Re The Great Annual Savings Company Limited [2023] EWHC 1141 (Ch).
Fonds
GAS is a brokerage firm in the conclusion of energy supply contracts, which has run into serious financial difficulties, mainly due to the impact of the pandemic and the volatility of the energy price market. GAS had outstanding debts of approximately £28 million to a secured creditor, was subject to a winding up application from HMRC (deferred pending the outcome of the settlement) and had no other refinancing or recapitalization options.
Fifteen separate creditors' group meetings were called, including for each of the creditors covered by HMRC, and three categories of energy suppliers who would be treated differently depending on whether they were essential to the business (category 1 which would be fully repaid ), value generators (category 2) or invalid (category 3). Based on the Company's evidence, only four of the fifteen classes were able to generate returns on the appropriate alternative of selling the discontinued operations under management. At class meetings, 12 of the 15 classes voted in favor of the Scheme (100% each), one class did not vote, HMRC voted against and 34% of Category 3 energy supplier creditors voted against. Therefore, the plan could only be approved if the court was willing to use the possibility of class displacement.
Scheduling conditions
The plan proposed by GAS aimed to return the company to profitability by reducing its exposure to debt and directing cash to counterparties deemed critical to its future business and profitability. It should be noted that no creditor or shareholder would provide new money. Consequently, the Scheme favored certain "income-generating" creditors and treated them more favorably under the Scheme than under the relevant alternative. Selected creditors who fell behind HMRC and failed to recover dividends in a suitable alternative were offered redress under the scheme, in some cases at a more generous level than the income offered to HMRC.
Based on the GAS evidence, HMRC would receive between £4.7 p/0 and £0 in a suitable alternative; under the Scheme you will receive a total of 9.1p/£ over two years, capped at £600,000, and agree to a moratorium on all activities unless the Scheme ends before the end of the plan term. In comparison, Tier 1 creditors would receive 0 p/£ under the relevant alternative and 100% under the plan. In addition, although HMRC and the secured creditor are broadly similar in terms of the likely recovery of principal in the relevant alternative, under the Scheme the secured creditor would retain the potential to recover its principal in full with the right to redeem the preferred shares repurchases offered under the Debt to Share Exchange under the Scheme. HMRC had no comparable option.
The "no worse situation" test
The first question for the Court was whether the GAS had successfully met the burden of proof.”clearly rests on his shouldersand showed, on the basis of a consideration of probabilities, that HMRC would be no worse off under the scheme than under the appropriate alternative. The GAS' largest asset was a portfolio of commission debt, which totaled £18.2 million, but the valuation certificate provided by GAS showed it to be valued in the relative alternative between £0 and £509,000.
The HMRC representative argued that the valuation was too pessimistic and that even a small change in this valuation would bridge the gap between HMRC's position on a suitable alternative and its return under the Scheme. In light of HMRC's criticism, the court was open to examining the valuation values on which the Company relied. Ultimately, the Court was not sufficiently convinced of the soundness of the expert's conclusions, as the figures presented appeared to be company data, unfiltered by any independent inspection or analysis. The Court held that the Company had not sufficiently demonstrated that HMRC was not at a disadvantage under the Scheme on a probabilistic basis.
Interestingly, HMRC has not provided any valuation evidence of its own, relying instead on criticism from the GAS. The GAS attempted to argue that, in the absence of valuation evidence from the deviating creditor, the court should accept the Applicant's Appraisal Analysis. The Court disagreed: having such a rule would "too restrictive approach”[paragraph 62]. An important part of the Court's role in considering any composition or restructuring plan has been to examine the company's proposal, which should include the ability to examine the valuation values on which the company was based in the light of any critical considerations to to determine whether the burden of proof had shifted. It was not the case that the counterparty creditor always had to provide its own expert opinion in support of any criticism, especially where there were obvious errors, inconsistencies or problems in the material provided by the applicant company.
HMRC's lawyer further argued that any change in the valuation of claims or possible third-party recoveries within the administration could mean that HMRC would be better off with a suitable alternative. These administration claims may include illegal trade claims, preference claims, Section 172 violations, payment cancellations, and damages. Significantly, HMRC had serious concerns about the management of GAS and expressed support for formal insolvency proceedings to consider possible claims against third parties, including director misconduct under section 172 of the Companies Act 2006. Given the uncertainties and risks associated with such lawsuits, the Court concluded that it could not assign any cash value to the alleged claims.
Discretion to Sanctions
Even if the court was satisfied that HMRC would not be at a disadvantage with a suitable alternative, the court still had to consider whether the plan was fair enough to be approved.
The first question was whether the program was one that "an intelligent and honest man, a member of a class and acting in his own interest, would accept it”.1While strong general support for the plan might be an important factor if there were similarities in the positions of the agreeing and opposing classes (so it could be argued that the opposing class was not acting rationally in voting against the plan), in this case , the Court ruledteleoesteThe rationality test and the relatively strong general support did not help much in assessing the overall soundness of the plan. Of those who voted yes, 9 out of 12 classes would have scored positively under the Plan, but received nothing in the alternative in question. It was rational that they should support the Plan and they didteleoestethe question will be answered in the affirmative. However, the unsecured creditors and HMRC had very different interests, so the soundness of the plan could not be judged by the support of other classes.
More useful in assessing the inherent fairness of the plan and whether it was appropriate to impose it on deviating creditors, determinant"if the Plan provides for an equitable sharing of the benefits arising from the restructuring between the classes that have joined the Plan and those that have not, even if their interests are different. If it makes for a fair distribution, it probably indicates that the class opposition's negative vote had no rational motivation to support the plan that was passed despite the opposition. The reverse is also true.Adam Johnson J found three questions important when thinking about fair distribution:
- existing creditors' rights and how they would be treated in the relevant alternative;
- what additional contribution they have to make to the success of the Plan, especially if they take additional risks by doing”new money"available; AND
- if they are intended to be at a disadvantage compared to a suitable alternative, the difference in treatment is justified.
The Court ruled that the distribution of benefits was unfair for the following reasons:
- In the relevant alternative, HMRC and the secured creditor would receive substantially similar returns if the parties didthe main economic interest" in the company. Application of the decision inactive virgin,The Court would expect HMRC and the secured creditor, as "cash creditors", to be responsible for the Scheme and determine how future benefits or value of the Scheme will be apportioned.
- There was no new money flow in GAS. If GAS returned to profitability, this would be possible by canceling most of HMRC's debt and sending the money to selected creditors, which the company said would add to potential profitability. HMRC would not benefit from the future increase in this debt relief, the beneficiaries of this increase being the secured creditor, existing shareholders (who retained their capital and did not contribute new funds) and related party creditors. The Court attached little importance to GAS's argument that HMRC would benefit from future tax revenue if GAS became profitable and thus benefited from the scheme.
- According to the Plan, the current mode of management will be maintained. While the secured creditor supported this approach, HMRC opposed it as it did not believe in the governance of the GAS. The court ruled that HMRC's views, which were not included in the plan at all, should be "real weight problems”to discretion.
- Although the restructuring plan allowed for a different order of priority to be proposed in the event of insolvency, no good reason was given for such a different order in this case. With regard to the selection of monetary creditors to benefit from the scheme, His Majesty has established a general structure of "real discernment is lacking"i"rather confusing rearrangement of prioritieswas designed to promote expected overall growth by favoring secured creditors, existing shareholders and related party creditors, effectively at the expense of HMRC. The range of creditor classes that benefited from the realignment of priorities and the size of the distributions to which they would be entitled were expanded.reasons that are not clear or unconvincingand the treatment of certain groups of creditors seemed difficult to justify.
The tribunal found that the scheme was unfairly implemented, that HMRC acted reasonably in voting against the scheme and that its views, both on the details of the GAS scheme and on the provider of a critical public function, deserved considerable weight. these views”were enough to tip the discretionary balance against approval of the plan, despite the positive support it received from most other types of creditors”.
Application
This is the second time a court has refused to approve a restructuring plan that would leave HMRC overcrowded. Although that is obviouspossibleto buy a senior creditor, including HMRC, the case confirms that if the company wishes to do so in the future, it will:
- ensure that the evidence you provide for the “no creditor worse off” test is strong and compelling and that your appraisers have used an independent analysis of the information provided by the company to arrive at a valuation based on the assumption that the figures given by the company's compliance with the facts are unlikely to convince the court of the correctness of the valuation tests;
- ensure that the benefits of restructuring are shared fairly and that, where insolvency is an appropriate alternative, any deviation from the legal priority of payment is justified; AND
- Consider HMRC's earlier commitment, which has now shown it is more than willing to stop shouting from the sidelines and actively oppose a restructuring plan it considers unfair.
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