Re Nasmyth Group Limited  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  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:
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  EWHC 814 (Ch)).
Leech J’s judgment is available at: https://www.bailii.org/ew/cases/EWHC/Ch/2023/988.html.
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:
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:
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  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:
(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  – ).
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 -).
(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 -).
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 -).
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 -).
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  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.
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