RP valuation evidence warning after Great Annual Savings judgement

31 May 2023

By Matt Jukes

Insolvency lawyers have warned of the need to check valuation evidence when proposing restructuring plans following the High Court’s recent decision to refuse a part 26A application by business services broker Great Annual Savings.

According to the judgment, which was handed down on 16 May, the restructuring plan was declined on two grounds: that the company had not discharged the evidential burden of showing that HMRC would not be any worse off under the plan; and even had it done so, the judge would have declined in his discretion to sanction the plan.

As part of his reasoning, Mr Justice Johnson also considered criticisms made of a valuation of the commission debtor book.

The plan had sought to cram down HMRC as a dissenting class of creditor, leading to the tax authority’s opposition and their challenge to the valuation evidence. Counsel for the company pointed to comments made in Re Smile Telecom Holdings Ltd [2022] that a creditor wishing to oppose a plan based on incorrect valuation evidence must provide their own. The judge maintained however that it was important part of the court’s function to scrutinise a company’s proposals when considering a scheme of arrangement or restructuring plan.  

Paul Sidle, counsel at Linklaters, said the judgment could cause problems for valuers. “Valuation experts should not blindly rely on information provided by a plan company without any independent analysis, assessment, or scrutiny. That will undermine the quality of the valuation evidence, opening it to attack by a challenging creditor to argue the plan company has failed to discharge its evidential burden that no creditor is worse-off under the plan than in the relevant alternative.

“While an uphill battle, a challenging creditor can win on valuation even without providing their own valuation evidence, provided they can point to and open up cracks in the valuation evidence – for example manifest errors, inconsistencies or matters not properly explained.”

Rachael Markham, professional support lawyer at Squire Patton Boggs, said some of the criticisms [mentioned in the judgement] in Great Annual Savings were levelled at the lack of independent analysis or assessment of information provided by the company, with most information being provided by the company and relied on by the valuers as factually accurate. “In particular, criticism was aimed at the assessment of book debt realisations which under the plan were valued at £18.2m but which were effectively written off in the relevant alternative – on a best case it was estimated they would return £509,000 but zero in the worst case,” she said.

“Given the position taken by HMRC – that the outcome for HMRC under the plan was marginal and much depended on the valuation evidence – it is clear that valuation evidence is, and was in this case, critical. For those preparing reports the case is a reminder to carry out a robust audit of information provided by the company in order to support the analysis of the relevant alternative and make it clear in the report that that has been done.”

Great Annual Savings is the second restructuring plan sanction hearing within a month to decline to an application for an SME, following the Nasmyth judgment on 28 April, which was also opposed by HMRC.

Frank Clarke, senior associate at Freshfields, said that valuation experts should not just “rubber stamp” their analysis, and that the case has wider implications for restructuring plans in future.

“The Great Annual Savings judgment cements the trend of treating the restructuring process as a piece of litigation,” he said.

“This requires plan companies to build a robust substantive and evidential case for sanction from the outset that can withstand challenges [not only] from dissenters but also from the court itself.”

Based in Seaham, County Durham, Great Annual Savings is a broker of energy and other services to businesses. According to the judgment, the company was “on paper” profitable in August 2019, with its parent company Project Byron Newco Limited returning a dividend to shareholders of £19m. In November 2022, HMRC issued a winding-up petition for the company and the directors proposed a restructuring plan. The company is now in administration.