English Court Crams Down Tax Authority in Prezzo’s Restructuring Plan; Ability to Zero “Out of the Money” Classes

At a Glance

The English court today handed down its judgment approving Prezzo’s restructuring plan, notwithstanding a challenge from the tax authority, HMRC. This contrasts with the court declining to approve two recent midmarket restructuring plans following opposition from HMRC (namely Nasmyth and GAS — see our Alert).

In Prezzo, the court was satisfied that:

• the payment to be provided to HMRC under the plan (33.5% in respect of its preferential claims; zero in respect of its smaller unsecured claims) meant it would receive most, if not all, of the “restructuring surplus” generated by the plan;
• the allocation of benefits under the plan was fair;
• the plan was not being used by the company as an “instrument of abuse”; and
• approving the plan would not give a “green light” to companies to use restructuring plans to “cram down” their unpaid tax bills.

In contrast to HMRC’s opposition on Prezzo, HMRC voted in favour of Fitness First’s restructuring plan, which involved a five-month instalment plan for a historic VAT liability. The court approved Fitness First’s plan on 29 June, binding dissenting landlord classes and despite opposition from certain landlords; judgment is awaited.

More generally: for the first time, the court in Prezzo held that it has jurisdiction to sanction a plan in which certain classes would receive no distribution under the plan (because they would be completely “out of the money” in the relevant alternative and were “no worse off” under the plan). 

Background

The principal terms of the restructuring plan were as follows.

The current shareholders will remain, with no variation to their rights. The secured loan noteholders largely coincided with the shareholders; they had made substantial contributions to the group including interim emergency funding and the additional £2 million to be paid to HMRC.

Judgment

The court found (and HMRC had accepted) that the statutory conditions to bind a dissenting class were satisfied — namely, no member of a dissenting class would be any worse off under the plan than in the relevant alternative, and an “in the money” class (here, the secured noteholders) had approved the plan. 

Accordingly, the judgment principally focussed on whether the court should sanction the plan as a matter of its discretion.

Binding HMRC: 

• The court paid “due regard to the fact that HMRC has objected to the Plan, and done so in strong terms, the fact that it is an involuntary creditor and the need for caution generally in considering the ‘cram-down’ of HMRC debts, as well as the preferential status afforded to the majority of those debts”. However, it was nevertheless satisfied that the allocation of benefits under the plan was fair. 
• The court distinguished other cases in which the court had refused to bind HMRC as a dissenting class (namely, Nasmyth and GAS) on various bases, including that: 
  • the proposed return to HMRC was higher in Prezzo, at 33.5% compared to 4.8% in Nasmyth and 9.1% in GAS; 
  • the payment to be provided to HMRC meant it would receive most, if not all, of the “restructuring surplus” generated by the plan;
  • HMRC would be repaid quicker in Prezzo — within 30 days of the effective date, whilst in GAS payments would be made over two years;
  • Prezzo had procured a significant improvement for HMRC — an additional £2 million — from its secured loan noteholders/shareholders;
  • HMRC’s debt in Prezzo related to a much shorter and more recent period (April-June 2023) than in Nasmyth; 
  • unlike Nasmyth and GAS, Prezzo had no history of broken time to pay arrangements with HMRC; and
  • certain creditors that Prezzo had continued to pay were truly critical to the preservation of its business, in contrast to the position in Nasmyth.

Jurisdiction to “zero” out-of-the-money classes:

The court held that the legislative requirement for a “compromise or arrangement” does not require out-of-the-money classes to be given any valuable compensation for the release or cancellation of their rights under the plan. Whilst some element of “give and take” is required in a conventional scheme of arrangement, the court held that this requirement does not apply in the context of a restructuring plan, owing to the court’s ability to approve a plan under which no member of a dissenting class is “worse off” than if the plan had not been sanctioned. 

^{1. Namely, restaurants considered to be profitable and critical to the future operation of the business. ↩}

^{2. Namely, landlords of loss-making sites, creditors in respect of deferred and exit consideration, local authorities in respect of loss-making sites and other unsecured creditors, including HMRC in respect of its non-preferential claims. ↩}