Karl Clowry, Seán McGuinness, and Aziz Abdul look to the lessons for shareholders, creditors and Administrators from the first creditor led Restructuring Plan.

The Good Box Co Labs Limited (in Administration) case demonstrates once more the viability of the process for the mid-market and continues a trend of RPs being used by a determined creditor / shareholder constituency to rescue an equity investment within an existing corporate group. In short, the mid-market RP is still a highly situational, albeit flexible, tool."

The recent sanction by the High Court of a creditor led part 26A restructuring plan ("RP") in respect of The Good Box Co Labs Limited (in Administration) ("Company") demonstrates once more the viability of the process for SMEs and continues a trend of RPs being used by a determined creditor / shareholder constituency to rescue an equity investment within an existing corporate group. As such, the mid-market RP is still a highly situational, albeit flexible, tool. 

A. Background

The Company is an FCA regulated provider of bespoke payment terminals for charities and fundraisers. NGI Systems Limited ("NGI") was the core technology supplier to the Company (and to that end, a creditor), and also a shareholder. The Company had received unsecured investor debt funding from the Government's Future Fund, alongside matching convertible investor lending (the "Convertible Loan Holders"). 

Deficient software licencing, the failure of certain technologies and an on-going shareholder dispute left the Company with a material balance sheet deficit and unable to access further liquidity from NGI and others. Thereafter, in June 2022, the Company entered Administration on the application of NGI.

NGI's view (acting as lead creditor/shareholder for a number of other existing shareholders and investors in the Company) was that a sale of the Company's assets should be avoided – and, to prevent a post-packaged Administration sale of the business and assets, developed an RP. Following its application to stay the sale, in the interim, NGI funded the trading of the Administration (£800,000, secured by a debenture) to bridge to the launch of its RP designed to rescue the Company on a solvent basis. As such, the Court granted NGI standing to make an application to propose the RP. 

B. Content of the RP

The key features of NGI's proposed RP were as follows:

1. Certain funders (including NGI) to provide a new working capital term loan to the Company (the "New Debt Facility") and, in exchange, be allocated 85% of the new shares in the Company [2];
2. Convertible Loan Holders to be fully equitised, receiving 14% equity in the post-RP Company;
3. Trade creditors to be paid in full via the New Debt Facility (with a payment delay of 6 months or, if later, once independently adjudicated);
4. Administration creditors (i.e., those claims ranking as expenses of the Administration and including the Administrators' fees) to be paid in full from the New Debt Facility (and subject to the same 'time-lag' as the trade creditors). NGI's funding during the Administration was included in this class but, under the RP, their claim was converted to equity. 
5. Existing shareholders to be diluted to 1% of the shares in the post-RP Company. 
6. The Company to adopt new articles of association and a shareholders' agreement to institute improved corporate governance;
7. NGI to continue to supply technology and engineering services to the Company under a 'supplier cost reduction agreement' (reducing relevant costs to the Company by 50%);
8. Specific treatment for historic accrued NGI creditor supply contract claims; and
9. 'Plan Administrators' (independent from the Administrators) appointed to oversee the RP, adjudicate trade creditor and other claims, and enter into (on behalf of creditors and existing shareholders) the relevant documentation to give effect to the RP.

Overall, the RP compromised over £16m of claims. The relevant alternative, as submitted by the Administrators, was the sale of the Company's assets for approximately £375,000, resulting in an estimated deficiency for creditors of over £15.6 million. Under the RP, the Company was estimated to be in a positive position (net assets of c.£35,000). Ultimately, the business and asset sale returns would be swallowed up by NGI's secured 'rescue funding'. 

C. Outcome of the Meetings

The RP comprised four classes: Convertible Loan Holders, Administration expense creditors, trade creditors, and existing equity. 

The only class to fail to vote in favour of the RP was the Convertible Loan Holders. The Court refused to exercise its discretion not to cram across this single class and sanctioned the RP. Dissenting classes may only be crammed down if they would be no worse off than in the "relevant alternative". In this case, the outcome of the RP - 14% of the post-RP equity in the Company - was a material improvement versus the outcome in the "relevant alternative" (i.e., the proposed sales process) of 0.004p in the pound.

D. Consent of the Company to Launch the RP Required? 

The Court confirmed that, as with schemes of arrangements, the consent of the plan company was necessary to sanction the RP. In light of the Company's "hopelessly insolvent" circumstances, the Court directed the Administrators, as officers of the Court, to give consent for the Company to the RP. There were no remaining residual interests to be protected justifying refusing consent. Query whether there is scope for a Court to diverge from the scheme precedent to date and order directors of a distressed RP company to consent in the face of a poorer alternative in view of their creditor regarding duties? 

E. Observations

This is the first RP proposed by a creditor rather than the company. Creditors have always had the ability to propose a RP but, in reality, such RPs are likely to be uncommon given that creditors will almost inevitably lack the sufficiently deep and current operational and financial knowledge of the company needed to put together a proposal. Here, the proposing creditor was the Company's majority shareholder and a supplier of key technologies. Further, as the Company was already in Administration, the creditor was able to rely on the statement of affairs prepared by the Administrators.

It is the first RP to be sanctioned without Company consent (possible down to the Court directing the Company, acting by its Administrators as officers of the Court, to so consent). A solvent company could not have been forced to enter the RP. Query how an Administrator who more actively resists an RP should show how they have balanced their responsibilities to pursue the rescue objectives against their duties to perform their role for the benefit of creditors "as a whole", and whether they could be exposed to direct claims from creditors who stood to gain under an RP had it received their full backing. 

The case continues the (welcome) development of RPs in a mid-market context in terms of proportionality and cost efficiency. For example, NGI's failure to provide detailed forward projections of the effect of the RP - which would have been highly problematic in a multi-constituency cross border financial restructuring - was excused given the weight of support in favour of the RP, the lack of any objections on that ground, and the fact that NGI was a creditor proposing the RP. The information to be expected in an explanatory statement must be judged in the context, including the urgency and the size and nature of the business and the state of information then readily available.

The RP took advantage of the flexibility afforded by the scale of this SME process: hybrid physical and virtual meetings of the voting classes were ordered at the convening hearing to facilitate foreign creditor attendance, and the timetable for the RP was expedited with availability outside London (in Leeds). A notably curtailed window for the stakeholder classes to consider the RP was further provided between convening and sanction hearing: a mere eleven business days passed between the hearings – deemed appropriate in the face of a narrow, active and known series of SME voting constituencies, and in the context of the otherwise "hopelessly insolvent" nature of the Administration.    

In the right situations, Good Box may prove the beginning of a trend of RPs being proposed / threatened by well advised shareholders or creditors in the mid-market to help them go further than merely threaten to vote against the plan (which brings the risk of that class being 'crammed across' in any event) or  Administrators' proposals, but to meaningfully challenge valuation assumptions around administration sales. A threat of an informed SME shareholder class devising an RP could have its own hold-out value.