The Prezzo Restructuring Plan Court Exercises Discretion To Cram Down HMRC Debt; Confirms No Requirement For Company To Provide Consideration To "out Of The Money" Plan Creditors

• Published date: 21 July 2023
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law
• Law Firm: Mayer Brown
• Author: Ms Devi Shah and Alexandra Wood

Summary

The English High Court¹ exercised its discretion to sanction a restructuring plan proposed by Prezzo Investco Limited (the Company), the parent company of Prezzo Trading Limited which is the operator of an Italian casual dining chain. The plan was opposed by HMRC, which had both secondary preferential claims and unsecured claims. In sanctioning the plan, the Court exercised its discretion to cram-down HMRC's debt.

This case can be contrasted with two recent decisions in which the High Court declined to sanction proposed restructuring plans which it found to be unfair to HMRC. These decisions could be distinguished on the facts and here the Court was satisfied that the plan was "fair".

It is important to note that the Court rejected the suggestion that, as a matter of principle, a restructuring plan should not be sanctioned without the discharge of (or proper provision for) HMRC preferential liabilities incurred during the plan process.

However, the Court will remain astute to the risks that: a plan can be used as an "instrument of abuse"; and sanctioning such a plan may be construed as giving a "green light" to companies to use Part 26A to cram-down unpaid tax bills.

It is also interesting to note that the Court confirmed that, in the context of a restructuring plan, the concept of an "arrangement" does not require some form of consideration to be provided to "out of the money" creditors. This differs from a scheme of arrangement, which has traditionally been interpreted as requiring some element of "give and take" between a company and its scheme creditors.

For creditors looking to oppose a restructuring plan (or scheme), this case is a useful reminder that it may be necessary to cross-examine the plan company's evidence on key points of contention.

Background

The Company was in serious financial difficulty, including as a result of the Covid-19 pandemic and the impact of price increases. It did not have the benefit of third party financial support and relied on funding under secured loan notes issued to the majority of its shareholders, which it on-lent to its trading subsidiary (Prezzo Trading Limited) under a secured loan agreement. The plan sought to restructure the liabilities of both the Company and its subsidiary², allowing the business to continue to trade. The relevant alternative was administration for both companies.

Pursuant to the terms of the proposed plan, the principal and interest due to the secured loan noteholders (being the...