Background
The Restructuring Plan, sometimes referred to as the "super scheme", was introduced under the Corporate Insolvency and Governance Act 2020. This (newish) procedure is closely based on the well trodden scheme of arrangement process (the "Scheme") now set out in Part 26 Companies Act 2006.
A Restructuring Plan differs from a Scheme in three key ways. First, a company must be, or likely to be in financial distress if it is to propose a Restructuring Plan. Secondly, the threshold for approval under a Restructuring Plan is 75% in value per class of creditor; there is no numerical test. Third, and most importantly, the Restructuring Plan provides for a "cross class cram down". That allows the court to sanction a plan where (i) 75% in value of one class of creditors with a genuine economic interest in a Restructuring Plan plan votes in favour of that Restructuring Plan and (ii) none of the members of the dissenting class would be any worse off than they would be in the "relevant alternative"; ie the outcome if the plan did not proceed.] This ability to cram down dissenting creditors was initially viewed as powerful tool both for large corporates and small and medium enterprises ("SMEs"), facing opposition to a restructuring proposal from some but not all of their creditors.
In December 2022, the Insolvency Service ("IS") published an evaluation report (the "Report") on the Restructuring Plan. Although the IS found that the Restructuring Plan procedure was broadly successful, it recognised that "there [were] a number of issues which [prevented] [Restructuring Plans] from being seen as suitable for SMEs", including the fact that 90% of those surveyed believed the Restructuring Plan was simply too expensive for use by SMEs. The Report suggests various ways in which the Restructuring Plan could be streamlined for SMEs, including moving to one court hearing rather than two, providing standard form templates and holding hearings in front of an Insolvency and Companies Court judge rather than a High Court judge.
Valuation Disputes
In the three years since its introduction, the Restructuring Plan has been subject to numerous challenges from dissenting creditors.
The power of the cross class cram down was demonstrated in Re Virgin Active Holdings Ltd, Virgin Active Ltd and Virgin Active Health Clubs Ltd [2021] EWHC 1246 (Ch)) ("Virgin"), in which the court exercised its discretion to cram down five of seven classes. The five dissenting classes were made up of landlords, who had failed to adduce any evidence to challenge the company valuations. The court, in approving the plan, noted that (i) market testing was not always necessary, especially in cases such as Virgin, in which the market for gyms "could hardly be less favourable" (due at that time to the ongoing COVID pandemic and the resultant restrictions); and (ii) the court could only make a decision on the evidence before it and any dissenting creditors should submit their own evidence. It concluded that the dissenting creditors would achieve better outcomes under the proposed restructuring plan compared to the relevant alternative, administration, in which they would be "out of the money".
The court again utilised the cross class cram down in April of this year in Re AGPS Bondco Plc [2023] EWHC 916 (Ch) ("Adler"). The Adler Group, a German property group, proposed a restructuring plan under which noteholders would be subordinated to new money lenders and the maturity dates of the notes would remain unchanged. A committee of bondholders challenged the proposal on the basis that their treatment offended the pari passu principle, as it maintained the staggered maturity dates, while in the relevant alternative, liquidation, they would rank pari passu.
The court sanctioned the plan, finding that it was likely that all plan creditors would be repaid in full. The court conducted a thorough cross-examination of witnesses and experts and came to a conclusion on the value of the Adler Group's assets. While it noted the inherent uncertainty of the evidence, it was ultimately convinced by the Adler Group's evidence and sanctioned the restructuring plan.
It is notable that in the cases referred to above, although the proposed restructuring plans were sanctioned, significant professional costs were incurred addressing the various creditor group challenges. While this may be of lesser concern to larger corporates, SMEs will need carefully to consider whether these costs are affordable, especially given the presence in the restructuring toolkit of more affordable and perhaps simpler options, such as pre-packaged administrations.
HMRC Challenges: A point of Principle?
There have been a number of instances where HMRC has strongly opposed the use of the cross class cram down to compromise debts owed to HMRC. This is of particular concern to SMEs, for whom HMRC is often a significant creditor.
In Re Houst Limited [2022] EWHC 1941 (Ch) ("Houst"), a holiday property management company proposed a restructuring plan to in order to avoid entering administration. As a preferential creditor, HMRC was placed into a separate class and voted against the proposal on the basis that the plan compromised its preferential status and allowed dividends to be paid to unsecured creditors. The court exercised its discretion to cram down HMRC, noting that it would be worse off in the relevant alternative. HMRC did not attend the sanctioning hearing and relied on its historical opposition and correspondence.
Since Houst, HMRC has taken a more active role in such cases. In The Great Annual Savings Company Ltd [2023] EWHC 1141 (Ch) (“GAS”), HMRC argued that the margin of return between a proposed Restructuring Plan and the relevant alternative was very fine. This meant that any misestimate, such as an unduly pessimistic view of the relevant alternative, would mean that HMRC would be worse off under the proposal. HMRC further argued that the plan proposed by GAS was substantively unfair as other creditors who would receive nothing in the relevant alternative would receive a dividend under the plan, thus further prejudicing HMRC. The court found in HMRC's favour, holding that the "strong terms in which HMRC voiced its objection deserve considerable weight" and noting that it was not always necessary for a dissenting creditor to produce competing evidence.
A similar approach was taken in Nasmyth Group Ltd [2023] EWHC 696 (Ch), in which HMRC opposed a restructuring plan proposed by Nasmyth Group Limited ("Nasmyth"). Under the proposed restructuring plan, HMRC would receive 34.8p in the £ compared to nil under the relevant alternative. Although it was accepted that HMRC would be better off financially under the restructuring plan compared to the relevant alternative, the court chose not to exercise its discretion to sanction the plan. This was because (i) although HMRC would not recover from Nasmyth in the relevant alternative, it would still be owed a significant sum by the other group companies; and (ii) the proposal was based on HMRC agreeing time to pay arrangements, which HMRC did not appear willing to do. The court said that it was necessary to exercise caution in relation to HMRC debts, and that the courts should not cram down HMRC "unless there are good reasons to do so".
The High Court has now handed down its decision in Prezzo Investco Limited [2023] EWHC 1679 (Ch) ("Prezzo"). In this case, HMRC accepted that no member of a dissenting class would be worse off under the proposed restructuring plan than would be the case under the relevant alternative. HMRC's challenge was based upon whether the court should exercise its discretion to sanction the proposal. The court ruled against HMRC and sanctioned the plan. It distinguished Prezzo from the two cases above for a number of reasons, including that in Prezzo, the return to HMRC would be higher, HMRC would be repaid much quicker and that it was appropriate for Prezzo to continue paying specified trade creditors as the support of those creditors was essential to enabling Prezzo's business to continue.
Analysis
The decisions in Houst and Prezzo are each welcome in the fast evolving jurisprudence of the Restructuring Plan. The ability, in appropriate circumstances, to cram down HMRC, often a significant creditor of SMEs made the Restructuring Plan an attractive option in circumstances where a scheme of arrangement or company voluntary arrangement was not viable. However, with the influx of challenges from dissenting creditors, particularly HMRC and the circumspect approach the court adopts when considering the exercise of its discretion in the light of the evidence before it, brings to the timely development and implementation of a Restructuring Plan material litigation risk.
The extent to which the court in Prezzo analysed the factual background to the Prezzo Restructuring Plan is striking. It attached material weight to the company's financial difficulties and the additional funding (£2 million) provided by the secured noteholders. The result is that HMRC will receive payment of 33.5% of its claims within 30 days of the plan going live. Additionally the judge observed that Prezzo had not been a party to a large number of broken time to pay agreements, in contrast to the position in GAS. There had also been "meaningful and prompt" communication between HMRC and the company.
While the Prezzo decision indicates that the court may be willing to cram down HMRC in certain circumstances, the fact dependent nature of the case law in this area means that in addition to being flexible, use of a Restructuring Plan can be costly and uncertain given the need for plan proponents both to prepare and to scrutinise valuation and other evidence put forward in relation to a Restructuring Plan. All of the cases referred to in this note demonstrate that nothing can really be left to chance, as well as showing that each case where a Restructuring Plan is put forward will turn on its own facts and the way those facts are presented.
In particular, any company proposing a restructuring plan will need to ensure the evidence submitted is clearly presented and substantiated. That will be of particular importance in the assessment of the correct "relevant alternative", the identification of which will to a material degree go to value and where value breaks. Where there is any doubt, serious consideration should, from the outset, be given, to implementing a restructuring or rescue process through the well tried and tested route of a pre-packaged insolvency process rather than staking success on the use of a restructuring plan.
