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Restructuring Plans and HMRC: Recent Developments

Restructuring Plans and HMRC: Recent Developments

23 November 2023

Lisa Linklater KC and Hateema Zia of Exchange Chambers look at the newest of the corporate insolvency procedures, and how HMRC’s relationship with it has changed since it came into force in June 2020...

The corporate insolvency statistics from the Insolvency Service for the third quarter of 2023 are bleak, revealing that company insolvencies are at their highest level since the global financial crisis of 2008/2009. 

Businesses continue to experience severe financial pressure through a combination of high borrowing costs, the end of Government Covid-19 support schemes, high energy costs and high inflation slowing demand.

Restructuring plans, introduced into Part 26A of the Companies Act 2006 (“CA 2006”) as one of the permanent measures made by the Corporate Insolvency and Governance Act 2020, may offer a solution for many companies in financial distress.  However, some companies, particularly SMEs, may have been mindful of the proactive approach of HM Revenue and Customs (“HMRC”) in successfully opposing the sanction of a number of plans.  It is to be recalled that HMRC’s status as a preferential creditor was reinstated in the Insolvency Act 1986 by s98 of the Finance Act 2020 soon after the introduction of restructuring plans.

Restructuring plans offer flexibility.  By contrast with schemes of arrangement, they confer on the court the “cross-class cram down” power in s901G CA 2006.  This power enables the court to bind a dissenting class of creditors to the plan at the sanction hearing stage, provided two conditions proscribed in s901G CA 2006 are satisfied.  The rights of secured or preferential creditors cannot be modified by a company voluntary arrangement without their consent.  There is no similar restriction upon the court in exercising its cross-class down power and sanctioning a restructuring plan. 

HMRC has actively opposed several restructuring plans, leading to the development of the jurisprudence in this field of practice.  HMRC’s opposition has moved on from its approach in Re Houst Limited [2022] EWHC 1941 (Ch) before Zacaroli J where it simply submitted one email referring to its general policy flowing from its status as preferential creditor.  In two recent decisions in which HMRC has actively opposed the restructuring plan in question, Re Nasmyth Group Limited [2023] EWHC 988 (Ch) and Re Great Annual Savings Company Ltd [2023] EWHC 1141 (Ch), the court has refused to sanction the plan and to cram down HMRC.

In Re Great Annual Savings Company Ltd, Adam Johnson J accepted HMRC’s submissions that the “no worse off” test in s901G (Condition A) was not satisfied by the relevant report relied upon by the applicant company.  The burden rested on the company to show that the “no worse off” test in the relevant alternative was satisfied.  The company had an admittedly chequered history with HMRC, having defaulted in time to pay arrangements that it had entered into on three separate occasions.  HMRC’s status as a major in the money creditor, and the strong terms in which it voiced its objection, not only in light of the facts of this particular case but also given its critical public function as the collector of taxes weighed heavily in the judge’s mind to not sanction the plan.  The judge stated that HMRC’s views would have tipped the discretionary balance against sanctioning the plan in any event.

Re Nasmyth Group Limited is a particularly notable decision because the two mandatory conditions for cross-class cram down, Conditions A and B, were both satisfied.  The court held that both preferential creditors and the unsecured creditors would be no worse off under the plan than they would have been if the company had gone into insolvent administration.  Despite this, Leech J exercised his discretion against sanctioning the plan and cramming down HMRC.  In this case HMRC opposed the sanction of the plan because it considered the plan “unfair”, and because there was a “blot” or “roadblock” preventing the plan from taking effect, namely, that it was dependent on HMRC entering into “time to pay” (TTP) agreements or arrangement with a number of the company’s subsidiaries.  HMRC provided evidence to the court that it had agreed TTP arrangement for all the relevant corporate group’s debt (including that of the company) in February 2022, and that it defaulted in September 2022.  Leech J accepted that it would be unfair to sanction the plan and was persuaded not to exercise his discretion to sanction the plan.  While accepting that the court should not refuse to sanction a restructuring plan as a matter of principle because HMRC will be crammed down, Leech J was satisfied that the court should exercise caution in respect of HMRC debts, noting that Parliament had recognised their importance by legislating for some debts to be treated as secondary preferential debts.   He noted that the plan appeared to have been seen as a convenient opportunity to eliminate debts owed to HMRC for a nominal figure and to put pressure on HMRC to agree new TTP terms, which in his judgment was not the purpose for which Part 26A should be used.

By contrast, in Re Prezzo Investco Limited [2023] EWHC 1679 (Ch), Richard Smith J crammed down HMRC and sanctioned the plan.  The facts of this case are distinct from Re Nasmyth Group in that in this case the allocation of benefits under the plan was considered by the judge to be fair notwithstanding HMRC’s submissions.  In fact, HMRC would receive most, if not all, of the “restructuring surplus” generated by the plan. 

The very recently released guidance from HMRC for insolvency practitioners to help their clients restructure their company’s finances using a debt restructuring scheme or plan, is very welcome.  The guidance is succinct and user-friendly and is likely to be very helpful to debtor companies in financial distress and their advisors who are considering whether to use a restructuring plan to relieve that distress.  Moving forwards, it is very likely that this guidance will help companies seeking the sanction of a restructuring plan to avoid active opposition from HMRC.  In turn this will reduce cost and provide certainty, thereby promoting the use of restructuring plans in the SME market in particular.

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