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CVA or a Restructuring Plan

We are hearing a lot about paying off the creditors. A CVA, a restructuring plan, what does it all mean.

BAWT finance expert Ian Redfern(@redfern_i_j) explains.

CVAs, Restructuring Plans, Dividends, Creditor Classes, and Contingent Liabilities. Just some of the terms being widely used in connection with the current Administration of Derby County Football Club. Enough to send heads spinning; so let’s try and make some sense of what we might see happen over the next few weeks.

Let’s start with a Company Voluntary Arrangement (CVA for short); historically a commonly-used mechanism for exiting Administration and the method adopted at both Wigan Athletic and Bolton Wanderers. A CVA is a proposal put to a company’s unsecured creditors, who then vote as a single class (group) on whether to accept it or not. It is important to note that secured creditors (MSD in this case), who are effectively guaranteed repayment via the collateral held, do not take part in the vote. It is also worth highlighting that in a CVA, amounts due to preferential creditors (which include HMRC) cannot be reduced without their express agreement.

In the first round of voting, at least 75% of creditors (by the amount owed) must vote for acceptance, or the CVA fails. If 75% is achieved, then the second round of voting takes place, which excludes ‘connected’ creditors; in this case, the £120m owed to Mel Morris via his Director’s loan into the parent company, Gellaw Newco 203. In this second round, 50% must be in favor for the CVA to pass.

Here lies a problem. Football Creditors are c£9m, other unsecured creditors c£6m and HMRC c£29m - so it follows that if HMRC will not support the proposal, their debt of £29m against the other £15m (9 + 6) ensures that the 50% threshold cannot be reached. Thus, without HMRC support, any CVA will fail and cannot be imposed. Historically, HMRC has not supported CVA’s at football clubs.

The other fly in the ointment is the ongoing legal cases brought by Middlesbrough & Wycombe; technically both Football Creditors. Currently, their claims are what is known as contingent liabilities. In other words, a liability that might arise in the future - in this case, if one or both clubs are successful in their fight for compensation. Under EFL regulations, all Football Creditors have to receive 100p in the £, as their dividend, whilst other unsecured creditors have to receive a minimum of 25p in the £. If those thresholds aren’t achieved, then a further points penalty arises; typically 15 points, on exiting Administration.

Still with me? Now the real fun starts!

Let’s assume that a CVA won’t pass, either because of HMRC’s refusal to support and/or the Middlesbrough/Wycombe cases. What then?

The likely course of action would appear to be a Restructuring Plan, a concept introduced by changes to Insolvency Law in 2020. Relatively few Restructuring Plans have been seen so far and none in professional football. A Restructuring Plan, like a CVA, still represents a proposal to creditors, but the key difference here is that it involves an application to the courts. Hence it is more time-consuming, more expensive, and perhaps more controversial than a CVA. If Quantuma is thinking that a Restructuring Plan is more likely than a CVA, then that might explain why timescales have now slipped into February.

Unlike with a CVA, under a Restructuring Plan creditors are placed into classes (groups) the make-up of which has to be agreed by a court. Each class of creditor then votes on the Plan and the results then go back to the court for sanction or refusal. At this point, we encounter another key difference between Restructuring and a CVA. A Restructuring Plan can be sanctioned by the court and become binding on ALL creditors, even if only ONE class of creditor has voted for it, provided the court is happy that the classes who voted to turn down the Plan would be no worse off than under the alternative outcome, which it could be argued might be liquidation. This is called cross-class cram down and might be a way to defeat creditors (real or contingent) who won’t cooperate - so potentially HMRC, Wycombe, and Middlesbrough.

This brings us to another complication. EFL regulations have not been updated to reflect the changes to Insolvency Law last year - so far there has been no need to and the position has not been tested. So what might happen, if under a Restructuring Plan all Football Creditors don’t receive 100p in the £ and/or all unsecured creditors don’t receive at least 25p in the £? It’s quite possible that the EFL and its member clubs will look to impose further (perhaps significant) points deductions on The Rams for season 2022/23. Whether they would be successful and how big those penalties would be is anyone’s guess. Uncharted waters……..

As you can see, the situation and options before Quantuma are complex; so perhaps we shouldn’t be too surprised if the bids reportedly on the table are heavily conditional and require significant work to unpack them before a preferred bidder can be established.

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