The English High Court1 exercised its discretion to sanction a restructuring plan proposed by Prezzo Investco Limited (the Company), the parent company of Prezzo Trading Limited which is the operator of an Italian casual dining chain. The plan was opposed by HMRC, which had both secondary preferential claims and unsecured claims. In sanctioning the plan, the Court exercised its discretion to cram-down HMRC's debt.
This case can be contrasted with two recent decisions in which the High Court declined to sanction proposed restructuring plans which it found to be unfair to HMRC. These decisions could be distinguished on the facts and here the Court was satisfied that the plan was "fair".
It is important to note that the Court rejected the suggestion that, as a matter of principle, a restructuring plan should not be sanctioned without the discharge of (or proper provision for) HMRC preferential liabilities incurred during the plan process.
However, the Court will remain astute to the risks that: a plan can be used as an "instrument of abuse"; and sanctioning such a plan may be construed as giving a "green light" to companies to use Part 26A to cram-down unpaid tax bills.
It is also interesting to note that the Court confirmed that, in the context of a restructuring plan, the concept of an "arrangement" does not require some form of consideration to be provided to "out of the money" creditors. This differs from a scheme of arrangement, which has traditionally been interpreted as requiring some element of "give and take" between a company and its scheme creditors.
For creditors looking to oppose a restructuring plan (or scheme), this case is a useful reminder that it may be necessary to cross-examine the plan company's evidence on key points of contention.
The Company was in serious financial difficulty, including as a result of the Covid-19 pandemic and the impact of price increases. It did not have the benefit of third party financial support and relied on funding under secured loan notes issued to the majority of its shareholders, which it on-lent to its trading subsidiary (Prezzo Trading Limited) under a secured loan agreement. The plan sought to restructure the liabilities of both the Company and its subsidiary2, allowing the business to continue to trade. The relevant alternative was administration for both companies.
Pursuant to the terms of the proposed plan, the principal and interest due to the secured loan noteholders (being the majority of the shareholders) would remain whole. HMRC (as secondary preferential creditor) would receive a cash payment equal to the value of the floating charge assets in the relevant alternative (less the estimated costs of an administration) (given that, as a preferential creditor, HMRC only has recourse to those assets of the subsidiary not subject to the fixed charge, namely floating charge assets). Following negotiations, the proposed plan also provided for HMRC to receive an additional preferential creditor payment of £2m. There would be no return for any other plan creditor.
The plan was approved by the requisite majority of those voting at two of the plan meetings but was not approved by the meetings of the preferential creditor class (comprising HMRC) and the other creditor class. HMRC accepted that statutory conditions to cross-class cram down were satisfied and therefore its objection turned on the exercise of the Court's discretion.
The Court's decision
No requirement to provide consideration to "out of the money" creditors
There are two jurisdictional requirements relating to a plan company's financial position, Condition A and Condition B3. The first limb of Condition B requires that the proposed plan be a "compromise or arrangement". In a scheme of arrangement context, this has traditionally been interpreted as requiring some element of "give and take" between the company and the scheme creditors. However, the Court confirmed that in the context of a restructuring plan, the concept of an "arrangement" does not require some form of consideration to be provided to "out of the money" creditors.
Cram-down of HMRC debt
The Court had regard to the fact that HMRC was an involuntary creditor and objected to the plan in strong terms, and to the need for caution generally in considering the cram-down of HMRC debts, as well as the preferential status afforded to the majority of those debts. However, the Court was nevertheless satisfied that the allocation of benefits under the plan was fair. The Court was firmly of the view that it should sanction the plan, including the cram-down of the HMRC debt which it contemplated.
The Court rejected the suggestion that, as a matter of principle, a plan should not be sanctioned without the discharge of (or proper provision for) HMRC preferential liabilities incurred during the plan process. This would be an inappropriate fetter on the power to sanction a plan afforded by Part 26A Companies Act 2006. In this case, the Company had not been trading "at the expense of" HMRC, let alone cynically so (as was alleged), while the plan was being pursued.
The Court was satisfied that the allocation of the benefits under the plan was fair. The secured loan noteholders would ultimately receive 100% of the value of their secured loan notes, which reflected the priority in which they would be paid as fixed charge holders in the relevant alternative, relative to other creditors.
There was also no departure under the plan from the order of priority in which HMRC would be paid in the relevant alternative. HMRC would receive most (if not all) of the "restructuring surplus" generated by the plan (£2.4m being the Company’s estimate of the saving of costs which would otherwise be incurred in an administration).
The Court accepted that little or no weight should be paid to the votes of "out of the money" plan creditors.
3 Condition A (section 901A(2) Companies Act 2006) states that "the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern"; and Condition B (section 901A(3)) states that "(a) a compromise or arrangement is proposed between the company and (i) its creditors, or any class of them … and (b) the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties mentioned in subsection (2)".