HMRC successfully opposes restructuring plan

Overview

In this case, the Court considered a challenge to a restructuring plan under Part 26A of the Companies Act 2006 made by HMRC on the basis that the Company had not discharged the evidential burden of showing that HMRC would not be any worse off under the plan than under the relevant alternative (an insolvent administration). The Court ultimately agreed with HMRC, finding that the assumptions underlying the relevant alternative had not been properly tested and, if they had been, this would likely give rise to a different outcome in which HMRC would be better off in the relevant alternative than under the plan.

Background

The Great Annual Savings Company Limited (the "Company"), a broker of energy supply contracts between energy suppliers and business users, brought an application for sanction of its restructuring plan under Part 26A of the Companies Act 2006. At 12 of the 15 creditors' meetings that were held to vote on the plan, the plan achieved 100% support. At one meeting, there was no attendance at all. At a meeting of four energy suppliers, the majority vote was against the plan. The final meeting was the meeting of a single-creditor class, that creditor being HMRC, which voted against the plan.

Pursuant to the cross-class cram down provisions of the Act (s.901G), the plan could still be sanctioned if the Court was satisfied that (A) none of the dissenting creditors would be any worse off under the proposed plan than they would otherwise be in the “relevant alternative”, and (B) at least one class of creditor who would receive a payment or have a genuine economic interest in the Company in the relevant alternative has approved the plan by a 75% majority.

The principal challenge to the plan came from HMRC, which argued that the Company had not discharged the burden of showing that HMRC would not be any worse off under the plan.

The plan did not involve the injection of any new money. Instead, the overall scheme was to reduce the Company’s present debt exposure, and then in appropriate cases, to defer payment terms to improve the pressure on cashflow, thus enabling the Company to continue to trade and, over time, return to profitability. With respect to HMRC, the plan proposed establishment of a “Secondary Preferential Creditor Fund” into which the Company would make apportioned “Minimum Monthly Contributions”. Payments would be made out of the fund in two instalments - the first after 1 year, and the second at the end of 2 years. Overall, the estimated return to HMRC under the plan was £600,000 - the equivalent of 9.1p/£, assuming a debt of £6.6m. In return, it was proposed there should be a moratorium on any enforcement action by HMRC, unless the plan was terminated in the meantime, including due to a default by the Company in making any future payments of tax following sanction of the plan.

A non-going concern sale of the Company in administration, with the parent company also being placed into liquidation, was identified as the relevant alternative. In this situation, HMRC would be expected to receive 4.7p/£ in the high case and 0p/£ in the low case.

HMRC’s Arguments

HMRC pointed to the fact that the return to HMRC under the plan was only marginally better than the return expected in the relevant alternative. HMRC argued that any viable challenge to the assumptions underlying the projections in the relevant alternative would likely to give rise to a different outcome, i.e. one in which HMRC would be better off in the relevant alternative than under the plan. It further argued that the assumptions were problematic in two respects: (1) they took too pessimistic a view of likely recoveries in respect of certain book debts (essentially claims for unpaid commissions); and (2) they ignored completely the possibility of claims which might be made by insolvency officeholders against third parties.

Issue (1) concerned the fact that the Company’s largest asset was its “commission debtor book” - i.e., claims by the Company for commissions due under brokerage contracts. As at November 2022, the commission debtor book had a headline book value of £18.2m; but in the relevant alternative this was effectively written off, with only a 2.8% recovery (£509,000) in the “high case” and zero recovery on the “low case". The Company’s valuation of the commission debtor book was based on a report conducted by Cerberus Receivables Management Limited (“CRM”).

Under the relevant alternative, HMRC was allocated a distribution of £307,000, whereas under the plan, HMRC was allocated a distribution of £600,000 over the course of 24 months. The difference was marginal - only £293,000. Thus, HMRC argued that the reliability of the CRM valuation was critical to the any worse off analysis, because even if it was slightly wrong, that would be enough to wipe out the £293,000 difference between HMRC’s position under the relevant alternative and under the plan (£293,000 was only about 1.6% of the overall face value of the commission debtor book).

As to issue (2), i.e. claims against third parties which might boost recoveries to HMRC, HMRC argued that, under the relevant alternative, any increase in the recovery of floating charge assets in the "high case", and any increase over £93,000 in the “low case”, would go directly to HMRC. It suggested that various categories of claim might boost its recoveries, including amongst others:

(1) the possibility of a wrongful trading claim on the basis of the Company deferring payments to HMRC, which was prima facie evidence of the Company’s inability to pay its debts as they fell due;
(2) a potential preference claim in respect of payments totalling £425,000 made to a director and shareholder of the company after HMRC sent a 7-day warning letter threatening to present a petition failing payment of its outstanding debt;
(3) a potential misfeasance claim arising out of the same matters said to give rise to the wrongful trading and preference claims, amongst other matters;
(4) potential post-petition transactions which may automatically be void; and
(5) potential directors’ disqualification proceedings and the possibility in such proceedings of the Court making a compensation order which could accrue directly to HMRC as the prejudiced creditor.

The High Court’s Decision

The High Court agreed with HMRC that the Company had not discharged the evidential burden of showing that HMRC would not be any worse off under the plan.

With respect to issue (1) (assumptions as to likely recoveries in respect of book debts), the Court had a number of serious reservations about CRM's analysis and did not find it persuasive. Amongst other things, the Court took issue with:

(1) the provision for "known clawbacks" of £2,325,000, which covered cases where energy suppliers had already notified clawback claims in respect of commissions paid, as well as (2) the "specific provision" of £3,829,000, which covered the possibility that commissions presently owed to the Company may not be paid because the relevant counterparties may seek to make clawback claims which would be offset against them. The weakness in this was that no independent analysis had been conducted in respect of the information provided by the Company, which CRM relied upon as factually accurate. No allowance was made for the possibility that the information might be inaccurate, and thus no range of possible recoveries was given;

(3) the "advance commission provision" of £6,411,000, which covered the possibility that contracts between energy suppliers and customers which have not “gone live” at the point of any insolvency event might, if such an event occurs, never go live; and if they do not, then energy suppliers who have already paid commissions might then seek to make clawback claims. Again, the overall provision was based on figures provided by the Company, which on the face of it were accepted by CRM without any scrutiny. No allowance was made for the fact that the figures might be wrong, even in part, despite the fact that (i) an insolvency event affecting the Company (as broker) would not obviously affect contracts entered into between the energy suppliers and the business customers as a result of introductions effected by the Company - they may still “go live”; and (ii) if they do, it was not obvious that the Company as broker should be deprived of any commission it had already earned, merely because of its later insolvency. To the contrary, the terms of most of the Company's contracts suggested the opposite; and

(4) the "general provision" of £6,788,000 in the low case, and £6,109,000 in the high case, which was a general wrap-up category. The Report referred to a collection of other potentially relevant risks (9 in total), including macroeconomic factors and risks associated with IT infrastructure, but also (again) the risk arising from “onerous contract clauses in relation to ‘clawbacks’”. The Court was concerned about the overall robustness of the very generalised analysis underlying this final provision. It was true that there might be difficulty in weighting individual risk factors, so that a compendious, overall approach was justified. The difficulty was that the result of the compendious approach was a final, general provision which wiped out all (on the low case) or nearly all (on the high case) of the remaining value. The problem was that the approach made very little allowance for the possibility that the “high level assumptions” might be wrong, even in part. Thus, it was legitimate to question the overall robustness of the approach.

With respect to issue (2) (potential claims against third parties), the Court found that even claims that at the outset appeared to have a strong prima facie case could quickly turn out to be claims of negligible or nil value. That made the exercise of attributing any present value to such claims a fragile and uncertain one. HMRC sought to encourage an approach which involved assessing the chance of a successful outcome, by analogy with the approach in cases where the Court is called on to value the loss of a chance in the negligence context. The Court had reservations as to whether such an approach was appropriate in the present context since reliably assessing the value of a lost chance can itself be a complex and time-consuming exercise involving many variables, and in a contested hearing the exercise could quite quickly develop into a form of mini-trial.

In light of this, and bearing in mind the uncertainties and risks always associated with ongoing litigation, the Court did not consider it could reliably attribute any present value to the alleged claims. As a result, it preferred to base its conclusion by reference to the CRM Report, and left out of account any possible value which might flow from the claims HMRC had identified.

Ultimately, the Court concluded that the Company had not discharged the evidential burden of showing that HMRC would not be any worse off under the plan, and refused to sanction the plan.

Judge: Mr Justice Adam Johnson

Counsel: Ted Loveday of Maitland Chambers (instructed by Wedlake Bell) for Orsted Sales (UK) Limited, Corona Energy Retail 4 Limited and Corona Energy Retail 2 Limited