Re Nasmyth Group Ltd (Re Companies Act 2006) [2023] EWHC 988 (Ch) sets out Leech J’s reasons for refusing to sanction a Part 26A restructuring plan.
The company acted as the holding company of engineering subsidiaries in the UK and elsewhere and provided administrative and treasury functions to the rest of the group.
In 2020 the group began to experience financial difficulties, predominantly as a result of the effect of the pandemic on the aviation industry. In 2021 attempts were made to arrange a debt refinancing or equity to stabilise the company’s business. The former failed, but there was an equity sale, and both the company and the group entered into new long term debt facilities, an asset lending agreement, and, in some cases, a secured working capital loan agreement. These steps turned out to be insufficient in the face of prevailing economic factors, as a result of which recourse was had to a restructuring plan.
Under the plan:
(1) The senior secured lender would waive existing defaults and refrain from taking enforcement action for three months following sanction, but the quantum of its debt and its security would not be compromised.
(2) The junior secured lender would make available the £7 million balance of a £15.5 million facility on new terms, and a new committed tranche of £1 million would be made available. Again quantum and security would not be compromised, but the repayment date would be extended until 2029 subject to new covenants.
(3) The claims of preferential creditors would be compromised in full for £10,000. In fact HMRC was the only preferential creditor.
(4) The claims of unsecured creditors would be compromised in full for £10,000 to be distributed on a pari passu basis.
(5) Intercompany creditors’ claims would be compromised in full for no consideration.
(6) The claims of critical supply creditors, identified by the company, would be unaffected and repaid in full.
Plan meetings took place at which approval was secured by a majority of all classes voting apart from the preferential creditor class (HMRC).
The company applied to the court to sanction the plan and to order what has come to be called “cross-class cram down.”
Three creditors opposed sanction of the plan. HMRC, Mr Peter Smith and Mr Christopher Henson, both unsecured creditors. Mr Smith challenged the outcome of the meeting of unsecured creditors on the basis that his claim had been wrongly valued at £1. Mr Henson challenged on the basis that he had been given inadequate notice and had been unable to vote. Mr Smith, Mr Henson and HMRC all contended that the plan was unfair. HMRC also opposed because there was “blot” or “roadblock” that would prevent implementation of the plan: it was dependant on HMRC’s entering into time to pay agreements or other arrangements with a number of the company’s subsidiaries.
“Cross-class cram down” involves satisfying the court of two conditions: it must be satisfied (a) that, if the plan is sanctioned, none of the members of the dissenting class will be worse off than they would be in the “relevant alternative” (the “relevant alternative” being what the court considers would be most likely to occur if the arrangement were not sanctioned) (condition A); and (b) that the plan has been approved by at least one class who would receive a payment or have a genuine economic interest in the company in the event of the “relevant alternative” (condition B). The court must then be satisfied that it is appropriate to exercise its discretion to sanction the plan.
The company relied on two experts’ reports to satisfy those conditions. Both expressed the opinion that the relevant alternative was administration, and each contained an estimated outcome statement comparing likely returns under the plan with likely returns in an administration.
The opposing creditors did not adduce expert evidence. Opposing counsel submitted that if the court did not sanction the plan, the most likely outcome was that funding would continue and the company would not, in fact, go into insolvent administration. The judge said that he might have been inclined to accept that submission but for an unexpected development.
In the course of closing submissions by counsel for the company, the company suddenly produced evidence that at 9 pm on the previous evening the board of directors had resolved to put the company into administration if the judge did not sanction the plan: the new funding the company needed would not be forthcoming in that event, so the company’s immediate cash-flow requirements would not be met. The judge said that his initial reaction was the same as that of counsel for the opposing creditors: that the board’s decision was “cynical and transparent and intended to hold a gun to the head of the court.” However, counsel for the company submitted that what the board said represented the genuinely held view of the directors, who could see no alternative to administration if the court did not sanction the plan. Leech J said,
“I accept [those] submission and despite the cumulative strength of the points which [opposing counsel] made, I am unable to accept his submission that the Company has failed to prove the relevant alternative on a balance of probabilities. The board of directors of the Company has made a decision that it will file a Notice of Intention if the Plan is not sanctioned and in the absence of any application to cross-examine [the director giving evidence of the development], I must accept his evidence and that the Company has proved to the civil standard that the relevant alternative is an insolvent administration.”
The judge also accepted that both the preferential 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.
Nonetheless, he took the view that, even if conditions A and B were both satisfied, the objections of the opposing creditors could be taken into account in the exercise of the court’s discretion. He noted in particular that s 901G Companies Act did not set out an express test or identify the factors which were relevant to the exercise of discretion. He identified the following relevant factors:
(1) A plan company will have a “fair wind” behind it if conditions A and B are satisfied (Re DeepOcean, Amicus Finance Plc (In Administration) and Re E D & F Man Holdings Limited).
(2) The words “just and equitable” should not be read into s 901G or treated as a statutory test (Re Virgin Active).
(3) The correct approach to the exercise of discretion under s 901G is to identify specific factors that are relevant to the exercise of that discretion.
(4) Specific factors include whether the affirmative votes in the assenting class are representative of the class, the overall level of support for the plan and whether the plan provides a fair distribution of the benefits of the restructuring (Re DeepOcean and Re Virgin Active).
(5) Whether any creditor appears to oppose the sanction of the restructuring plan and/or seeks to explain in evidence why the plan should not be sanctioned (Re E D & F Man Holdings Limited and Re Houst).
(6) Whether there is any blot or defect in the plan which may hinder its operation or effectiveness (Re DeepOcean and Re Virgin Active).
He went on to say that the authorities did not lay down any rigid rule and noted that in DeepOcean Trower J had said that the court must take into account “all the legal consequences” which the restructuring plan will have on the relevant class of creditors in deciding whether they will be worse off if it is implemented.
With those, and other points in mind, he went on to conclude:
“First, there is no dispute that the Group owes HMRC £2,961,674.42 (plus further interest) in total and that the Company’s subsidiaries will still owe HMRC £2,561,499.38 once the Company has gone into administration. It will remain one of the largest creditors of the Group. Secondly, there is no dispute either that the success of the Plan depends upon HMRC agreeing TTP arrangements with the Group’s subsidiaries if it is sanctioned. The Company’s position is that HMRC will have no option but to agree TTP arrangements if the Court sanctions the Plan. But HMRC may well take the view that it prefers to negotiate with administrators who are attempting to sell the Group as a going concern and that, if it does, it has a greater likelihood of agreeing satisfactory TTP arrangements and ultimately to be paid in full.
I, therefore, find that HMRC has a genuine economic interest in the Company if it goes into administration, even though it would be unable to recover the debts due from the Company alone and that I can properly attribute weight both to HMRC’s vote against the Plan and to its interests. I find that neither Mr Smith nor Mr Henson has a genuine economic interest in the Company even if it goes into administration and I cannot attribute any weight to Mr Smith’s vote or their interests for that reason. However, I find that they both have a legitimate interest in opposing the Plan and I consider that I am entitled to take their views into account in the general exercise of the Court’s discretion whether to sanction the Plan.
In my judgment, it would be unfair to sanction the Plan and enable the Company to cram down the HMRC debts totalling £472,308.44 in the present case. In reaching this conclusion, I have taken into account the size of the debt, the fact that £209,703.01 is a secondary preferential debt, the fact that the Group as a whole owes £2,961,674.42 and also that some of these debts go back as far as January 2020. I have also taken into account the fact that HMRC’s share of the restructuring surplus if the Plan is sanctioned is both tiny by comparison with JCP and in absolute terms. It seems to me that these are all strong reasons why the Court should be slow to sanction the Plan.”
This is not the first time sanction of a restructuring plan has been refused. That happened in the case of Hurricane Energy plc, where the court found that the dissenting shareholders would not be better off under the plan, so the relevant conditions could not be found to have been satisfied. This may be the first case in which sanction has been refused as a matter of discretion.