English Court Refuses to Approve Two Restructuring Plans “Cramming Down” Tax Authority

At a Glance

• The English Court refused to approve two separate SME restructuring plans in which the debtors had sought to “cram down” the UK tax authority (HMRC) as a dissenting class.
• HMRC actively opposed the restructuring plans of Nasmyth Group Ltd (Nasmyth) and The Great Annual Savings Company Ltd (GAS).
• Although Nasmyth’s plan satisfied the statutory requirement that no member of a dissenting class be any worse off under the plan than in the relevant alternative, the court refused to approve the plan as a matter of discretion. Nasmyth is the first UK restructuring plan to be refused approval on discretionary grounds.
• In contrast, the court found that GAS’ plan failed the requisite “no worse off” test and stated that it would have declined to approve the plan as a matter of discretion even if the plan had passed that test.¹
• The court held that:
  • the court should not refuse to “cram down” HMRC as a matter of principle², but should exercise caution in relation to HMRC debts (Nasmyth);
  • GAS had not discharged the burden of showing that HMRC would not be any worse off the plan, because the court was not sufficiently persuaded of the robustness of the conclusions in a valuation of GAS’ principal asset (its debtor book);
  • the proposed distribution of benefits under both plans was ultimately unfair to HMRC; and
  • Nasmyth’s failure to agree “time to pay” arrangements with HMRC (i.e., an agreed instalment plan) for the wider group before proposing the plan tipped the balance against sanctioning the plan and was a “blot” (technical or legal defect) that prevented its plan from taking effect in the manner intended.
• Fair distribution of benefits: The court’s judgment in GAS provides significant guidance as to relevant factors when considering whether a plan constitutes a fair distribution of post-restructuring benefits — including 1. stakeholders’ existing rights, 2. additional contributions to the plan (including if they are taking on additional risk by making new money available) and 3. if any disadvantageous treatment is justified.
• Critical creditors: In Nasmyth, the court held it would not have been prepared to accept a particular creditor as a “critical supply creditor” (who was to be repaid in full outside the plan, effectively at the expense of HMRC). Particular care is needed in considering whether there are respectable commercial reasons for leaving certain creditors uncompromised by a plan.
• Background: The background to Nasmyth’s plan is summarised in Annex A; the background to GAS’ plan is summarised in Annex B.
• Post-script: Following the court’s judgment, Nasmyth reportedly entered administration and, in a “pre-pack” deal, was sold to an affiliate of its existing shareholder. It remains to be seen whether GAS will enter administration following today's judgment.
• Future compromises: We expect HMRC to seek reform of restructuring plans, such that it would be impossible to compromise HMRC debts via a restructuring plan without its consent. Pending any such reform, the ability to compromise HMRC in future has not been excluded “as a matter of principle”. 

For full details, see our detailed deck.

^{1. This mirrors the court’s approach in Hurricane Energy, the first and only other case in which the court has refused to approve a UK restructuring plan; see our Alert.↩}