First use of cram up power in restructuring plan

This case concerned a restructuring plan proposed by a company in which:

• The shareholders would inject capital in return for preference shares.
• The fixed and floating chargeholder bank would receive a dividend of 27p in the £ funded out of the capital injection and future trading.
• The preferential creditor, HMRC, 20p in the £.
• Non-critical unsecured creditors 5p in the £.
• Liabilities to customers, critical suppliers and employees would be excluded from the plan and paid in full.

Uncontested evidence as to the company's financial position was to the effect that the relevant alternative to the plan was a pre-pack administration which would result in an estimated dividend of 7p in the £ for the bank, 15p in the £ for HMRC and nothing for the unsecured creditors. Thus the plan resulted in a better outcome for all creditors than the alternative, including for HMRC. However, the relative outcome for HMRC by comparison to other creditors was worse under the plan than under the alternative. Under the plan, HMRC’s p in the £ return was less than the bank’s whereas it would have been more in the alternative. The plan involved a departure from the ordinary order of priority between creditors that would exist in the alternative in that unsecureds received something under the plan whereas they would have received nothing under the alternative.

At the convening hearing, the judge convened six meetings, all of which subsequently voted in favour by the requisite majority save the preferential creditor meeting (consisting of HMRC alone) which voted against the plan.

At the sanction hearing, the court sanctioned the plan, reasoning as follows:

• The better treatment afforded to critical creditors was justified on the basis that the company's ability to generate additional funds to pay an enhanced dividend to HMRC depended on paying critical creditors.
• The shareholders had the prospect of, over time, owning an interest in a solvent company but this was a heavily diluted interest, the capital injecting new shareholders enjoying by far the largest part of the shareholding going forward.
• The explanation for the enhanced dividend payable to the bank was that that was the most it was prepared to accept in order to support the restructuring. In the judge’s view, this offered only a weak basis for depriving HMRC of the priority they would have in the relevant alternative. This was not a case where the company was dependent on the bank to continue trading and, while it is true that no plan could be achieved without one of the company's in-the-money creditors voting in favour of it, there seemed to be no reason in principle why that could not have been HMRC rather than the bank. Against that, the judge balanced following factors, principally:
  • The new value generated came principally from the new capital injection from members rather than the company’s own assets.
  • The only creditor who was disadvantaged was HMRC. HMRC was a sophisticated creditor with full notice of the plan. Although they voted against it, they did not attend the sanction hearing or present any arguments against sanctioning at the hearing.
  • Even HMRC stood to receive a better outcome if the plan were sanctioned than in the relevant alternative and the only explanation given by HMRC for voting against was a decision reflecting a general policy, or at least not a decision taken with specific regard to the circumstances of the particular case.
  • While it would in theory be possible to require the company to start again and seek to negotiate with HMRC, that was highly undesirable where the costs and delay in requiring it to do so would impose a disproportionate burden on the company, a small to medium enterprise.

In re Houst Limited, convening hearing 14 June 2022; sanction hearing 22 July 2022