Restructuring plan
Also known as: Scheme of arrangement, Part 26A plan, StaRUG plan
The court procedure that delivers a takeover, applied to creditors. A majority binds the rest — and a whole dissenting class can be crammed down.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
Negotiating with creditors has one weakness: any of them can refuse. A single holder can hold out for full payment while everybody else takes less, and if enough of them think that way, nothing gets agreed.
A restructuring plan solves that with a court. Creditors are sorted into groups, each group votes, and if enough of them approve, a judge can make the plan binding on everybody — including the ones who voted no.
It is exactly the same machinery that delivers a takeover — see the scheme of arrangement — pointed at creditors instead of shareholders. The vote is by class, the thresholds are statutory, and the court checks the process rather than the merits.
Newer versions go further. If a whole class votes against, the court can still approve the plan, provided that class would be no worse off than in the realistic alternative and at least one class that genuinely has money at stake voted yes. That is a large power and it is why the comparison against the alternative is argued so hard.
- 1
Structuring4–10 wks
Classes are defined and the comparison against the alternative — what creditors would get otherwise — is built.
- 2
Explanatory statement3–6 wks
Creditors receive the plan, the valuation and the relevant alternative, in a document the court will test.
- 3
Convening hearing1–3 wks
The court is asked to allow meetings on the proposed class basis, which is where class objections belong.
- 4
Class meetings1 day
Each class votes, and the statutory majorities are tested separately.
- 5
Sanction hearing2–5 wks
The court decides whether to make the plan binding, including on classes that voted against it.
Class composition — The court decides. Classes drawn wrongly is the one procedural error that sends everybody back to the beginning.
The statutory majorities — Each class of creditors decides. Missing them in one class is survivable in newer regimes and fatal in older ones.
The cram-down tests — The court decides. No dissenting class worse off than in the relevant alternative, and at least one class genuinely in the money voting in favour.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The company | Neither | Proposes the plan, which is why it needs a management team creditors still deal with. |
| Each class of creditors | Both | Votes separately, so how the classes are drawn decides who has a veto. |
| Dissenting creditors | Neither | Can be bound by a majority, and in newer regimes a whole dissenting class can be crammed down. |
| The court | Neither | Tests the process and the comparison against the alternative, not whether the deal is a good one. |
| The valuation witnesses | Both | Give evidence on the relevant alternative, which is what the fairness test is measured against. |
- Desk
- Restructuring
- Decided by
- Each class of creditors, then a court
- Binds
- Everybody, including those who voted against
- Newer regimes allow
- A dissenting class to be overruled entirely
- The court tests
- Process and the relevant alternative, not the merits
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricematters
- Financingbarely applies
- Approvaldecides it
- Diligencebarely applies
- Executiondecides it
What decides it here. By this point the economics have been argued; what remains is whether the classes were drawn in a way the court accepts and whether the comparison against the relevant alternative holds up. Classes drawn wrongly is the one error that sends months of work back to the beginning.
3 · IntermediateHow it runs in practice
Classes, again
Creditors vote in classes, and a class is a group whose rights are similar enough to consult together. Drawing them is the most consequential decision in the whole process:
- Too many classes and a small group acquires a veto it should not have.
- Too few and creditors with genuinely different interests are outvoted, which is exactly the objection a dissenter takes to court.
Class objections belong at the convening hearing, before the vote. Raised at the sanction hearing they are usually too late — but the applicant still had to find out.
The relevant alternative
The plan is tested against what would happen otherwise, which is normally a wind-down. Every creditor must be shown to receive at least as much under the plan as in that alternative. This is why understanding liquidation explains restructuring: it is the benchmark every plan is measured against.
Cram-down across classes
Older procedures required every class to approve. Newer ones allow a dissenting class to be bound if two conditions hold: no member of it is worse off than in the relevant alternative, and at least one class with a genuine economic interest voted in favour. That second condition is what stops a plan being approved by a class that is being paid in full and therefore does not care.
Why the forum is chosen
Companies choose the jurisdiction whose procedure suits their creditor structure, provided they have sufficient connection to it. That is a real feature of international restructuring and a contested one — the choice of forum is a choice about which minorities can be overruled.
4 · AdvancedThe numbers & the documents
What the court actually examines
- Jurisdiction — is there a sufficient connection to this court.
- Class composition — were creditors with materially different rights properly separated.
- Information — did the explanatory statement give creditors what they needed to decide.
- The relevant alternative — what would actually happen if the plan failed, on evidence rather than assertion.
- Fairness — is the allocation of the restructuring surplus defensible, and were dissenting classes treated appropriately.
That last one is where the law is developing fastest. When a plan creates value by fixing the balance sheet, who is entitled to that surplus is not obvious — and courts have declined to treat "the senior class takes everything above its own claim" as automatically correct.
The valuation evidence
Both sides put valuation experts in front of the judge. The dispute is rarely about method and almost always about the forecast: whether the business plan the valuation rests on is realistic. A court that accepts a low valuation puts the junior classes out of the money; one that accepts a high one gives them a seat.
This is the sharpest example on the site of valuation having direct legal consequences rather than being an input to a negotiation.
Lock-up before launch
Almost every plan is negotiated with a committee and locked up before it is filed. The percentage committed in advance is the best available prediction of the outcome, and a plan filed without one is a plan whose proposer is betting on the court rather than on the creditors.
The constitutional oddity, stated plainly
Property rights are altered without the owner's consent, on the vote of others and the approval of a judge. That is a large power, justified by the alternative: without it, one holdout can force a value-destroying liquidation on everybody. The safeguards are the class test, the disclosure, the alternative comparison and the court's discretion — and the argument about whether they are sufficient is a live one, not a settled one.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Restructuring plan in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyCourt-supervised reorganisationDealA company files for protection and keeps running
- EasyWind-downDealThe business stops and the assets are sold for whatever they fetch
- MediumDebt-for-equity swapDealCreditors give up debt and receive the company instead
- MediumDistressed exchangeDealBondholders are offered less than they are owed, and the alternative is not repayment
- MediumLiability managementDealAn issuer buying back or exchanging its own bonds
- MediumSqueeze-outDealPast a statutory threshold, a buyer may take the last shares whether or not those owners agree
- HardRestructuringDeskWhat happens when a company cannot pay: the standstill, the valuation fight, classes and voting, new money and the…
- HardScheme of arrangementDealA takeover run through a court: it delivers the whole company or nothing, and the classes decide who has a veto