On 16 May 2023, Mr Justice Adam Johnson in the High Court refused to sanction the restructuring plan proposed by The Great Annual Savings Company Limited (GAS) following objections from HMRC.
GAS had sought to cram down the UK tax authority and this case follows the recent refusal of the English court to sanction the restructuring plan proposed by Nasmyth Group Limited, which also sought to cram down HMRC (see our blog).
The short judgment (28 pages) provides a concise overview of much of the recent – and developing – case law on restructuring plans. In this blog we highlight the main takeaways:
- This judgment continues the trend of the court treating restructuring proceedings as pieces of litigation – with the expectations and potential pitfalls this entails. Companies proposing plans need to build a robust and convincing case for sanctioning their plan, and meeting possible challenges, from day one (see our blog).
- Companies proposing a plan have a clear evidential burden to demonstrate that creditors/members would be no worse off under the plan than in the relevant alternative (if asking the court to consider exercising its discretionary power to cram-down). The plan company’s evidence must be robust, properly explained and convincing.
- Dissenting creditors/members can successfully challenge a plan without filing their own contrary expert evidence. Here, HMRC identified various issues in GAS’s valuation evidence, which were sufficient for the court to decline to sanction the plan. There is no absolute requirement that dissenting creditors file their own expert evidence. GAS had argued that Snowden LJ’s judgment in Smile Telecoms now meant that, unless competing expert valuation evidence was before the court, the court should accept a plan company’s calculations. The court did not agree (see our blog on that case).
- Valuation experts need to properly scrutinise and test information and assumptions provided by the plan company. Allowance should be made for the possibility that information provided by the company is incorrect, even in part, and valuation experts should ensure that their analysis is sufficiently rigorous and independent - or risk a finding by the court that their evidence is unpersuasive.
- The allocation of the restructuring surplus must be fair – and the court will interrogate this carefully. This includes taking into account:
- the existing rights of creditors going into the plan and how they would be treated in the relevant alternative;
- whether any creditors are providing additional contributions as part of the plan, including providing any ‘new money’ that might be at risk; and if any creditors are disadvantaged under the plan as compared to the relevant alternative (for example, if the plan proposes a different order of priority than would exist in the relevant alternative), then whether the difference in treatment is justified – including by reference to further possible alternative structures to the relevant alternative;
- whether any creditors/members would receive disproportionate benefits under the plan as compared to the relevant alternative, with particular regard to the relative treatment of creditors that are ‘in the money’ in the relevant alternative and whether the writing down of debts is expected to contribute to the success of the plan; and
- whether those who are ‘in the money’ in the relevant alternative support the plan. While strong overall support among creditors/members for a plan may be relevant in many cases, support for a plan among creditors who receive nothing in the relevant alternative is unlikely to be a useful factor in assessing the fairness of a plan. A more pertinent question is likely to be the level of support for the plan among those ‘in the money’ who would receive something in the relevant alternative.
- The court will carefully scrutinise the retention of any equity in the restructured business. This may be justified in the circumstances, but the court will be concerned to ensure that existing shareholders do not “do a deal” with senior creditors to capture value via a plan which ought properly to have been allocated to other creditors. This may indicate that the plan is unfair and will need to be properly justified to the court. When the High Court sanctioned Adler Group’s restructuring plan earlier this year, it identified as its “greatest concern” the fact that shareholders retained almost 80% of the equity in the restructured company, despite providing no additional funding.
Background to GAS’s plan
GAS is an English company whose main business consists of brokering energy supply contracts between energy suppliers and business users, charging commission for its services.
The plan sought to write-down GAS’s debts without any new cash injection, in order to avoid an insolvency process. The relevant alternative to the plan was GAS’s administration.
The plan divided creditors into 15 creditor classes and proposed, among other things, to modify the order of priority that would apply in administration.
Some creditors were to be repaid in full under the plan, including certain creditors that GAS had identified as being “critical” to its future success, some of whom would be ‘out of the money’ in the relevant alternative. A debt for equity swap provided that the secured creditor could be repaid its principal in full, although the existing shareholders were able to regain 100% of their equity if certain profitability milestones were met by GAS. Other creditors received a haircut and HMRC’s claim of over £6m was to be written off and replaced by payment to HMRC of £600,000 made by GAS in two instalments.
HMRC objected to the plan primarily on the basis that it would be worse off under the plan than in the relevant alternative (i.e., that Condition A was not satisfied and therefore the court had no power to exercise its discretion to cram down HMRC). HMRC and two other creditors also argued that, in any event, the plan was unfair and should not be sanctioned.
The court found that GAS had not discharged its evidential burden of showing that HMRC would not be any worse off under the plan and the court declined to sanction the plan. The court was not “sufficiently persuaded of the robustness of the conclusions” contained in GAS’s expert valuation evidence.
The court concluded that, in any event, the plan was not fair and the court would not have exercised its discretion to sanction it, had it been open to the court to do so. The court awarded HMRC over £71,000 in costs.
The court also noted that whether a company may pay more taxes if a restructuring plan succeeds is not relevant to the question of whether HMRC would be no worse off under that plan. Possible future payments of tax arise under legislation, rather than the terms of a plan, and are therefore too remote from the plan to be taken into account.
The outcome in GAS, following shortly after HMRC’s successful challenge to the restructuring plan in Nasmyth, is notable not just for the UK tax authority’s engagement and opposition to prevent it being routinely crammed down. Although, clearly any companies considering seeking to cram down HMRC will need to consider the judgments in GAS and Nasmyth carefully.
It will be interesting to see how the engagement between HMRC and companies proposing plans develops. The restructuring plan currently proposed by Fitness First seeks to defer, rather than write off, debts owed by the plan company to HMRC, while the plan proposed by Prezzo seeks to reduce the company's debts to HMRC to a similar amount as the company estimates HMRC would receive in the relevant alternative.
In principle, restructuring plans can be used to cram down HMRC. Compromising HMRC’s preferential claims in the face of objection from HMRC is not possible under a scheme of arrangement - which does not provide for cram down - or a company voluntary arrangement (CVA) – which cannot be used to compromise secured or preferential creditors. While it may be open to HMRC to consider seeking legislative changes to ensure that restructuring plans cannot be used to cram down HMRC’s preferential claims, it is not clear that this is of practical necessity following the judgments in GAS and Nasmyth.
The court’s unambiguous expectations in respect of plan companies’ evidence and their valuation experts will be noted by many. These are fundamental matters that will need to be taken into account from the outset of any plan or scheme.
For valuation experts, the judgment provides useful guidance that the plan company’s experts should demonstrate that they have properly and independently tested the company’s information and assumptions before placing any reliance on them. This goes to the heart of the relationship between the plan company and its experts, and valuation experts should not just rubber stamp the company’s analysis. The court’s approach on this point also echoes the judgment last year in Smile Telecoms, where the court made it clear that evidence from foreign law experts in respect of plans and schemes needs to comply with Part 35 of the Civil Procedure Rules, which deals with expert evidence in civil court proceedings (see our blog).
The GAS judgment cements the trend of treating the restructuring process as a piece of litigation. This requires plan companies to build a robust substantive and evidential case for sanction from the outset – that can withstand challenges from dissenters – but also from the court itself.
A copy of the judgment is available here.