Crammed Down But Not Out: HMRC Successfully Opposes Restructuring Plans

• Law Firm: Cadwalader, Wickersham & Taft LLP
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law
• Author: Mr Cadwalader, Wickersham & Taft LLP
• Published date: 25 May 2023

HMRC has recently taken an increased interest in opposing restructuring plans under Part 26A of the Companies Act 2006 ("Part 26A") under which HMRC would otherwise be crammed down. This follows HMRC somewhat regaining its status in 2020 as a secondary preferential creditor in respect of certain taxes in insolvency scenarios (see here and here).

Three recent cases demonstrate this change in approach. Whilst these cases are sure to be of interest from a restructuring and insolvency perspective, the shift in HMRC's approach together with the issues specific to HMRC that were considered by the High Court are also of interest from a taxation perspective.

Houst

In the first case, the High Court sanctioned the proposed restructuring plan in Houst¹ in 2022. Houst was notable for being the first time that such a plan had been used to cram down HMRC. Whilst HMRC did not make submissions to the High Court, the High Court observed that in an email response opposing the plan that HMRC described its reasons for opposing the plan as being that it did not want to relinquish its status as a secondary preferential creditor in order to provide a dividend to unsecured creditors. Despite HMRC not challenging the company's evidence as to the outcome for creditors in the alternative, the High Court noted that HMRC stood to receive more under the proposed restructuring plan than under the alternative (here, a pre-pack administration) and inferred that HMRC would prefer the result proposed under the restructuring plan under which it would receive a greater amount than under the alternative.

The High Court in Houst noted that HMRC was a "sophisticated creditor able to look after their own interests". It is therefore perhaps unsurprising that HMRC went on to oppose the restructuring plans proposed in two further cases, each of which provide salient lessons for companies and their advisors in considering the relationship with, and obligations to, HMRC.

Nasmyth

In April 2023 and in the second case, Nasmyth², the High Court again considered a restructuring plan under Part 26A. However, in Nasmyth, the High Court refused to sanction the plan on the basis that the company had failed to agree "time to pay" ("TTP") arrangements with HMRC before putting forward the plan for consideration by the High Court. This failure on the part of the company was seen as "tipping the balance" against sanctioning the plan, given that TTP arrangements in respect of the company's subsidiaries were seen as...