have spent considerable time and effort in creating their own restructuring strawman but whose proposals are ultimately rejected in favour of sponsor driven or senior lender supported proposals. This is one area where guidance is welcome: as to the level of detail and content of the Restructuring Plan and court submissions necessary for a Court to be satisfied that a Super Scheme proposed by a creditor contains sufficient information for other creditor classes / shareholders to make a reasonably informed decision on the proposal.
Creditor-led Restructuring Plans will often have a practical obstacle to overcome in terms of access to current information regarding the state of the business – and, therefore, their ability to promulgate a credible Restructuring Plan. This will of course make a huge difference to the time that it may take for a Restructuring Plan to be developed and the cost implications. After all, the best source of reliable knowledge will be the company and its directors, who will have developed and refined their business plan and will likely have stress-tested the same in a downside case and against a range of alternatives.
However, in this regard, some of the existing cases provide useful clues. Guidance around the documentary standard for a Restructuring Plan is provided in a Practice Statement3, which should be as concise as the circumstances permit. Further, the remarks of Mr Justice Zacaroli in Amicus are also useful in that the Court ought to have regard to the level of disclosure already provided, the urgency of the case, the extent to which further disclosures would assist creditors or the Courts in making a determination, and the proportionality of such information and / or disclosure requests.4 As Mr Justice Snowden acknowledged in the context of the Sunbird scheme: “perfection is not always attainable”.5
Implications and Analysis
At a time when more restructuring activity is expected, the development and evolution of case law and case precedent on a Restructuring Plan’s parameters is welcome.
The case is the first time that the Court has been asked to consider the authority of a creditor to propose a Restructuring Plan pursuant to Part 26A of the Companies Act 2006 where the company itself (or, in this case, the joint administrators) does not. It also provides important guidelines on the procedural requirements, including the level of disclosure that is required to be put before creditors sufficient for them to make an informed assessment of the merits of the proposed compromise – as well as the timetable for submitting such information to creditors.
It is also a useful reminder that Restructuring Plans can be created and deployed with the objective of permitting administrators of a company to pursue a ‘purpose one’ outcome in the administration with a greater degree of regularity, thus promoting and reaffirming the corporate rescue regime in the UK. This might also result in certain administrations where a Restructuring Plan is a viable “exit route” being curtailed – potentially saving cost and time and limiting the effect of the administration on the business.
In the context of broader market usage of Part 26A Restructuring Plans, our team have written extensively about the viability and ongoing development of this flexible process as a “one stop shop”. Precedents now allow cross-class cramdown, exclusion of out-of-the-money creditors, binding shareholders, and its ability to be deployed rapidly in urgent situations.
Looking ahead, we would suggest that the Restructuring Plan will continue to have a number of adaptations:
- This might include opportunities for creditors to seek to propose “rival” Restructuring Plans as an additional means of challenging value and the relevant alternative.
- Restructuring Plans proposed more often as a genuine and credible alternative to an accelerated sale process or pre-packaged administration.
- Greater usage of the Restructuring Plan as a means of effective liability management, similar to how schemes of arrangement have been used achieve interim style “amend and extend” restructuring solutions.
As we continue to march forward into a world of higher-for-longer-interest rates, inflation, economic downturn, labour shortages and other macro-economic challenges, it is likely only a matter of time before we see ever more ambitious transactions achieved at all levels of the marker through the use of the Restructuring Plan.
1 The Joint Administrators secured funding arrangements from NGI to enable them to continue the administration for a period of time and fund the trading losses of the business. Such funding was done on a secured basis with NGI being granted security by way of a debenture giving them fixed and floating charges over the assets of Goodbox entered into post the date of administration as security for the funding they would provide to Goodbox to allow it to continue to trade in administration.
2 The Court sanctioned Houst Limited’s restructuring plan on 22 July 2022, which was also the first time that the restructuring plan was used to cram down HM Revenue & Customs as preferential creditor.
3 June 2020 Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006)
4 Zacaroli J, Re Amicus Finane Plc [2021] EWHC 2245N (Ch), para 13-15
5 See Snowden J, Re Sunbird Business Services Limited [2020] EWHC 3459 (Ch) at [94]
