UK: English High Court Refuses To Sanction Restructuring Plan Which Crams Down HMRC

In the recent restructuring plan case of Re Nasmyth Group Limited¹("Nasmyth"), the English High Court declined to exercise its discretion to order "cross class cram down" of HMRC, which was a dissenting plan creditor and which had opposed sanction of the plan, concluding that it would be unfair to sanction the plan.

There may be circumstances in which out of the money creditors have a legitimate interest in opposing a restructuring plan. In this case, HMRC was unlikely to recover anything in an administration, which was the relevant alternative. However, the Court was satisfied that HMRC would retain a genuine economic interest in Nasmyth if it went into administration (and hence it had a legitimate interest in opposing the plan) as the plan's success depended upon HMRC agreeing "time to pay" (TTP) arrangements with Nasmyth's subsidiaries if the plan was sanctioned, and HMRC had already rejected their proposals.

The failure to agree TTP arrangements tipped the balance against sanctioning the plan. This failure was also a "roadblock" (or "blot") which prevented the restructuring plan from taking effect in the manner in which Nasmyth and its creditors intended.

Implications

In principle, debts due to HMRC can be crammed down in a restructuring plan, however, there must be good reasons to do so. The Court went so far as to express the view that it should not be seen to approve the non-payment of tax and it was aware that, if it sanctioned the restructuring plan in this case, it would give a "green light" to companies to use a restructuring plans to cram down their tax bills.

Background

Nasmyth was an SME incorporated in England & Wales, the principal activity of which was as a holding company of subsidiaries providing specialist engineering services.

The company proposed a restructuring plan and the High Court convened five meetings of plan creditors for voting purposes². The plan was approved by the requisite statutory majority in all classes, with the exception of the preferential creditor class (which comprised solely of HMRC), in respect of which a cross-class cram down was sought. HMRC opposed sanction of the plan.³.

Court's decision

Cross class cram down and the Court's discretion - the Court accepted that the relevant alternative to the plan was an insolvent administration and that statutory conditions A and B were satisfied⁴.

However, the Court concluded that it would be unfair to sanction the plan and cram down debts due to HMRC:

• The Court should not refuse to sanction a plan as a matter of principle simply because HMRC would be crammed down.
• However, the Court should not cram down HMRC unless there are good reasons to do so.The Court can and should take into account that it should not be seen to approve the non-payment of tax and, if the Court were to sanction the plan, it would give a green light to companies to use restructuring plans to cram down their unpaid tax bills.
• There may be circumstances in which out of the money creditors have a legitimate interest in opposing a plan.
• HMRC would retain a genuine economic interest in the company:
  • Nasmyth's subsidiaries would still owe a significant sum to HMRC once it has gone into administration and it would remain one of the largest creditors of the group; and
  • the success of the plan depended upon HMRC agreeing TTP arrangements with the subsidiaries, if sanctioned.The Court characterised this as a significant financial benefit which contributed to the restructuring surplus.
• Therefore, although HMRC would be unable to recover debts due from Nasmyth in any administration, the Court could properly attribute weight both to its vote against the plan and to its interests.
• What tipped the balance against sanctioning the plan was thefailure to agree TTP arrangements with HMRC before putting the plan forward and asking the Court to sanction it.
• The Court also noted that HMRC's share in the restructuring surplus if the plan was sanctioned was tiny both in comparison to the junior secured lender and in absolute terms.

The company's failure to agree new TTP arrangements for the wider group was a roadblock which prevented the plan from taking effect in the manner in which Nasmyth and its creditors intend. Even if the Court had been prepared to exercise its discretion to sanction the plan and cram down HMRC's debt, it would only have been prepared to do so on the condition that the company agreed TTP arrangements satisfactory to HMRC.

Footnotes

1. Re Nasmyth Group Limited [2023] EWHC 988 (Ch)

2. Re Nasmyth Group Limited [2023] EWHC 696 (Ch)

3. The challenges by two other creditors fall outside the scope of this bulletin.

4. s901G Companies Act 2006 empowers the Court to sanction a plan under s901F notwithstanding that the arrangement has not been approved by the requisite majority in every meeting of creditors provided that conditions A and B are met. Condition A is that the Court is satisfied that, if the compromise or arrangement were to be sanctioned under s901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (the "no worse off test"). Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under s901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.

Originally published 10 July 2023

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