Not too early, is the warning from the recent case of E Realisations 2020 Limited.
HMRC as the UK tax authority is often the largest creditor in any insolvency, but has not always been willing to engage in the process. This has caused viable restructuring proposals to fail for lack of support and this sometimes results in HMRC not achieving the best return. HMRC recognise that this stance has frustrated Insolvency Practitioners trying to achieve a restructuring. So, is this is about to change?
There has been very little to indicate how HM Revenue and Customs (“HMRC”) might approach a restructuring plan (RP), following HMRC’s preferential status being restored in 2020.
The reinstatement of HMRC as a preferential creditor potentially makes company voluntary arrangements non-viable if HMRC do not support, but what about RPs? RPs introduced for the first time, the ability for the court to ‘cram down’ creditors who vote against it.
In the recent case of Houst, this is exactly what the court did, cramming-down (and therefore binding) HMRC to the terms of the plan even though HMRC voted against it.
But, how did the court justify exercising its cram down power in light of HMRC’s preferential status?
In PGD (in liquidation) Manolete Partners plc v Hope Mr Justice Zacaroli considered whether it was possible and/or appropriate to limit the quantum of relief granted in insolvency litigation to the amount required to pay the liquidation debts, costs and expenses where the claim had been assigned to a third-party litigation funder.
Zacaroli J held it was not clear whether the court possessed the power to do so but, even if the jurisdiction did exist, it should not be exercised to deny a third-party litigation funder innocent of any wrongdoing from the proceeds of the claim.
(The below article first appeared on LexisPSL R&I and is republished with consent. It was written by Paul Wright, a barrister at 9 Stone Buildings who appeared for the appellant in this matter (with Joe Curl QC) and was instructed by Squire Patton Boggs)
Although there have not been many moratoriums since they were introduced, there have been a few, and according to data collected for this recent interim report, the costs of appointing a monitor and entering into a moratorium appear to be fairly reasonable. This will provide comfort to both corporates and practitioners who (understandably) might be a little nervous about utilising the process given it is still a relatively new tool. So what might those costs be (based on recent experiences) and when might a moratorium be used?
The perceived costs of proposing a restructuring plan are seen to be the biggest inhibitors to using the process for SMEs. It is still a relatively new tool and insolvency practitioners, lawyers and the courts are still grappling with it, but as we have seen recently in Amigo Loans it can provide creative and innovative restructuring solutions.
It would be a good tool for the SME market – were it not for those perceived costs – however, we have had limited insight into what the true costs of the process are and how, for example, they might compare to say a company voluntary arrangement (CVA).
The recent interim report commissioned by the government to review the operation of the Corporate Insolvency and Governance Act 2020 (CIGA) gives us a glimpse into what the actual costs might be.
Perhaps, not unsurprisingly (based on the figures quoted) the costs are likely to prohibit a restructuring plan for ‘run of the mill’ SME restructuring.
On June 6, 2022, the U.S. Supreme Court issued its opinion in Siegel v. Fitzgerald, in which the Court held that the Bankruptcy Judgeship Act of 2017, Pub. L. 115-72, Div. B, 131 Stat. 1229 (the “2017 Act”) was unconstitutional. The 2017 Act required a significant, temporary increase of the fee rates paid into the United States Trustee System Fund (the “UST Fund”) by debtors in large chapter 11 cases. Underlying the Court’s holding is the Bankruptcy Clause of the Constitution (Article I) which gives Congress the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” The Court held that the 2017 Act was unconstitutional because the fees were not uniformly applied. Perhaps most interestingly, the Court did not decide on a remedy. Instead, it remanded the proceeding back to the Fourth Circuit Court of Appeals alongside a $325 million question: “Now what?”
The Court of Appeal recently handed down its judgment in the Hoey case. The case is noteworthy because it helps illustrate the extent of HMRC’s powers to collect tax by shifting compliance obligations from one person to another. As can be readily appreciated, this could be particularly of note for directors of companies that have entered into an insolvency process.
It is often the case, that insolvency claims are pursued against former directors of the insolvent company or persons connected to them. It is also often the case, that such claims are assigned to a litigation funding company given lack of funds in the insolvent estate to pursue them. This is what happened in Lock v Stanley where various claims against the former directors, their parents and connected company were assigned to Manolete.
The decision of the Court of Appeal in Lock v Stanley provides comfort to assignees of insolvency claims that defendants will not be able to avoid claims by seeking to attack the assignment where their interest is self-serving, and that liquidators are not obliged to offer to assign an insolvency claim to a proposed defendant.
It also reminds liquidators that although s168(5) of the Insolvency Act 1986 (“Act”) allows aggrieved persons to challenge their decisions, unless the applicant has a legitimate interest and there will be a benefit to creditors as a whole in reversing or modifying the liquidator’s decision, an applicant is unlikely to have standing to challenge.
What options does a creditor have when they are frustrated with how a debtor is conducting its chapter 11 bankruptcy case? In In re PWM Property Management LLC, the Delaware bankruptcy court denied a motion by creditors and interest holders to file a proposed plan of reorganization as an exhibit to their opposition to the debtors’ motion to extend the exclusivity period. The PWM Property Management decision serves as an important reminder of the strict limits on who can file and solicit a plan of reorganization and when filing of a plan is appropriate. Continue Reading