Prezzo Investco Ltd
01 / 09 / 2023
The application before Richard Smith J in Re Prezzo Investco Ltd (Re Companies Act 2006)  EWHC 1679 (Ch) was for sanction of a restructuring plan between the company and certain of its creditors under ss 901F and 901G of Part 26A Companies Act 2006.
The company had a single, wholly-owned subsidiary, Prezzo Trading Limited, which operated (and continues to operate) a chain of Italian restaurants under the Prezzo brand. It got into serious financial difficulties, initially as a result of the pandemic, later because of the effect of price increases. The company attempted to deal with its difficulties by means of a CVA, which resulted in the sites operated by the trading business being reduced from 300 to 209 and the closure of three other restaurant brands then operated by it. Following the CVA, a further 23 sites were closed, reducing the operating restaurants to 186. However, a loss of some £4.5m in 2022 led to further cuts and the proposal of a restructuring plan. The only alternative, it was said, was administration of the company and its trading arm. That, it was said, would leave creditors and others affected materially worse off than under they would be under the plan; the plan would allow the Prezzo business to continue to trade as a going concern, albeit from a much reduced number of outlets, but on a financially sustainable footing.
Under the plan, principal and interest due to secured loan noteholders was to remain largely unaffected, although the maturity date was to be extended, as was the notice period for the exercise by the majority noteholders of an optional redemption right. HMRC (as second preferential creditor) was to receive a cash payment equal to the value of the floating charge assets in the relevant alternative less the estimated costs of administration, the rationale being that HMRC, as a preferential creditor, would only have recourse to Prezzo Trading’s floating charge assets. Under an amendment to the plan, HMRC would also receive an additional payment of £2m. The claims of the classes of what were called deferred and exit consideration creditors were to be written off. They would receive nothing under the relevant alternative. The claims of landlords of loss-making sites, local authorities and other unsecured creditors were also to be written off in full: they too would receive nothing under the relevant alternative.
HMRC opposed sanctioning of the plan. It relied on a number of prejudicial factors, including the size of the debt due, some £11.8m of which £9.9m had secondary preferential status; the company’s failure (or that if its subsidiary) to make tax payments while trading, whilst at the same time paying other creditors deemed to be critical; its status as a secondary preferential creditor, which should, it contended, itself be considered critical; it also submitted that giving a “green light” to companies to use plans to cram down their unpaid tax bills where there had been trading at the expense of HMRC was a further factor militating against sanction.
Richard Smith J noted the power given to the court by s 901G to sanction a restructuring plan under s 901F, even where the plan had not been approved by the requisite majority in each meeting of creditors (as was the case here), provided that: (a) an assenting class had “a genuine economic interest in the company, in the event of the relevant alternative” and (b) the court concluded that none of the members of the dissenting class(es) would be “any worse off” than in the relevant alternative. In this case, two creditor classes had not approved the plan by the requisite majority, and the company was asking the court to exercise its s 901G cram-down power. Having considered the statutory provisions and recent authorities, including two cases in which HMRC had successfully staved off “cram down,” he concluded that the restructuring plan before him should be sanctioned: the relevant conditions obtained, and it was appropriate to exercise the court’s discretion to approve the plan. He reached that conclusion for the following main reasons:
The fact that HMRC was an involuntary creditor, so that caution was necessary in considering whether to “cram-down” its debt, as well as the preferential status afforded to the majority of its debt, did not prevail where the allocation of benefits under the plan was fair.
The position of the secured loan noteholders and HMRC under the plan reflected the reality of their status. The payment to HMRC of what was likely to amount to at least £3.3 m odd was not a departure from the order of priority in which HMRC would be paid in the relevant alternative.
Under the plan, HMRC would receive most, if not all, of the “restructuring surplus” generated by the plan.
The company had meaningfully and promptly communicated with HMRC, which included the provision of extensive information with a view to addressing HMRC’s concerns about the plan; and, having considered HMRC’s concerns, the company had engaged with the secured loan noteholders to procure a significant improvement in HMRC’s position under the plan compared to administration. “At the hearing, I enquired whether, in light of the concerns expressed by HMRC, it had sought to engage in negotiation with the Company concerning the Plan. HMRC confirmed it had not.”
As to HMRC’s contention that the company had used its debts to HMRC to fund the business since March 2023 while the plan was being pursued, the company’s director’s evidence was that, from the commencement of the plan process in April 2023, the company had lacked sufficient funding to pay all its creditors in full. HMRC had not sought cross-examination on the issue, so the judge accepted the company’s evidence. He also accepted that a time to pay agreement would not have been feasible.
The judge accepted that the company had continued to pay (and proposed to exclude from the plan) creditors critical to the preservation of its business and ability to trade, whilst not treating a number of non-critical creditors, including the landlords of loss-making sites owed more than £32m, in the same way; but he also accepted that “it may be necessary to pay ‘critical creditors’ to preserve value and rescue a company’s business as a going concern. I accept that the course undertaken by the Company and Prezzo Trading in this case was appropriate in the interests of creditors.”
- He also took into account that the secured loan noteholders had procured emergency interim funding of £1.4m to enable the business to continue trading during the plan process.
In the light of those and other factors, he concluded:
“Having approached this matter with appropriate circumspection, I am satisfied in all the circumstances of this case that the Plan is a fair one, that the Company has not been trading ‘at the expense of’ HMRC, let alone cynically so as HMRC canvassed that possibility in submission, and that the directors of the Company and Prezzo Trading could reasonably have formed the view here that HMRC should not be treated as a ‘critical’ creditor. More broadly, I am also satisfied that the Plan is not being used by the Company as an ‘instrument of abuse’ and that its sanction here will not give a ‘green light’ to companies to use Part 26A to ‘cram down’ their unpaid tax bills, a risk to which the court is, of course, astute.”
The decision in the case marks something of a reversal in fortune for HMRC after its success in opposing the sanctioning of restructuring plans and “cram down” in Re Nasmyth  EWHC 988 (Ch) and Re GAS Co. Limited  EWHC 1026 (Ch). The judge noted a number of factors applicable in those cases which were not applicable here:
“79. I have…considered carefully…those authorities in which HMRC ‘cram-down’ has been considered, albeit recognising the multiple and often countervailing considerations in play in those cases and their very different facts from this one. So, for example, in Re Nasmyth, although HMRC’s preferential debt was much lower than in this case (£209,703), the relevant corporate group owed a larger aggregate debt (approximately £2.6m), some of which had accrued over a much longer period. In this case, HMRC’s debt relates to a much shorter and more recent period (April to June 2023).
80. Also significant in Re Nasmyth was that HMRC had in place from February 2022 time to pay agreements for the tax debt of the corporate group, an arrangement that went into default from August 2022. Against that background, the relevant company’s failure to conclude further such agreements prior to plan launch was considered to ‘tip the balance’against sanction. In this case, there were no such agreements. Moreover, the proposed distribution to HMRC in Re Nasmyth was only 4.8p in the £, described as ‘tiny’ in both absolute and relative terms compared to the distribution to be made to one of the secured creditors. In this case, HMRC will be paid a return of 33.5p in the £ within 30 days of the Plan’s effective date.
81. Likewise, the facts of Re GAS Co. Ltd were materially different from this case, including the history of (broken) time to pay agreements compared to the much shorter and more recent period of the preferential debts to be compromised under the Plan. Moreover, the proposed return to HMRC in that other case was again low (9.1p to the £) and would not be paid in full until after two years.”
Fairness will, then, depend on “the multiple and often countervailing considerations in play” in each case.