Overview of Prezzo Part 26A Restructuring Plan Approval By the High Court
Prezzo Part 26A Restructuring Plan approved by the High Court notwithstanding HMRC’s Objection following a judgment from Mr Justice Richard Smith dated 5 July 2023.
In the case of Prezzo Investco Ltd, In the Matter of (Re Companies Act 2006) [2023] EWHC 1679 (Ch) (“the Prezzo Case”) he said:
…I am firmly of the view that I should sanction the Plan, including the ‘cram-down’ of the HMRC debt it contemplates…
What Is A Part 26A Companies Act Restructuring Plan?
A Part 26A Companies Act Restructuring Plan is an arrangement with creditors or members of a company that is in or likely to get into financial difficulties. It is a process that requires the Court’s approval of the proposed arrangements once it has been put to creditors (or the members).
A notable feature that provides it with its potentially attractive flexibility for the restructuring specialist is its ability to cram down a class of creditor (or member). This is untypical in insolvency proceedings given the pari passu principle is so dominant.
What Is Cram Down?
The Cram Down (also known as Cross-Class Cram-Down) was explained as follows:
As Mr Smith KC submitted, Part 26A provides for the sanction of a plan against the dissenting vote of a creditor class under the Court’s ‘cram-down’ jurisdiction in section 901G of the Act. Since the related statutory condition is that such a class should be “no worse off” than if the plan had not been sanctioned, if it would receive nothing in the alternative scenario, it follows that the Act envisages the compromise of their claims under a plan under which they would also receive nothing.
Section 901G of the Companies Act 2006 enables the Court to approve a Part 26A restructuring plan even if it has not been approved by the required majority at a meeting of creditors (or members) provided the assenting class has a genuine economic interest in the company, where the relevant alternative is concerned and the dissenting class would be no worse of than they would be in the relevant alternative plan.
In the Prezzo Case, the Court noted the conditions for Cram Down from a historic case that had looked into the arguably contentious provision. It said:
Where the Court is asked to sanction a plan in reliance on the cross-class cram-down power, there are three questions the Court must consider (Re Virgin Active Holdings Ltd at [104]; Re Houst Ltd at [13]):-
(i) Condition A: If the restructuring plan is sanctioned, would any members of the dissenting class be any worse off than they would be in the event of the relevant alternative?
(ii) Condition B: Has the plan been approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative?
(iii) Discretion: In all the circumstances, should the Court exercise its discretion to sanction the restructuring plan?
Objection From HMRC To The Cram Down
It was notable HMRC opposed the company’s application for the Part 26A restructuring plan. Prezzo Investco Limited (“the Company”) did not agree with HMRC’s rationale it seems. The Court noted the following:
At very headline level, HMRC’s position is that the Plan would be unfair and should not be sanctioned. The Company, on the other hand, says HMRC’s position in opposing sanction is perverse.
If the Part 26A restructuring plan was not approved the alternative would be an Administration and it appears that HMRC as a preferential creditor would receive £1,326,837. The Part 26 restructuring proposal was amended after HMRC objected to enable it to be afforded a further £2 million.
It appears HMRC was concerned about the size of their debt being subject to the cram down provision. HMRC was owed £11,815,196 of which £9,927,492 had secondary preferential status.
Between 31 March to June 2023 when the Part 26A restructuring plan was being assembled the so-called ‘critical’ creditors (required to continue trading) were paid around £4.9 million a month. From HMRC’s point of view, those crucial creditors are paid 100p in £. It took the view the Company might have been in effect trading to the detriment of the Crown.
HMRC said non-payment of tax should not be sanctioned by the Court and given HMRC was a secondary preferential creditor it should be elevated to the ‘critical’ class. However, the Court said:
I also discerned from its submissions that HMRC were approaching this case on the basis of a point of principle and enquired whether it was being contended that HMRC’s preferential debts should in all cases have to be paid during the period of preparation of a restructuring plan before the court entertains sanction. Although it appeared to admit of the possibility of cases based on different facts in which sanction might be appropriate, it seemed to me that HMRC was in effect so contending.
The Court Approved The Prezzo Restructuring Plan
The Court was persuaded that the Part 26A restructuring plan should be approved and said:
HMRC does not contest that the alternative if the Plan is not sanctioned is administration, FRP’s estimate of HMRC’s likely return in that administration and that HMRC’s return under the Plan will be significantly higher. The alternative of administration will be a costly and value destroying process. The cost of that process can be avoided under the Plan and the saving enure instead to HMRC and, therefore, the taxpayer. HMRC accepts that this is a relevant consideration in the exercise of my discretion. I agree.
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.
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