On 5 July 2023, the High Court sanctioned the restructuring plan proposed by Prezzo Investco Limited (the Company) despite opposition from HMRC. This marks a contrast to the two more recent cases GAS (see our blog here) and Nasmyth (see our blog here) in which HMRC successfully opposed restructuring plans seeking to compromise its preferential claims.
Key takeaways at a glance
- There is no obligation to provide consideration for the compromise of ‘out of the money’ creditors.
- HMRC’s preferential liabilities incurred between the commencement of the plan process and sanction do not need to be discharged / provided for under the restructuring plan in order for the court to exercise its discretion to sanction.
- Rates payable in the course of a ratings year are to be treated as contingent liabilities arising at the outset of that year.
- Whilst the court still acknowledges the “need for caution” with respect to cramming down HMRC, its public function does not impede the court’s discretion.
- A company’s record regarding arrangements with HMRC, such as Time to Pay arrangements, will be a factor for the court’s consideration, as will the length of time for which HMRC debt has been accruing.
- The court expects early engagement by the company and opposing creditors in relation to plan negotiation.
- Opposing creditors need to consider whether the evidence of the plan company should be cross-examined to support arguments before the court.
- The court continues to examine whether the allocation of the restructuring surplus is fair, including who provides new money.
The Company is the parent company of Prezzo Trading Limited (Prezzo Trading) which is the operator of the Italian restaurant chain under the ‘Prezzo’ brand. Prezzo’s most recent financial difficulties have been attributed to 47 loss-making restaurants which, by 31 March 2023, the Company concluded had no real prospect of returning to profitability.
Both the Company and Prezzo Trading are cash flow and balance sheet insolvent.
The Company assumed the obligations owed by Prezzo Trading to the plan creditors on a joint basis so that it could be the proposer of the plan. It did so to avoid the possibility of landlords calling events of default under Prezzo Trading’s leases (including those of the profit-making restaurants) which would harm Prezzo’s future profitability and ability to continue trading as a going concern.
The proposed plan, treatment under the relevant alternative and creditor meetings
The plan sought to restructure the liabilities of the Company and Prezzo Trading to avoid an administration of both companies. Comprising four classes of creditors, their treatment under the plan and the relevant alternative are delineated below:
- Senior secured loan noteholders: £24.2m outstanding. To receive 100% of the value of the outstanding secured notes (including interest) with a maturity extension. In the relevant alternative, would be likely to receive 100% of the equity in the purchasing company of Prezzo Trading.
- HMRC as preferential creditor: £9.9m outstanding. To receive £3,326,837 – as opposed to £1,326,837 in the relevant alternative.
- Local authorities in relation to sustainable sites: £597,252 outstanding. To receive nil in the plan or the relevant alternative (although liabilities accruing from July 2023 onwards were excluded from the plan and therefore were not compromised).
- Other creditors (including landlords and local authorities owed sums relating to unsustainable sites): £35,561,844 outstanding collectively. To receive nil in the plan or the relevant alternative.
Two classes approved the plan: the secured loan noteholders by 100% of those voting and the local authorities in relation to sustainable sites by 80% in value of those present and voting. Two classes voted against the plan: HRMC as preferential creditor and the other creditor class (where 18% voted in favour, with 82% voting against). The court, therefore, had to decide whether to exercise its cross-class cram down power in its decision to sanction the plan.
Cross-class cram down and sanction
Two conditions need to be met for cross-class cram down to be available:
- Condition A: no creditor will be ‘worse off’ under the plan than in the relevant alternative); and
- Condition B: the plan has been approved by one class who would receive payment or have a genuine economic interest in the company in the relevant alternative.
Condition A was met because each creditor class was to receive either equal or better treatment under the plan than in the relevant alternative. Condition B was satisfied by the secured loan noteholder class voting in favour of the plan. The issue, therefore, hinged upon whether the court should – as a matter of discretion – sanction the plan. The court decided to do so.
1. There is no obligation to provide consideration for the compromise of ‘out of the money’ creditors
A scheme of arrangement or a restructuring plan requires a compromise or arrangement to be proposed by the plan company and its creditors (or any class of them). In the context of scheme of arrangements, this has traditionally been interpreted as requiring some element of “give and take”.
The court here determined that in the context of a restructuring plan the concept of arrangement does not require consideration to be provided to “out of the money” creditors. Given a court is empowered to cram down creditors provided they are ‘no worse off’ under the plan than in the relevant alternative, it follows that the legislation envisages a compromise of claims where creditors would not receive anything under a plan. Whilst this point has been raised in previous judgments, such as Smile Telecoms (see our blog here) and GAS, this is the first time it has been decided upon directly.
2. HMRC’s preferential liabilities incurred between the commencement of the plan process and sanction do not need to be discharged / provided for under the restructuring plan in order for the court to exercise its discretion to sanction
The court considered this would be an “inappropriate fetter” on its power under Part 26A which contemplates the cram down of such debts. Instead, the judge concluded that the proper course is to consider whether a plan is to be sanctioned by reference to the particular facts and circumstances of each case.
3. Rates payable in the course of a ratings year are to be treated as contingent liabilities arising at the outset of that year
This aligns with the approach taken in company voluntary arrangements. Practically, this means that the full annual rating sum payable, characterised as a contingent debt, can be compromised. Here, the Company did not seek to compromise the contingent liability business rates and council tax of the profit-making sites accruing from July 2023 onwards, given such rents and the corresponding rates are of such importance to Prezzo’s future profitability.
4. Whilst the court still acknowledges the “need for caution” with respect to cramming down HMRC, its public function does not impede the court’s discretion
In light of the judgments of GAS and Nasmyth, there arguably was a burgeoning ‘public interest’ angle to the court’s consideration and weight afforded to HMRC opposition in restructuring plans.
In Nasmyth, the court noted that it should exercise caution in relation to HMRC debt, acknowledging the importance Parliament has placed upon such debt by giving it preferential status and that it “should not cram down HMRC unless there are good reasons to do so”. In GAS, the court arguably went further to grant greater weight to HMRC’s views given its function of state tax collector.
Whilst the court in Prezzo acknowledged the need for caution generally in considering the cram down of HMRC and paid due regard to the fact that it is an involuntary creditor, it appears the court will not allow any such ‘public interest’ arguments to prevent or impede the court’s discretion, if, on balance, it is satisfied that a plan is fair.
5. A company’s record regarding arrangements with HMRC, such as Time to Pay arrangements, will be a factor for the court’s consideration, as will the length of time HMRC debt has been accruing
The judgment echoes a word of caution in relation to entering arrangements with HMRC (such as Time to Pay arrangements) as Mr Justice Smith noted the “broken” record of arrangements in GAS and Nasmyth in contrast to Prezzo which had not entered into such arrangements (due in large part to the short time period in which HMRC’s preferential debt had accrued, namely April to June).
Whilst deferred payment arrangements with HMRC may be the best suited solution, companies need to assess the likelihood of being able to fulfil any such deferred payment obligations and what the ‘runway’ might look like to sustain this. GAS defaulted on such payments three times in 2020 and 2021 – years before coming to court with a restructuring plan. Similarly, in Nasmyth, a failure to remedy defaulted Time to Pay arrangements “tipped the balance” for the court in not sanctioning the plan. By contrast, here, the court was satisfied that HRMC received most, if not all, of the restructuring surplus provided by the plan and that it would be paid its return within a short period (30 days) of the plan’s effective date.
6. Conduct and the degree of engagement of the plan company and creditors is still fundamental
In contrast to the Company which provided extensive information to HMRC and entered into discussions with the secured noteholders to seek to better HMRC’s position in light of its concerns, HMRC failed to engage in any further negotiations with the Company.
Whilst it would appear that HMRC has learnt its lesson from Re Houst (see our blog) and is now a more active participant in its dissent to restructuring plans, the court is developing its thinking in relation to the conduct it wishes to see from opposing creditors. The court here has made clear that it expects creditors to engage early with the plan company outside and before entering the forum of the court.
7. Opposing creditors need to consider whether the evidence of the plan company should be cross-examined to support its arguments before the court
We have commented before on the need to treat restructuring plans as pieces of litigation (see our blog here) and whilst there is no obligation for an opposing creditor to file contrary evidence, an opposing creditor should be mindful of how it can best communicate and present its arguments against a plan. Here, the court commented that HMRC could have cross-examined the Company’s witness to satisfy the court of one of its key arguments (on whether the Company was able to afford to pay HMRC’s preferential debt). In the absence of doing so, the court accepted the Company’s evidence. Therefore, whilst filing its own evidence may not be necessary, opposing creditors should fully explore litigation strategies, including the possibility of cross-examining, and consider how best to interrogate and contest submitted evidence in court.
8. Restructuring surplus; source of new money
The court has continued the trend to examine closely who will receive the restructuring surplus. While there is no ‘absolute’ priority rule in restructuring plans, the court commented that, here, the plan reflected the priority in which creditors would be paid in the relevant alternative. As noted, most, if not all, of the restructuring surplus generated by the plan was due to benefit HMRC. Similarly, the injection of new money remains a contemplation of the court; the secured noteholders agreed to a £2m cash injection to better the position of HMRC. This stands in stark contrast to GAS in which no new money was being injected, yet unsecured creditors (including shareholders) were to receive a greater portion of the restructuring surplus than HMRC, at the tax collector’s expense.
A copy of the judgment is available here.