Simon Passfield acts successfully for unsecured creditor in relation to rejected restructuring plan under Part 26A of the Companies Act 2006

02/05/2023

OVERVIEW

Re Nasmyth Group Limited [2023] EWHC 988 (Ch) is only the second case in which the court has refused to sanction a restructuring plan and the first in which the court has done so in light of opposition from the company’s creditors and in circumstances where the conditions for cross-class crawdown in s.901G of the Companies Act 2006 (“CA”) were met (in Re Hurricane Energy Plc [2021] EWHC 1759 (Ch), the plan was opposed by the company’s shareholders and the court was not satisfied that they would be no worse off in the relevant alterative).

Leech J’s judgment (which was handed down on 28 April 2023) significantly develops the evolving body of jurisprudence on Part 26A CA in a number of respects. In particular:

• In Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch), Snowden J (as he then was) indicated that a class of creditors which would be “out of the money” in the relevant alternative (and thus has no genuine economic interest in the company) has no right to complain about the distribution of the “restructuring surplus”. That  approach has been followed in a number of subsequent cases (Re E D & F Man Holdings Limited[2022] EWHC 687 (Ch); Re Smile Telecoms Holdings Ltd [2022] EWHC 740 (Ch); Re Houst Ltd [2022] EWHC 1941 (Ch); Re Good Box Co Labs Limited [2023] EWHC 274 (Ch); Re Listrac Midco Limited [2023] EWHC 460 (Ch)). However, Leech J concluded that Snowden J had not intended to lay down a rigid rule and there may be circumstances in which creditors without a genuine economic interest in the company may nevertheless have a legitimate interest in opposing the plan (see [97]-[100]) (although he did not consider the plan to be unfair to such creditors in the present case: see [120]-[121]).
• This was the first case in which HMRC opposed the sanctioning of a restructuring plan, having failed to attend the sanction hearing in Re Houst Ltd [2022] EWHC 1941 (Ch) at which it was crammed down. Leech J indicated that the court should exercise caution in relation to HMRC debts and should not exercise its power under s.901G CA to cram down HMRC unless there are good reasons to do so (which, in the present case, there were not) (see [111]-[119]).

Simon Passfield, the Head of Guildhall Chambers’ Insolvency Team acted for Peter Smith (an unsecured creditor who opposed the restructuring plan) at the sanction hearing on 24-26 April 2023. He has considerable experience of Part 26A CA, having previously acted for Pure Gym Limited at the convening hearing in Re Virgin Active Holdings Ltd [2021] EWHC 814 (Ch)).

Leech J’s judgment is available at: https://www.bailii.org/ew/cases/EWHC/Ch/2023/988.html.

BACKGROUND

Nasmyth Group Limited (“the Company”) is the holding company for a group of subsidiaries which provide specialist precision engineering services to the aerospace, defence and related industries (together, “the Group”).

In 2020, the Group began to experience financial difficulties as a result of the Covid-19 pandemic and this ultimately led to the Company being acquired by Rcapital Limited (“Rcapital”) (a turnaround and special situations investor) in 2022. In this regard:

• Prior to the acquisition, the Company’s shares were held by Peter Smith (“Mr Smith”) (90%) and Simon Beech (“Mr Beech”) (10%). On acquisition, those shares were transferred to Lettbel Limited (“Lettbel”) (a special purpose vehicle whose shareholders are Rcapital (80%), Mr Smith (10%), Mr Beech (5%) and Stuart Fyfe (5%)). In return, Mr Smith and Mr Beech were issued with loan notes from Lettbel in the sums of £1.8m and £200,000 respectively.
• Following the acquisition: (i) Secure Trust Bank Plc (“STB”) (an independent “challenger bank” brought on board by Rcapital) provided the Group with a receivables finance facility and an overpayment facility (“the STB Facility”); and (ii) JCP Five Limited (“JCP”) (an affiliate of Rcapital) agreed to provide the Group with a discretionary loan facility of £15.5m (“the JCP Facility”). The repayment of the STB Facility and the JCP Facility was secured by the Company by way of cross-company guarantees and debentures, with STB’s security ranking in priority to JCP.

In July 2022, Mr Smith was summarily dismissed as CEO of the Company on the grounds of alleged gross misconduct. Mr Smith claims that the allegations against him were contrived in order to enable Rcapital to acquire his shares in Lettbel for £1. In November 2022, Mr Smith commenced proceedings against the Company for unlawful and wrongful dismissal (“the Smith Claims”).

In December 2022, in response to the Smith Claims, the Company proposed a restructuring plan under Part 26A CA (“the Plan”) under which:

• STB would waive existing defaults under the terms of the Plan and be unable to take enforcement action for 3 months following sanction, but the quantum of its debt and its security would not be compromised;
• JCP would make available the balance of the JCP Facility (£8m) on new terms and a new committed tranche of £1m would be made available. The quantum of its debt and its security would not be compromised, but the repayment date would be extended by 5 years;
• HMRC’s preferential claim against the Company (for £209,703.01) would be compromised in full in return for a payment of £10,000;
• the claims of the Company’s unsecured creditors (including Mr Smith and HMRC) would be compromised in full in return for £10,000 to be distributed on a pari passu basis;
• the claims of intercompany creditors would be compromised in full for no consideration;
• “critical” supply creditors would be paid in full;
• Lettbel would transfer its shares in the Company to W5SD Limited (“W5SD”) (a company 100% owned by Rcapital).

In the Practice Statement Letter in support of the Plan, it was asserted that: (i) the Company did not have the financial means to fund a defence the Smith Claims; (ii) in consequence, the Company was cashflow insolvent; (iii) JCP was only prepared to make the balance of the JCP Facility available to the Group in the event that the court sanctioned the Plan; and (iv) in the absence of such further lending, it was likely that the Company would enter insolvent administration and there would be a pre-pack sale of the Company’s subsidiaries, in which case there would be no return to the Company’s preferential and unsecured creditors.  

On 14 February 2023, Leech J made an order giving the Company liberty to convene five meetings of creditors to consider and, if thought fit, approve the Plan (Re Nasmyth Group Limited [2023] EWHC 696 (Ch).

At the plan meetings: (i) the Plan was unanimously approved by the senior secured creditor (STB), the junior secured creditor (JCP) and the intercompany creditors; (ii) the Plan was rejected by the preferential creditor (HMRC); and (iii) the Plan was purportedly approved by 77% of the unsecured creditors, but only because the chair valued the Smith Claims at £1 for voting purposes (notwithstanding that under the Plan they were admitted in full for dividend purposes).

At the sanction hearing, Mr Smith, HMRC and Chris Henson (a former employee of the Company who did not attend the plan meeting of unsecured creditors) opposed the sanctioning of the Plan on the following grounds:

• Mr Smith argued that if the court did not sanction the Plan, the “relevant alterative” (i.e. the most likely outcome) was that JCP would continue to fund the Company and it would not go into insolvent administration;
• Mr Smith, HMRC and Mr Henson all argued that the Plan involved an unfair distribution of the “restructuring surplus” to JCP and Rcapital;
• HMRC argued that the Company’s failure to agree new time to pay (“TTP”) arrangements for its subsidiaries was a “roadblock” which prevented the Plan from taking effect in the manner in which the Company and its creditors intended.

DECISION

(i) Relevant Alternative

On behalf of Mr Smith, Simon Passfield argued that it could be inferred from the relevant factual background that if the Court did not sanction the Plan, the most likely outcome was that JCP would continue to fund the Company and it would not go into insolvent administration. Leech J indicated that there was “considerable force” in these submissions and he “might well” have accepted them but for the fact that at 9pm on the second day of the hearing (after the court had adjourned overnight to enable the Company’s Counsel to complete his reply), the Company’s directors resolved to take immediate steps to put the Company into administration if the court did not sanction the Plan (notwithstanding that there had been no obvious change in the Company’s position to justify taking this decision even before the court had decided whether to sanction the Plan) (see para [72] – [86]).

However, whilst this decision (which Leech J described as “jumping the gun”) meant that the court was bound to accept that the relevant alternative was insolvent administration, in considering whether or not to exercise his discretion to sanction the Plan, Leech J indicated that the Company had not demonstrated that there was a pressing need to sanction the Plan or that its future was not in the hands of its directors, Rcapital and JCP (as he could see no reason why JCP could not provide continuing support for the Company and the Group whilst the directors considered whether to put forward a new restructuring plan or to adopt a new strategy and was not satisfied that there was a risk of imminent administration if JCP agreed to do so) (see paras [122]-[124]).

(ii) Restructuring Surplus

Leech J held that it would be unfair to sanction the Plan and enable the Company to cram down HMRC, having regard to: (i) the size of the debts (£472,308.44); (ii) the fact that £209,703.01 was a secondary preferential debt; (iii) the fact that the Group as a whole owed £2,961,674.42 and that some of these debts go back as far as January 2020; (iv) the fact that HMRC’s share of the restructuring surplus was tiny (both in comparison to JCP and in absolute terms); and, in particular (v) the Company’s failure to agree TTP arrangements with HMRC before putting the Plan forward and asking the Court to sanction it (in that the directors and the secured creditors

appeared to have seen the Plan as “a convenient opportunity to eliminate the debts which the Company owed to HMRC for a nominal figure and to use the Plan to put pressure on HMRC to agree new TTP terms” which is not a purpose for which Part 26A can be used) (see paras [110]-[119]).

However, despite Simon Passfield’s “able submissions”, Leech J did not consider that the Plan was unfair to Mr Smith or Mr Henson (see paras [120]-[121]).

(iii) Roadblock

Leech J held that the Company’s failure to agree new TTP arrangements for its subsidiaries was a “roadblock” which prevented the Plan from taking effect in the manner in which the Company and its creditors intended. Accordingly, even if he had been prepared to exercise his discretion to sanction the Plan and cram down HMRC’s debts, he would only have been prepared to do so on condition that the Company agreed TTP arrangements satisfactory to HMRC (see paras [127]-[132]).

CONCLUSION                             

A key innovation of Part 26A CA is that it empowers the court to approve a restructuring plan in the face of opposition from one or more classes of creditors where they would be no worse off in the relevant alternative. Although previous cases have made it clear that the court retains a discretion to refuse to sanction a plan in such circumstances (and the court has rowed back from Trower J’s suggestion in Re DeepOcean 1 UK Ltd [2021] EWHC 138 (Ch) that the satisfaction of the conditions in s.901G CA will give a company a “fair wind”), this is the first occasion on which that discretion has been exercised. This case therefore serves as a stark reminder that the court may reject a restructuring plan as unfair even if it would results in a better financial outcome to all stakeholders and this is particularly likely to be the case where a company is seeking to use a plan in order to eliminate its tax liabilities.