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Houst’s Restructuring Plan was sanctioned last week. It was notable because of its size, that is, the company is very small compared with the financial giants which have used the process so far - and because it used the cram-down facility to overrule HMRC in its status as a secondary preferential creditor.

SMEs and the Restructuring Plan

When the Restructuring Plan was introduced, the government stated the intention was for it to be used not only for large multi-national entities, but for small and medium sized enterprises as well. So far, it has only really been used by big businesses. The perception has been that with two court hearings and the possibility of having to fund objections raised with the court by creditors, the Plan can be an expensive form of restructuring when a company voluntary arrangement (CVA) would do the job.

Here, however, only a Plan would have sufficed. The proposal was to compromise HMRC in its status as a preferential creditor, and HMRC had confirmed by email it would not support such a course of action. In a CVA, preferential creditors have to consent before being compromised. In a Restructuring Plan, that is not the case. In practice, the costs would not have been as high as they might have been in this case, because HMRC did not appear to make submissions to the court on its objections to the Plan.

No ‘shouting from the side lines’

The court acts to a certain extent as a check and balance in Restructuring Plan proceedings, to prevent unfairness for creditors. However, it can only do so much. Mr Justice Zacaroli was at pains to point out in his judgment that for him to be able to take HMRC’s interests into account, they ought to have appeared and made representations. In another recent judgment, Lord Snowden commented that it was no good creditors “shouting from the side lines” if they did not like the projected course the Plan would take. They must turn up to Court and put their case. In Houst, the only communication the Judge had seen from HMRC was an email written to the company saying HMRC refused to relinquish its status as a preferential creditor. The Judge said he was not clear from this whether HMRC would prefer the company to enter into a formal insolvency process, for example, to allow for investigation of the directors’ conduct. He decided that, given that the company’s financial difficulties seemed more linked to pandemic-related issues, rather than general mismanagement and that HMRC would actually collect more under the Plan than in a formal insolvency process, the Plan was the better option for all.

It highlights, though, the need for creditors to appear where they have objections. The Court will not try all that hard to second guess what they might have wanted.

Lemi McAuley, partner in Shoosmiths’ corporate restructuring and advisory team, commented “This is a court-based process. While companies proposing such Plans will want to keep the costs down, it is important for those with objections and doubts to appear at Court and make their concerns known. The Court will come to the best conclusion it can based on the evidence presented to it and dissenting creditors may rue missing the opportunity to make their position clear.”

Cramming down the hold-out creditors

To enable a restructuring in circumstances where there are creditors blocking a resolution to the company’s difficulties, the Restructuring Plan allows for those classes of creditors which have voted against it to be, essentially, ignored or crammed down. The cram down will only be allowed where there is at least one class which approved the Plan, that class has a financial interest in the predicted outcome should the Plan not go ahead (also known as the relevant alternative) and, crucially, evidence that those creditors who are being crammed down will be no worse off in the Plan than they would have been in the relevant alternative.

It is a tall order to be able to cram down HMRC as a preferential creditor. The floating charge realisations need to be predicted to be so low in the relevant alternative that HMRC would not be paid in full (or at all). In this case, that is precisely what happened, with floating charge assets being limited to the realisation of book debts and the valuation of those realisations in an insolvency process being severely compromised. Whilst HMRC did not appear before the Court to challenge those valuations, it would seem the Judge asked the company to produce further evidence to confirm the rationale for the valuation conclusions it had reached which delayed the sanction judgment slightly. The Court will not use the cram down process lightly.

In the Plan, the proposed outcome was for all creditors to be better off under the Plan than when compared to their outcome in the relevant alternative. However, when comparing the outcomes for certain creditors relative to other classes of creditor, it allowed for a return to unsecured creditors, which would be outside the usual order of priority of payments in an insolvency process. It proposed that ordinary unsecured creditors will receive a dividend of 5p/£ but critical creditors will receive full payment. This was justified to the Court because the company asserted paying those creditors who were critical to the company’s ongoing trade would allow it to survive and flourish in the future. On balance, the Court found that that would produce a better outcome for all in the long run.

Bethan Moore, also a partner in the corporate restructuring and advisory team at Shoosmiths, added, “It is great to see the Court supporting the restructuring of a company in this context. While the circumstances to be able to cram down HMRC as a preferential creditor are specific to these facts, confirmation that the Court can and will do it where the situation and the law allows indicates that, going forward, the Restructuring Plan can be the creative restructuring tool for many businesses (including SMEs) that we all hoped it would be.”

 

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