The Corporate Insolvency and Governance Act 2020 (CIGA), rushed through the UK Parliament in a five-week period last summer, is now over a year old. Driven by the pandemic, this was the largest reform to UK insolvency law in over 20 years. It was intended to sort the major insolvencies of large organisations with multiple share classes and creditor classes. While the provisions are not relevant to small or medium enterprises, the impact on business valuation methods and standards will likely trickle down over time.

CIGA’s new restructuring plan (under s.26A of the Companies Act 2006) replaced the previous Scheme of Arrangement with one major difference: the introduction of the cross-class cram-down (CCCD) mechanism and requirements that business valuation professionals now document how value cascades throughout the capital structure of the company in question.

CCCD’s already appear in the US Chapter 11 regime, and, as of January this year, Holland have added them, bringing the practice to the EU for the first time.

While a Scheme of Arrangement required the support of 75% by value and 50% by the number of each class of affected creditors, a CIGA restructuring plan requires only the support of 75% by value of creditors in each class who vote. Under the restructuring plan, if the consent of all classes of creditor cannot be secured, the court can invoke the CCCD. Also, if the business valuer determines that a creditor is “out of the money,” that creditor may be excluded from voting.

Business valuers can support the courts with ‘most likely’ analyses under CIGA: The new process puts more pressure on valuations, and it also appears to favour restructuring outcomes other than liquidation. The interpretation of “supporting valuation evidence” is only now starting to be tested in the UK courts, with the Virgin Active restructuring plan in May 2021 leading the way. The New Look and Regis cases also highlighted the need for early independent expert input on identifying the “most likely” outcome in formulating restructuring plans (both New Look and Regis plans originated prior to CIGA).

The UK courts have also affirmed their support of “most likely” outcomes, and a further concept of “no worse off” terms, when they approved the recent DeepOcean restructuring plan.

Additionally, Grant Thornton continues to administer the restructuring plan for supply chain finance firm Greensill Capital’s UK operation, which lent money to firms by buying their invoices at a discount and collapsed in March 2021. Credit Suisse and steel magnate Sanjeev Gupta’s GFG Alliance have independent valuers representing their claims in this collapse.

As more companies become subject to the new plans, most financial analysts who have commented on this provision anticipate litigation and challenges to the plan and its valuation assumptions at nearly every step.

Some elements of a business valuation conducted for purposes of insolvency that will require more preparation and support appear to include:

• Providing even more scenario analysis than in the past to aid the court in approving a new plan;
• Additional defensive support against the claims of dissenting parties who may be deemed out of the money;
• Recognition of the need for an accelerated sale of the business, since each week of delay will reduce the likelihood of an ultimate sale;
• Inclusion of “path analysis” for both tangible and intangible assets if liquidation becomes necessary;
• Consideration of recapitalisation or refinancing of the business if any, leading to a requirement for new projections, rather than budgets or forecasts that predate the claim for restructuring;
• Nearly complete reliance on DCF analyses and scenarios, particularly assuming volatility in market multiples continues. (Martin Drummond of Alverez & Marsal has been quoted as saying, “DCF is perfectly suited to the valuation of distressed businesses as it can explicitly assess the costs, losses, and time frame required in getting any business back on track.”);
• Additional stress-testing of DCF scenarios so that the courts and creditors can identify further deterioration of the quality of cash flows immediately; and
• A likelihood that many stakeholders will need their own independent business valuation expert to have their position fully considered.