English High Court Refuses To Sanction Restructuring Plan Which Crams Down HMRC

• Published date: 12 July 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Mayer Brown
• Author: Ms Alexandra Wood and Sheena Frazer

In the recent restructuring plan case of Re Nasmyth Group Limited¹("Nasmyth"), the English High Court declined to exercise its discretion to order "cross class cram down" of HMRC, which was a dissenting plan creditor and which had opposed sanction of the plan, concluding that it would be unfair to sanction the plan.

There may be circumstances in which out of the money creditors have a legitimate interest in opposing a restructuring plan. In this case, HMRC was unlikely to recover anything in an administration, which was the relevant alternative. However, the Court was satisfied that HMRC would retain a genuine economic interest in Nasmyth if it went into administration (and hence it had a legitimate interest in opposing the plan) as the plan's success depended upon HMRC agreeing "time to pay" (TTP) arrangements with Nasmyth's subsidiaries if the plan was sanctioned, and HMRC had already rejected their proposals.

The failure to agree TTP arrangements tipped the balance against sanctioning the plan. This failure was also a "roadblock" (or "blot") which prevented the restructuring plan from taking effect in the manner in which Nasmyth and its creditors intended.

Implications

In principle, debts due to HMRC can be crammed down in a restructuring plan, however, there must be good reasons to do so. The Court went so far as to express the view that it should not be seen to approve the non-payment of tax and it was aware that, if it sanctioned the restructuring plan in this case, it would give a "green light" to companies to use a restructuring plans to cram down their tax bills.

Background

Nasmyth was an SME incorporated in England & Wales, the principal activity of which was as a holding company of subsidiaries providing specialist engineering services.

The company proposed a restructuring plan and the High Court convened five meetings of plan creditors for voting purposes². The plan was approved by the requisite statutory majority in all classes, with the exception of the preferential creditor class (which comprised solely of HMRC), in respect of which a cross-class cram down was sought. HMRC opposed sanction of the plan.³.

Court's decision

Cross class cram down and the Court's discretion - the Court accepted that the relevant alternative to the plan was an insolvent administration and that statutory conditions A and B were satisfied⁴.

However, the Court concluded that it would be unfair to sanction the plan and cram down debts due to HMRC:

• The Court should...