Restructuring Plans: should an opposing creditor be granted security for costs? Might that open the floodgates where companies are by definition “distressed,” or was this particular Plan more akin to ordinary adversarial litigation? Read our summary below.
Consort Healthcare (Tameside) plc is a special purpose vehicle providing services to the Tameside And Glossop Integrated Care NHS Foundation Trust under the terms of a project agreement entered into in 2007 by way of a private finance initiative. The Trust was required to redevelop an existing hospital site and, having done so, provide services such as estate maintenance, security and a help desk.
A dispute arose between the company and the Trust which went to adjudication and resulted in a significant award against the company in favour of the Trust. The company took the view that the adjudication award, coupled with its implications for the level of service that it would have to provide in future, made its business unviable. It proposed a restructuring plan under Part 26A Companies Act 2006 to compromise the claims against it and vary its obligations under the project agreement. Its position was that, without the benefit of a restructuring plan, it would have to go into administration.
The restructuring plan, in respect of which Richards J made a convening order in May ([2024] EWHC 1438 (Ch)), involved three creditors: Consort Healthcare (Tameside) Intermediate Limited, a group company holding subordinated debt of the plan company; Ambac Assurance UK Limited, a guarantor of senior debt issued by the plan company; and the Trust. The first two creditors supported the plan, but the Trust opposed. Richards J’s second judgment, Consort Healthcare (Tameside) Plc v Tameside And Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch), deals with an application for security for costs by the Trust against the plan company.
The principles applicable to such an application are set out in CPR 25.12 and CPR 25.13:
(1) An application for security for costs may be made by a defendant to any claim (CPR 25.12(1)).
(2) The court may make an order for security for costs only if one of the gateways set out in CPR 25.13 is satisfied.
(3) The court must also be satisfied that it is just to make an order for security for costs having regard to all the circumstances of the case.
The Trust was a defendant to the plan proceedings, having been joined as such, and it was accepted that there was reason to believe that the company would be unable to pay its costs if ordered to do so, thus satisfying the gateway set out in CPR 25.13(2)(c). The only dispute between the parties went to requirement (3), i.e. whether the court should, in all the circumstances, exercise its discretion to make an order for security for costs.
The company relied on three arguments why the court should not exercise its discretion to make the order sought:
(1) It contended that the nature of Part 26A proceedings made them fundamentally different from ordinary adversarial litigation.
(2) If the application were allowed, there would be a risk that the plan proceedings would be stifled, a risk that was particularly unpalatable having regard to the nature of the Part 26A regime; and
(3) A set-off argument meant that the Trust was not subject to any real risk of being unable to recover costs against the company.
Richards J accepted that there were differences between Part 26A proceedings and ordinary adversarial litigation, some of which had been explored in Re Virgin Active Holdings Ltd and Re Smile Telecom Holdings Ltd (notably the fact that in ordinary litigation, a claimant is seeking a remedy to protect its own enforceable rights, whereas Part 26A permitted a company to invoke a statutory procedure which, if sanctioned, involved a change in the legal rights of members or creditors of the company involved; and a defendant in ordinary civil litigation had no real choice but to “put in an appearance to resist a claim”). He recognised strength in the company’s submission that any company proposing a Part 26A plan to its creditors was necessarily experiencing some degree of financial distress. He noted the company’s submission that Part 26A proceedings were “underpinned by a policy of facilitating company rescues,” but went on to say,
“If by this the Company means that Part 26A was enacted to permit companies in financial distress to propose restructuring plans I agree, and I respectfully agree with the comments of Miles J to similar effect in Re CB&I UK [2023] 2987 (Ch) at [24]. However, I do not accept that it follows that any particular plan enjoys a presumption that it will be sanctioned simply because at a high level of generality it might be said to facilitate a company rescue.”
He also agreed with the company’s characterisation of Part 26A proceedings as “a court-supervised coordination of the interests of a number of stakeholders who share the common misfortune of being economically exposed to a company in financial distress.”
But for a number of reasons he declined to exercise the court’s discretion in favour of the company. They may be summarised as follows:
(1) The aim of the plan was to reverse some of the benefits the Trust had obtained as a result of the adjudication. It was thus to be “understood [to be] a continuation of the commercial dispute between the Company and the Trust relating to performance obligations under the Project Agreement. Having lost the Adjudication, the Company argues that the resulting interpretation of the Project Agreement makes its business unviable with the result that some compromise with the Trust should be imposed. The Part 26A procedure gives the Company a tool which it hopes to use to impose a compromise which negotiation has thus far not achieved.”
(2) He considered how the costs of the company and its creditors were being met. Two funds owned indirectly through investment vehicles the equity in the company and the equity in Intermediate Ltd, meaning the entire interest in both the equity in the company and its subordinated debt. Those funds were funding their own costs, the company’s costs, and those of Ambac in connection with the plan. He said:
“It is quite clear to me that the Funds could reasonably be expected to put up security for the Company’s costs. According to their accounts, one investment vehicle through which the Funds invested had net assets of over £133 million as at 31 December 2022 and the other investment vehicle had £400 million of net assets as at 31 March 2023. I am not satisfied that the Funds lack either assets or liquidity.”
(3) He rejected the argument that there was a real risk of the Trust not being able to set off its entitlement to receive costs from the company against other payment due to the company.
(4) He rejected a “floodgates” argument, namely that success in the application would mean that dissenting creditors would routinely seek security for costs as a means of frustrating the kind of restructurings that Part 26A was intended to facilitate: “I consider the court proceedings relating to the Plan to be not dissimilar to ordinary adversarial litigation. In other Part 26A plans, there may be no such similarity or the similarity may be weak. I do not consider that a concern as to how creditors affected by other restructuring plans might behave in the future provides much of a guide as to how I should exercise my discretion in the particular circumstances of this Plan.”
“Those conclusions,” he said, “indicate that it is appropriate to exercise discretion to require the Company to provide some security for costs. I am not persuaded that the differences between the Plan and ‘ordinary adversarial litigation’ are sufficient to dissuade me from that course.”
He then went on to consider the judgment of the Court of Appeal in Chernukhin v Danilina,to the effect that security should be tailored so as to provide protection against the relevant risk, and the implications for quantum. Having done so he ordered security to be given for half the amount that the Trust had requested.
In the face of resistance, he awarded the Trust its costs of the application on the basis that it had been “the overall successful party,” having obtained an order for security for costs in circumstances where the company argued that no order should be made. He rejected the company’s argument that, because the Trust had obtained only 50% of the security that it sought, the company should have to pay only 50% of its costs:
“The Company has been unsuccessful on almost all the arguments that it put forward as a principled objection to the provision of security for costs. It is true that I have accepted the Company’s assessment of the magnitude of the risk of set-off failing if the Plan is not sanctioned in preference to the assessment put forward by the Trust. However, that was simply an element of failure on the way to the Trust’s overall success in the Application.”
Applications for security for costs in connection with Part 26 schemes and Part 26A plans are rare, and nothing in this judgment suggests that that is likely to change. Richards J makes clear at a number of points that the plan before him was indeed a continuation of prior adversarial litigation, and whilst this may be a feature of some schemes and plans, it will be rare. No floodgate has been opened by this decision.