SME restructuring plans: HMRC debt cram down

The High Court in London recently sanctioned a Restructuring Plan for Houst Limited despite opposition from HMRC, one of the company’s major creditors. Our Restructuring team explains the significance of the case.

Restructuring Plans were introduced as a Business Recovery and Rescue option in the Corporate Insolvency and Governance Act 2020. While a number of larger entities have already had Restructuring Plans sanctioned under the new regime, Houst Limited is the first SME to do so. The case is significant as it highlights a potential alternative rescue route for SMEs in financial difficulty.

Companies with HMRC debt

The introduction of secondary preferential status for HMRC in December 2020 heightened concern about the feasibility of existing restructuring options such as Company Voluntary Arrangements (CVA) and Administration for companies with significant HMRC debt.

Up to now, HMRC’s position (which is clearly stated in their published criteria and reflected in HMRC practice) is that they will not accept a CVA or restructuring procedure where unsecured creditors are paid a dividend unless HMRC’s preferential liability is fully discharged.

In the Houst Limited case, HMRC adopted this approach and voted against the Restructuring Plan which proposed both a cram down of preferential debt and a dividend for other classes of creditors. However, despite voting against the Plan, HMRC did not otherwise participate in the Court process.

Significance of Houst Limited

Although existing recovery processes such as CVA can be efficient, they do not enable a company to seek court approval for restructuring in the absence of acceptance by creditors. The significance of the Houst Limited case is that it shows Restructuring Plans may be an option for SMEs with significant HMRC liabilities. The judge highlighted that HMRC obtained a better return through the Restructuring Plan than would have been obtained had the business failed.

Hopefully, the outcome in this case may encourage HMRC to take a more commercial approach to voting and consider accepting CVAs and Restructuring Plans, which although they may compromise the return on preferential debt, give a better overall return than the alternative insolvency process.

In a related development HMRC recently issued guidance stating their intention to be more proactive in exercising their voting rights around proposed insolvency arrangements. However, the guidance does not state whether they will reconsider their position on cram down of preferential debt where this results in a better return to HMRC and gives the company the possibility of being rescued.

Future corporate rescue & recovery

When deciding on the best rescue option for an SME in financial difficulty, the  pros and cons of both Restructuring Plans and CVA will need to be weighed up. The type of creditors, and the potential return that can be achieved, will determine the most appropriate rescue mechanism.

As always, the earlier a company in distress obtains professional advice, the better the chances of formulating a successful recovery plan.

For further information on the case opinion or advice in general contact our restructuring team on UKandIRestructuring@aab.uk