The High Court has recently sanctioned a Part 26A restructuring plan for Houst Limited (“Houst”) despite opposition from HMRC, one of Houst’s main creditors.
This restructuring plan is particularly interesting as it is the first to:
(i) cram down HMRC in respect of its preferential claim, and
(ii) involve an SME where the company in question was not already in a formal insolvency process.
This is likely to encourage SMEs to pursue these versatile and creative plans going forward.
Houst is a holiday lettings and private house rental company with some 300 employees whose business has been significantly impacted by the COVID-19 pandemic. Without action, the High Court determined that Houst was, in the relevant alternative, likely to enter administration with just two of the company’s creditors receiving any dividend.
Clydesdale Bank is a secured creditor with fixed and floating charges over Houst’s assets, while HMRC is a secondary preferential creditor following the re-introduction of crown preference pursuant to the Finance Act 2020. The evidence suggested that, in the relevant alternative, both Clydesdale and HMRC would suffer a significant shortfall in recoveries whilst other creditors, including customers, critical suppliers and employees, would receive nothing at all.
The High Court exercised its discretion to sanction Houst’s restructuring plan under the cross-class cram-down procedure, ensuring that HMRC, as the dissenting secondary preferential creditor, was nevertheless bound. HMRC, which is owed approximately £1.7 million, opposed the plan because it would have meant it relinquishing its preferential creditor status to allow dividends to be paid to unsecured creditors, something it was not prepared to do, despite the fact that it acknowledged that it was likely to receive a smaller dividend in the event of Houst’s administration or liquidation than if the restructuring plan were agreed. The High Court determined that, on balance, and taking into account, firstly, the lack of active opposition to the plan and, secondly, the fact that all creditors would be likely to be worse off if it was not sanctioned, the restructuring plan should be sanctioned.
While the Houst decision is the first instance of HMRC being crammed down under a restructuring plan in respect of its preferential claim, we are likely to see further examples of this given HMRC can no longer be compromised in company voluntary arrangements. Although the majority of the restructuring plans that have been sanctioned to date have only been sought by larger corporate entities such as Pizza Express and Virgin Active, this decision is evidence of the Court’s willingness to sanction restructuring plans for SMEs and a precedent for the flexibility and scope for development of restructuring plans in this market segment.