The judgment of Adam Johnson J in Re Great Annual Savings Company Ltd, (Re Companies Act 2006)  EWHC 1141 (Ch) demonstrates again the rigorous approach the courts are taking in relation to the fulfilment of the conditions required to “cram down” dissenting creditors in restructuring plans as well as in the exercise of the court’s discretion to sanction them.
The company carried on business as a broker of energy supply contracts, a business which it conducted with some success for a period of time. However, it got into financial difficulties, entered into time to pay arrangements with HMRC but defaulted, so that HMRC issued a winding up petition which remained hanging over the company. The solution was to propose a restructuring plan under Part 26A Companies Act 2006.
Meetings were held of 15 classes of plan creditors. At 12 of them the plan achieved 100% support; at one meeting there was no attendance, and at two the vote went against the plan. One such meeting was the meeting of so-called “Category 3 Energy Suppliers”, where the majority vote was 66% by value against the plan; the other was the meeting of a single-creditor class, HMRC, who also voted against. The company sought to “cram down” the dissenting creditors to achieve sanction.
As is now well known “cross-class cram down” under s 901G Companies Act 2006 requires the satisfaction of two conditions:
- that none of the dissenting creditors would be any worse off under the proposed plan than they would otherwise be in the “relevant alternative” (condition A); and
- that at least one class of creditor who would receive a payment or have a genuine economic interest in the company in the relevant alternative has approved the plan by a 75% majority (condition B).
It was accepted that condition B was satisfied, but the dissenting creditors said that condition A was not. They also contended that the court should not exercise its discretion to sanction the plan. HMRC argued that the company had not discharged the burden of showing that they would not be any worse off under the plan: they contended that on the projections put forward on behalf of the company, the return to them under the plan would be only marginally better than the return expected in the relevant alternative, in particular because the assumptions made were too pessimistic as to likely recoveries in respect of certain book debts and ignored the possibility of claims which might be made by insolvency office-holders against third parties. The Category 3 Energy Suppliers also took points on condition A, saying that they, too, could be worse off under the plan than in the relevant alternative. As to fairness, they all complained that there was no justification for the better treatment of some creditors proposed under the plan, a point taken in particular by HMRC who relied on their status as secondary preferential creditors.
Not all of those arguments succeeded: the judge was not persuaded by the arguments as to potential claims in the event of insolvency; he also affirmed the principle that there was no inherent objection to varying the ordinary priorities in a restructuring plan (following the decision of Zacaroli J in Re Houst Ltd) and that a “no vote” meeting did not constitute an obstacle to cram down (following the decision in Re Listrac Midco Ltd).
The judge did, however accept many of the dissenting creditors’ points about the relative alternative (identified as a non-going concern sale in administration, with the parent going into liquidation as the trading company was dormant), as a result of which he came to the view that the company had not discharged the burden of showing that HMRC would not be any worse off under the plan: “That is because I am not sufficiently persuaded of the robustness of the conclusions in the CRM Report” [relied on by the company]. Much detail follows in the judgment. The judge accepted that the exercise undertaken by CMR “was necessarily an imprecise and unscientific one” [and that] one had to make an allowance for CRM’s experience and expertise, but, nonetheless, he said, “[I] do not find them persuasive given the fact that the figures put forward appear in most cases to be the Company’s figures, unfiltered by any independent scrutiny or analysis.” Nor did he accept that the payment of future tax was a persuasive consideration:
“The point in this case is that the Company’s obligation to pay taxes in the future is not an obligation that arises under the Plan: it arises independently, under the relevant tax legislation, and is not being offered up as part of the package of rights made available by the Company by way of compromise of its existing liabilities. I thus consider that the benefits flowing from such future payments are too remote from the Plan to be relevant in applying the no worse off test.”
The judge went on to consider fairness, expressing, among other things, concern as to the breadth of the creditor classes benefitting from the re-ordering of priorities and the scale of the benefits conferred on at least some of them “for reasons which are not clear or which are unconvincing.” He said,
“The treatment of these creditor classes seems difficult to justify, and no or no satisfactory explanation is given. The treatment of the Category 2 Plan Creditors is particularly striking. By definition, they are not critical creditors, yet they fare better under the Plan than HMRC. The explanation given for this…is simply that, “these creditors will assist the Company with continued revenue.” This chimes with the stated rationale…for the less favourable treatment of HMRC under the Plan, i.e., HMRC “does not intend to assist the Company with generating any restructuring surplus.”
He went on:
“To my mind, these two statements encapsulate the nature of the unfairness inherent in the Plan. They affirm that while the basic idea of the Plan is to provide ‘a solid platform for future growth and value creation’, and while the mechanism for achieving that objective involves both the eradication of HMRC’s existing debt and prioritising payments to various unsecured creditors at HMRC’s expense, the benefits from such value growth as might be achieved are allocated disproportionately to the Secured Creditor and the existing shareholders/Connected Party Creditors. They are the principal beneficiaries under the Plan. In the circumstances, this distribution of benefits to my mind is unfair.”
Sanction was therefore refused additionally on the basis of unfairness.
Among the many notable features of the judgment are
- that once again, the creditors were able to prevail without, it seems, putting in expert evidence of their own; and
- the following statement as to unfairness:
“ It is advisable not to be prescriptive, but I consider that in the circumstances of the present case at least, it is useful in considering fairness in this general sense to have in mind the following: (i) the existing rights of the creditors and thus how they would fall to be treated in the relevant alternative; (ii) what additional contributions they are expected to make to the success of the Plan – and in particular whether they are taking on additional risk by making available “new money”; and (iii) if they are disadvantaged under the Plan as compared to the relevant alternative, then whether the difference in treatment is justified.”