The High Court refused to sanction the restructuring plan put forward by Nasmyth Group Limited (Nasmyth) pursuant to Part 26A of the Companies Act 2006 on 28 April 2023, despite both statutory conditions for cross-class cram down having been met.
Meanwhile, judgment is awaited in respect of the restructuring plan put forward by The Great Annual Savings Company Limited (GAS), which was proceeding simultaneously to Nasmyth and which also seeks to cram down HMRC.
The cases are noteworthy not least because they see the UK tax authority taking an active role in opposing restructuring plans, in stark contrast to its approach in Houst, which saw the first use of the Court’s discretionary power to cram down HMRC (see our blog here).
We set out below our thoughts based on the judgment available in respect of Nasmyth – at the time of writing the decision on the GAS plan is not yet available but we have included references where possible.
Nasmyth is a UK based company providing specialist precision engineering services to the aerospace and defence industries. It encountered financial difficulties as a result of (among other things) ongoing supply chain issues and inflationary pressures.
The key terms of the restructuring plan were broadly as follows:
- Waiver of existing defaults under the terms of the secured creditors’ respective loan agreements and extension of the repayment date under the junior secured facility by 5 years;
- The balance of £8 million to be made available by the junior secured creditor on existing terms, and of that £8 million, a new fully committed tranche of £1 million to be made available;
- Claims of HMRC (as secondary preferential creditor) and unsecured creditors compromised in full in exchange for a share in a £10,000 fund (on a pari passu basis); and
- Intercompany creditors’ claims compromised in full;
Secured creditors and the so-called Critical Supply Creditors were to be unaffected. HMRC is owed £209,703 (which consisted of liabilities in respect of PAYE, NIC and VAT) in addition to £236,154 (in respect of which it is an ordinary unsecured creditor). HMRC would receive 4.8% of its claim under the plan, in contrast to its position in an insolvency where it would receive nothing.
The plan was conditional on the group’s subsidiaries agreeing time to pay (TTP) arrangements with HMRC. The TTP proposals put forward by the group were rejected by HMRC, with HMRC noting that other members of the group owed debts to it and that TTP arrangements are a concession (or gift) by the tax authority – in short, taxpayers do not have a right to it.
Nasmyth had initially submitted that, in the event the plan was not sanctioned, it would explore other options, including if possible a pre-pack sale out of administration whereby the value would break in the junior secured debt. On the last day of the hearing, Nasmyth changed the relevant alternative to an immediate insolvent administration (without sale).
Classes and voting
Creditors were divided into 6 classes. The plan meeting was held on 3 March 2023 with all classes of creditors voting in favour, save for the Preferential Creditor class comprising only HMRC.
Cross-class cram down
Cross-class cram down was required in order to sanction the plan.
Two statutory conditions must be satisfied:
- Condition A, namely that the dissenting classes would be “no worse off” in the relevant alternative, here being an administration; and
- Condition B, namely that the restructuring plan has been approved by at least one class with a genuine economic interest in the company in the relevant alternative.
In addition to Conditions A and B, the Court must consider its general discretion to exercise cross-class cram down and sanction a plan.
Both the GAS plan and the Nasmyth plan saw opposition from certain creditors including HMRC. The key grounds of challenge raised by HMRC across both plans are these:
In both plans, HMRC argued that there would be an unequal distribution of the restructuring surplus, and that, whilst a restructuring plan can permit differential treatment of creditors in a manner which does not strictly reflect the creditor ranking in insolvency, it must be commercially justified. In Nasmyth, the Court agreed.
In respect of the GAS plan, HMRC also claims it is unfair due to the differential treatment of creditors, namely itself, when compared with other “in the money” creditors. Pursuant to the GAS plan, HMRC would be seventh in the order of priority, as opposed to third ranking (after secured creditors and primary preferential creditors) in an insolvency. In addition, shareholders would keep control under the plan instead of being wiped out in insolvency.
Treatment of Critical Supply Creditors
Both plans see so-called Critical Supply Creditors paid in full, but HMRC says it has not been evidenced they are in fact critical, which is a fairness point.
The Court in Nasmyth sympathised and expressed surprise at the directors’ “sense of priorities”, casting doubt on their decision to pay “critical” creditors ahead of HMRC “especially when the group’s future existence depends on its goodwill”.
HMRC also argued that tax collected for onward transmission is held on a “quasi-trust”, which it is unfair to compromise. HMRC’s preference in an insolvency reflects this and HMRC’s position as an involuntary creditor.
In Nasmyth the Court rejected the quasi trust argument. However, the Court noted that, where a company has traded at the expense of HMRC, Part 26A was vulnerable to being used “as an instrument of abuse.”
Condition A: no worse off test
In Nasmyth, Leech J was satisfied that preferential creditors and the unsecured creditors would be no worse off under the plan, crucially noting that none of the opposing creditors filed expert evidence challenging the reports or estimated outcome statement submitted on behalf of the company.
In relation to the GAS plan, HMRC argues that it fails to satisfy the “no worse off” test, as HMRC would recover more on an insolvency, due (at least in part) to GAS’s estimate of book debt recovery in an administration being too low and because of other administrator recoveries. GAS (relying on ED&F Man and Smile Telecoms) argues HMRC should provide evidence of an alternative valuation, which it has not.
The Nasmyth judgment provides five key learning points.
1. No reason in principle why HMRC can’t be crammed down
Whilst the Court noted that it should exercise caution and not cram down HMRC unless there are “good reasons to do so”, it is not a matter of principle that HMRC cannot be crammed down.
2. Out of the money creditors can have a legitimate interest in opposing a plan and can be taken into account
In Virgin Active, Snowden J held that it is for creditors who are in the money to decide how to divide up the restructuring surplus. While accepting the proposition that it is not usually unfair to cram down unsecured out of the money creditors, there is no rigid rule. Indeed, the Court in Nasmyth noted that there “may be circumstances in which the out of the money creditors have a legitimate interest in opposing the Plan”. Because HMRC had a genuine economic interest in the company, the Court could properly attribute weight to its vote against the plan. Two other opposing creditors had no economic interest, so it could not attribute any weight to their vote, but they still had a legitimate interest in opposing the plan and the Court was entitled to take their views into account when exercising its discretion.
3. Allocation of the restructuring surplus must be fair
It is common ground that Part 26A does not incorporate an absolute priority rule and that it is possible to deviate from the statutory order of priority. However, the Court will still focus on the order of priorities in the relevant alternative in determining whether the allocation of any restructuring surplus is fair and therefore whether to sanction a plan using cross-class cram down.
When considering the appropriate allocation of the restructuring surplus, Houst noted that similar considerations apply as for “horizontal comparator” challenges to a company voluntary arrangement – broadly, whether there are differences in treatment between creditors, and if so, whether those differences are justified.
In both cases, GAS and Nasmyth were asked to provide further detail on the differential treatment. In Nasmyth, the Court was not satisfied, noting that HMRC’s share of the restructuring surplus is both “tiny by comparison with [the junior secured creditor] and in absolute terms”.
The Court held that Nasmyth’s failure to agree TTP arrangements with HMRC was a roadblock which prevented the plan from taking effect as intended. The Court noted that even if it had been prepared to sanction the plan it would only have been on condition that the TTP arrangements had been agreed. The Court was not prepared to put pressure on HMRC by sanctioning a plan that is then reliant on HMRC’s agreement – that is not the purpose of Part 26A.
5. Active engagement required from creditors opposing a restructuring plan
In Houst, HMRC was unwilling to engage in a restructuring plan and relinquish its preferential status. A key message from Smile Telecoms (see our blog here) was that if a creditor wishes to challenge a plan, it must actively attend the hearing and submit evidence.
The outcome in Houst appears to have prompted HMRC to engage with and actively oppose those plans which see them take a substantial haircut, notably in order to prevent being routinely crammed down, with HMRC warning that other restructuring plans seeking to compromise HMRC debt are “waiting in the wings”. This approach in actively opposing plans which seek to cram it down appears to have been successful so far, with Leech J noting that “… if HMRC had not opposed the Plan or [the Plan] had provided for the payment of the debts due to HMRC, [the Court] would not have refused to sanction the [Nasmyth] Plan”.