Vol 20 (2023) - Issue 3

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Houst Restructuring Plan: A Restructuring Plan Can Be Tailored to the Needs of an SME and Provide a Powerful Tool to Cram Down Even HRMC as a Preferential Creditor

Synopsis
The restructuring plan of Houst Limited ('Houst'), which is the first restructuring plan of an SME (outside insolvency proceedings), has shown that the restructuring plan process can be adapted to fit the needs of SMEs and that the English court is conscious of the cost and time pressures faced by SMEs.
Houst's case has also shown that the Court is willing to sanction a plan that deviates from the order of priority that would apply in the relevant alternative, not only where all in-the-money creditor classes approve of the plan (as was the case in Re Virgin Active Holdings Limited1) but also where one of the in-themoney creditor classes votes against the plan, provided the plan satisfies the statutory cross-class cram-down conditions and the Court considers the proposed distribution of the restructuring surplus to be otherwise fair. In Houst's case, HMRC as secondary preferential creditor was the only creditor other than the secured bank creditor which would receive a payment under the relevant alternative (a pre-pack administration). It voted against the proposed plan but did not challenge the plan in Court. The Court, reasoning that HMRC is a sophisticated creditor able to look after its own interests and could therefore have engaged with Houst to negotiate its dividend under the plan and/or challenged the plan in Court, balanced HMRC's inaction and the fact that it would likely receive a higher absolute dividend under the plan than in the relevant alternative against its view that Houst's reasons for deviating from the priority in the relevant alternative were a weak basis for depriving HMRC of its preferential status. Taking the view that it faced a binary choice of sanctioning the plan or rejecting it, risking cost and delay and likely insolvency, it chose to sanction the plan absent HMRC's clear indication to the contrary.
Houst's case demonstrates that Part 26A of the Companies Act 2006 ('Companies Act') can be used to compromise debts owed to HMRC against its will, which might invite other SMEs to do the same. It is also another example that secured creditors, especially of SMEs, need to carefully consider the value of their fixed charge security they accept as otherwise the preferential status of certain, potentially sizeable debts owed to HMRC can substantially undermine the value of its floating charge security. Lastly, it shows that HMRC's refusal to engage in the process did not prevent the Court from sanctioning the plan. HMRC was expected to receive a higher absolute dividend in the plan than in the relevant alternative, however, by not engaging in the process (albeit that this may be on policy grounds) HMRC are potentially setting an unfavourable precedent that SMEs can agree with their secured creditors how to distribute the restructuring surplus as long as they ensure that HMRC gets at least what it would get in the relevant alternative.