Houst restructuring plan sanctioned despite HMRC opposition

It is the first restructuring plan to be sanctioned for an SME under the Corporate Insolvency and Governance Act (CIGA) where the company concerned is not already in a formal insolvency process.

Houst’s business focuses on short-term and holiday rentals. Its business was severely impacted by the pandemic. The company was both cashflow and balance sheet insolvent and three creditors threatened it with winding-up petitions.

According to the High Court, without action, Houst was likely to enter administration and subsequently have its assets sold off.

In that scenario, the court said just two of the company’s creditors – Clydesdale Bank and HMRC – would receive any dividend. Clydesdale Bank is a secured creditor with fixed and floating charges over Houst’s assets. HMRC is a secondary preferential creditor following the re-introduction of crown preference. In the relevant alternative, being administration, the evidence showed that both Clydesdale and HMRC would suffer a significant shortfall in recovery of the money owed to them. Other creditors, such as customers, critical suppliers and employees, would receive nothing at all.

To avoid the need for the company to enter administration, a proposed restructuring plan was drawn up on behalf of Houst by Begbies Traynor under provisions in CIGA.

CIGA was introduced during the 2020 Covid-19 lockdown and contained a range of temporary measures to support businesses affected by trading restrictions linked to the pandemic response. CIGA introduced three permanent measures to help companies recover in the longer term: restructuring plans under the 2006 Companies Act; and the standalone moratorium and the restriction on contractual termination clauses – both under the 1986 Insolvency Act.

A restructuring plan constitutes an "arrangement" or "compromise" between the company and its stakeholders and will result in a reduction or reshaping of the liabilities owed to those stakeholders.

The process for a restructuring plan is very similar to the well-established "scheme of arrangement" regime, with stakeholders split into classes in respect of both their treatment under the proposal and for voting purposes. However, unlike a scheme of arrangement, a restructuring plan allows for dissenting classes of stakeholders to be bound in certain circumstances. This is known as "cross-class cram-down".

The restructuring plan proposed for Houst is multi-faceted.

Under the plan, new preference shares would be allotted and issued by Houst in return for a capital injection. Existing preference shares would be converted to ordinary shares and the interests of those preference shareholders diluted. In addition, Houst would make an upfront payment of £250,000 to Clydesdale Bank, with an additional £500,000 paid over three years, and the company would also make monthly contributions to separate funds to be used to make payments to HMRC and trade creditors. Loan holders would be given the option of swapping their existing debt for equity or, alternatively, to be paid out of the same fund as the trade creditors. An inter-company creditor would receive no funds from the arrangement.

Although excluded from the plan customers, critical suppliers and employees would be paid the debt they were owed because of the impact non-payment is perceived to have on the company’s ability to continue trading successfully.

The majority of creditors voted in favour of the Houst restructuring plan. One of those that did not was HMRC. As it was in a creditor class of its own, its vote meant that there was a dissenting class of creditors which was opposed to the plan. This presents a barrier to restructuring plans being agreed, but it remains in the High Court’s power to nevertheless sanction a restructuring plan under the cross-class cram-down procedure.

In this case, HMRC said it was opposed to the plan because it would have meant it relinquishing its preferential creditor status to allow dividends to be paid to unsecured creditors – something it was not prepared to do. It took this position despite acknowledging that it was likely to receive a smaller dividend in the event of Houst’s administration or liquidation than if the restructuring plan was agreed.

The court decided that the balance of interests in the case merited it using its discretionary powers to sanction the restructuring plan.

Restructuring expert Andrew Robertson of Pinsent Masons said: “The Houst decision is the first where HMRC has been ‘crammed down’ under a restructuring plan in respect of its preferential claim. Given the wall of HMRC debt sitting on the balance sheets of SMEs following Covid, this could be a trigger for a number of other businesses to apply to do the same, especially as they are no longer able to compromise HMRC in a company voluntary arrangement.”

“The court has taken a pragmatic approach to sanctioning the restructuring plan, acknowledging that Houst is an SME with circa £5 million of debt, and therefore not requiring the same evidential burden as with a larger corporate. The decision further supports the courts’ apparent willingness to see more restructuring plan cases in respect of SMEs, and in line with UK government’s intentions when the restructuring plan concept was introduced as part of CIGA in June 2020,” he said.