HMRC strikes back!

The classes included one class containing only HMRC in its capacity as a secondary preferential creditor. HMRC voted against the plan and opposed sanction at the sanction hearing.

Under the restructuring plan procedure, the court can sanction a plan even if a class votes against provided, inter alia, the court is satisfied that none of the dissenting classes are worse off under the plan than in the relevant alternative (the No Worse Off Condition).

At the sanction hearing:

• HMRC submitted that the plan company’s projected recovery in the relevant alternative (being administration) underestimated the likely recoveries under two heads: (1) book debts; and (2) recoveries for claims against third parties (made up of potential clawback/misfeasance type claims). HMRC did not, however, file their own expert valuation evidence.
• The court rejected a submission by the plan company that any creditor wishing to oppose a plan on the ground that the plan company’s valuation evidence was wrong should file expert evidence of their own. The court held that it was not bound to accept the valuation analysis put forward by the plan company in the absence of expert evidence from an opposer
• The court had a number of reservations with the plan company’s evidence on book debts and held that the No Worse Off Condition had not therefore been satisfied
• On third party claims it held that there were real difficulties in seeking to evaluate them and stated that it could not reliably attribute any present value to them
• The court then went on to hold that, had it held that the No Worse Off Condition had been satisfied, it still would have exercised its discretion to refuse sanction on the ground of unfairness.
• In assessing unfairness the court held that it was useful to have in mind:
  • the existing rights of the creditors and how they would fall to be treated in the relevant alternative
  • what additional contributions they are expected to make to the success of the plan and in particular whether they are taking on additional risk by making available "new money"
  • if they are disadvantaged under the plan as compared to the relevant alternative, then whether the difference in treatment is justified.
• Here the court made the following points:
  • The assessment of fairness could involve comparing the plan with other possible alternative structures
  • unlike the Virgin Active case, this was not one in which new money was being introduced
  • there was nothing inherently objectionable in a plan proposing a different order of priorities than would apply in the relevant alternative, but there must be a good reason for it and none was present here. Instead the overall structure lacked any real discernment and effectively involved the restructuring surplus being diverted away from HMRC to the secured creditor, existing shareholders, and other plan creditors who would receive nothing in the relevant alternative and were not critical creditors.

The court therefore refused to sanction the plan.

In re Great Annual Savings Co Ltd, sanction judgment, 16 May 2023