Restructuring plan rejected: Ted Loveday acts for opposing creditors
Mr Justice Adam Johnson has handed down judgment in Re The Great Annual Savings Company Ltd  EWHC 1141 (Ch) refusing to sanction a restructuring plan for an energy broking company. Ted Loveday acted for three energy suppliers who successfully opposed the plan. The judgment is available here.
Summary of the judgment
A number of different creditors appeared in opposition to the plan, including HMRC and various energy suppliers who were unsecured creditors. The plan would have resulted in the interests of several classes of creditors being ‘crammed down’ against their wishes. Having heard their submissions, the Court refused to sanction the plan on two grounds:
- The Company had failed to show that HMRC (which, as secondary preferential creditor, formed its own class) would be ‘no worse off’ under the plan, as compared to an insolvency.
- In any event, the plan was not fair and should be rejected as a matter of discretion.
This is a key milestone in the growing jurisprudence on Part 26A of the Companies Act 2006. Coming hot on the heels of Re Nasmyth Group Ltd  EWHC 988 (Ch), it marks the second recent case in which creditors have successfully opposed a restructuring plan which would have ‘crammed down’ HMRC’s interests.
There are a number of implications for practitioners in the area:
(1) Treatment of expert evidence. The judgment gives a clear warning that companies and insolvency practitioners can expect the Court to apply independent scrutiny to their calculations and assumptions – even if opponents have not prepared expert evidence of their own. This provides a useful safeguard for the interests of creditors. From the point of view of debtor companies, it may reinforce existing concerns about the cost of the Part 26A process for small and medium enterprises.
(2) Approach to possible claims against directors and shareholders. The Court gave no weight to potential claims against allegedly miscreant directors and shareholders by insolvency office-holders, despite accepting that such claims might be plausible. This may make it easier for companies facing governance issues to pass restructuring plans. It is to be hoped that the courts will give further clarity on this to prevent the system from being abused.
(3) Fairness. The judgment further underlines the importance of being able to demonstrate that a restructuring plan is fair as between classes of creditors, and as between creditors and shareholders. The Court made useful observations in this regard at ,  and -.
(4) The role of HMRC. Given HMRC’s increasingly engaged approach, it is expected that debtor companies and their advisors will increasingly engage with HMRC at an early stage to identify its expectations from a Part 26A plan. HMRC have not yet published any standard policies on their approach towards Part 26A plans. It is hoped that they will do so in the near future.
Scrutiny of estimated outcome report
There was a dispute between the Company and the various classes of creditors – including HMRC in particular – about whether they would be worse off under the plan than in a formal insolvency.
The opposing creditors had sought to challenge the analysis in the Company’s estimated outcome report, which had calculated that various parties would recover 0p in the £ in the ‘relevant alternative’: .
The Court agreed that it was entitled to scrutinise the report, even though the opposing creditors had chosen not to prepare any expert evidence of their own. The Company bore the burden of showing that creditors would be ‘no worse off’ and that it would be too restrictive if creditors were always obliged to adduce their own expert evidence. It emphasised the importance of the Court’s function in scrutinising the Company’s proposals, including its valuation figures: . This was especially relevant if the Company’s materials contained manifest errors, inconsistencies or matters which were not properly explained: .
Applying this approach, the Court engaged in close scrutiny of the Company’s projections relating to the likely recovery of book debts in an administration. It found that a number of management assumptions had been “unfiltered by any independent scrutiny or analysis” and demonstrated a “lack of rigour which is unpersuasive”: . On that basis, the Company had failed to discharge its burden of proving that HMRC would be ‘no worse off’ under the plan.
It followed that ‘Condition A’ in section 901G(3) of the Companies Act 2006 was not met, and Part 26A could not be invoked to cram HMRC down.
Treatment of potential claims against directors and shareholders
The Court also addressed potential claims against directors and other third parties that might be available in a formal insolvency. It recognised “that there may be proper grounds for thinking they are viable and that there may be a proper basis for bringing them”: . However, it held that “the exercise of attributing value to the potential claims is extremely difficult” and it declined to attribute any weight to them: ; ; . As a result, it held that the opposing unsecured creditors would – unlike HMRC – be inevitably worse off in the relevant alternative than under the plan.
Discretion and fairness
The Court went on to consider whether, if Part 26A had been available, it would have approved the plan as a matter of discretion. It made a number of observations about the law:
- A restructuring plan under Part 26A would not necessarily be tested by reference to its ‘rationality’, i.e. whether a rational creditor would support it – a test primarily drawn from cases on schemes of arrangement under Part 26. While much would depend on the circumstances, the approach to ‘rationality’ from scheme cases did not help the Court, on the facts of this case, to evaluate the inherent fairness of imposing the plan on dissenting classes of creditors: -.
- A more pertinent question would be whether the plan provided a fair distribution of the benefits generated by the restructuring, i.e. the ‘restructuring surplus’: . While it is advisable not to be prescriptive, the Judge indicated at  three elements of this analysis which were relevant in this case (see below).
- The Court confirmed that, in principle, the assessment of fairness may involve comparing the plan with other possible alternative structures, on the basis that “things could and should have been done differently”: .
- It was principally for HMRC and the secured creditor, as the parties with the most significant economic interests in the company, to determine how to divide up any value which might be generated following implementation of the plan: -.
Turning to the plan itself, it did not involve the introduction of any new money by way of capital or loan finance. It was to be achieved by writing down or deferring existing debt, and funnelling the proceeds to contractual counterparties who would be able to contribute to the company’s financial success: . Although the basic idea of the plan was to provide a “solid platform for future growth and value creation” by means of “the eradication of HMRC’s existing debt and prioritising payments to various unsecured creditors at HMRC’s expense”, the benefits of the plan would be allocated disproportionately to the secured creditor and the existing shareholders/connected parties.
It followed that the distribution of benefits was unfair: .
Maitland’s Insolvency & Asset Recovery team are happy to provide advice and representation on all aspects of corporate insolvency and restructuring law, including Part 26 schemes of arrangement and Part 26A restructuring plans. To instruct one of our specialist barristers, please contact our clerking team at email@example.com.