English cram downs - Attempts artificially to create an in-the-money class to be avoided
In Houst Limited [2022] EWHC 1941 (Ch) Mr Justice Zacaroli approved a plan of arrangement under Part 26A of the English Companies Act 2006 cramming down the HM Revenue and Customs (HMRC) who objected to the plan. English cases are of interest since they are persuasive in the offshore jurisdictions. Harneys believes that cram downs, if implemented by future legislative change, would make a positive contribution to offshore restructuring.
The Company provided property management services for short term/holiday lets. Property owners who wished to let their properties to guests on a short term basis signed up to the Company’s online platform. The Company’s business was severely affected by the Covid-19 pandemic. It was both cash flow and balance sheet insolvent.
Under the English regime, where one or more meetings of creditors or members has not approved the plan by the requisite majority, the court is empowered nevertheless to sanction the plan, by using the cross-class cram-down power. HMRC’s reasons for voting against the plan were, having referred to its preferential status: “HMRC will not relinquish this status in order to provide a dividend to unsecured creditors. We appreciate that this may be problematic with regards to creditors of this category, and we understand that our dividend is likely to be less in liquidation.”
As noted by Mr Justice Snowden in Re Smile Telecoms Holdings Ltd [2022] EWHC 740 (Ch), at §53, if a creditor or member wishes to oppose a plan based upon a contention that the company’s valuation evidence as to the outcome for creditors in the relevant alternative is wrong, it is for them to produce their own evidence, including where necessary expert evidence. In this case, the HMRC did not seek to do so, and they accepted that they will be better off under the plan than in the relevant alternative.
In Virgin Atlantic Airways Ltd [2020] EWHC 2376 (Ch), at §49-50, Mr Justice Snowden left open the question whether the power to cram down a dissenting class can be activated by including within a plan a class of creditors who would otherwise all have been prepared to enter into consensual arrangements to give effect to the restructuring of their rights.
In Houst Limited, Mr Justice Zacaroli held that: “Clearly, attempts artificially to create an in-the-money class for the purposes of providing the anchor to activate the cross-class cram down power should be resisted, particularly where such a class is not impaired by the plan. Where, as here, however, the in-the-money class of creditors is undoubtedly adversely affected by the Company’s insolvency and is substantially impaired under the plan, then I do not think that the mere fact that 100% of that class is prepared to support the plan is a reason to prevent the cross-class cram-down power being exercised”.
