Lessons and themes as use of restructuring plans increases

As the case law in this area continues to develop, companies and restructuring practitioners will have increasing confidence in launching and shaping plans in a way that is most likely to achieve sanction. However, although the increase in precedents is generally helpful, uncertainties and contradiction remain in certain areas.

HM Revenue & Customs special creditor status

HM Revenue & Customs (HMRC) already enjoys its own elevated status as a secondary preferential creditor on insolvency for PAYE, VAT and certain other taxes. That position must always be respected in any restructuring plan, when considering recoveries in the relevant alternative and the return to be received by HMRC under the plan.

However, the cases of Nasmyth and Great Annual Savings (GAS), heard between April and May 2023, seem to have afforded HMRC an additional special status in addition to its secondary preferential status. These were the first cases to be opposed by HMRC after the Houst restructuring plan – which saw HMRC’s debt ‘crammed down’ for the first time, but without active opposition from HMRC – was sanctioned in 2022. In Nasmyth and GAS, the court was sympathetic to HMRC’s various arguments that it is an “involuntary creditor”, its arrears were longstanding, ‘time to pay’ agreements had been breached, the company had been trading at its expense and that it should be treated as a critical creditor and get an appropriate share of any restructuring surplus.

In the case involving Nasmyth’s restructuring, the judge explained that a restructuring plan should not be used as an instrument to cram down HMRC, that it retained a legitimate interest despite being clearly out of the money and the fact that it would receive nothing in the relevant alternative, and that there was no justification in paying certain other critical creditors ahead of HMRC. Ultimately, the court did not sanction the Nasmyth plan on the basis that there was a roadblock created by the fact that the group’s subsidiaries had no time to pay agreements in place with HMRC.

In the Prezzo restructuring heard in July 2023, HMRC raised the same arguments in opposing sanction. However, the court sanctioned the plan on the basis that HMRC would receive the majority of the “restructuring surplus” and there was no history of broken time to pays or long overdue arrears. The court appeared to retreat slightly from its earlier decision in the Nasmyth case, and made clear that there should be no fetter on the legislation that allowed a cram down of HMRC.

Notwithstanding the success of the Prezzo restructuring and HMRC also voting in favour of the Fitness First plan in June 2023 – which pushed back payments of its arrears rather than writing them off – HMRC does appear for now to enjoy a special status in the eyes of the court when exercising its cram down discretion. As such, careful consideration and engagement with HMRC is required in shaping any restructuring plan.

How to treat ‘out-of-the-money’ creditors

Another theme of 2023 is how out of the money creditors should be treated and what their rights are in a restructuring plan. Section 901C(4) of the 2006 Companies Act requires that every creditor or shareholder whose rights are affected must be permitted to vote. However, section 901C(4) of the Companies Act provides that creditors without such rights do not need to vote on the plan at all. 

The Lifeways restructuring plan judgment has been helpful in explaining that in this context it is rights rather than interests that matter. There must be a real economic effect on creditors or shareholders to give them a right to vote. As set out above, in the case of Nasmyth, HMRC was out of the money in the relevant alternative – a fact that was not disputed. However, the judge considered that it had a legitimate interest in the restructuring plan given that it had contributed to the restructuring surplus by virtue of its forbearance, and it also retained an interest in the subsidiaries that would continue to trade after the plan.

In the GAS case, at the convening hearing the company tried to restrict voting to four classes using section 901C(4) of the Companies Act. However, following initial challenge by the judge the classes were extended to include all previously excluded classes. Section 901C(4) of the Companies Act had previously been used in the Smile case in 2022, when it was not challenged, but the court had made clear it was a more draconian action than allowing cram down.

In contrast, in the case of Fitness First, the court made clear that the views of out of the money landlords carried little weight when assessing allocation of the restructuring surplus. So where does that leave us? Section 901C(4) of the Companies Act remains a legitimate means to remove out of the money classes and should be considered where there is limited room to dispute valuation and adequate notice has been given to the excluded classes.

It remains unclear if that is potentially an easier route than allowing a dissenting class to vote and then seeking to cram down. The position of HMRC in this respect is also unclear following the Nasmyth decision, where despite being out the money the court was willing to grant Nasmyth an interest in the proceedings.

Restructuring surplus

Throughout the 2023 cases, discussion of the “restructuring surplus” is prevalent. There is no reference to the “restructuring surplus” in the legislation, however, and what started as a matter of academic debate has moved into the judgments and the judges’ deliberations when they seek to consider use of their discretion to approve cross-class cram down.

The restructuring surplus can be loosely defined as the value of the potential future benefits to the company generated from the restructuring plan. How it is shared by ‘in the money’ creditors is increasingly key to ensuring sanction where cross-class cram down is being used. Unlike the US model, there is no absolute priority rule so that higher ranking creditors do not need to be paid in full before lower ranking ones.

The company, therefore, has a degree of flexibility in determining the share of the restructuring surplus. However, the beneficiaries need to be wary of the court’s determination of what is just and equitable when using its discretion. As the HMRC cases clearly demonstrate, where HMRC is to be crammed down there must be a demonstrable fair share of the restructuring surplus going to HMRC. Along with valuations to determine the position of creditors in the relevant alternative, allocation of the restructuring surplus is set to be a significant battleground in restructuring plans going forward.

Cross-border restructuring

On the introduction of restructuring plans during the pandemic, there was speculation as to how popular they would be for international groups and for cross-border restructurings. The rise of alternative cramming mechanisms and flexible restructuring tools throughout Europe, such as the Dutch ‘Wet Homologatie Onderhands Akkoord’ (WHOA), and the increasing difficulties of cross-border recognition following Brexit meant that there were questions as to its likely uptake overseas.

The restructuring plan lost an early battle in the case of Gategroup Guarantee Ltd in 2021, in which – unlike a scheme of arrangement – a restructuring plan was deemed to be an “insolvency process” for the purposes of the bankruptcy exclusion of the Lugano Convention, making cross-border recognition seemingly more difficult.

However, the 2023 cases suggest that there remains an appetite for ‘forum shopping’ to the UK and for use of the restructuring plan. The Adler restructuring case, which is currently being challenged in the Court of Appeal, involved the transfer of bonds to an English plan company to allow a restructuring plan for a German group. Likewise, in the case of Yunneng Wind Power, a Taiwanese company is seeking a restructuring plan for a windfarm off Taiwan.

In addition, the widespread reach of English law finance documents and the UK courts continued recognition of the so-called ‘Gibbs rule’ means that any overseas processes that seek to compromise English law obligations will not be recognised in the UK. As such, a number of the 2023 restructuring plans involve the use of a plan in parallel with an overseas process, such as the Hong Kong Airlines case and the Cimolai case. For now, the Gibbs rule appears to be surviving the proposed extension to the UNCITRAL Model Law in the UK.