It’s now level pegging for HMRC on cram down – twice it has been crammed down, and twice it has not.
In the most recent restructuring plan proposed by Prezzo, the court sanctioned the company’s restructuring plan and crammed down HMRC as both preferential and unsecured creditor. Unlike Houst’s restructuring plan, where HMRC was also crammed down, HMRC fiercely contested the plan proposed by Prezzo.
Alongside various policy arguments – that sanctioning plans that cram down tax debts sends the wrong message, that it could be open to abuse – HMRC also relied on recent judgments where cram was refused. However, citing their special status as preferential creditor, how their views should be given considerable weight, and arguing that HMRC should be treated as a critical creditor did not persuade the judge against sanction.
Although under the Prezzo plan HMRC will lose 71% of its outstanding tax payments, the judge was nevertheless prepared to sanction the plan on the basis that it was fair.
In real terms HMRC will receive 150% more in respect of its preferential tax debts, than it would if Prezzo had been placed into administration. It will also receive the lion’s share of the restructuring surplus. The judge also thought it right, that the decision not to pay HMRC whilst the plan was proposed and to pay critical creditors in order to preserve the business, was the correct one.
One of the main takeaways from this decision is that the judge was not persuaded that HMRC’s accruing tax debts, should be paid as a matter of principle whilst a plan is proposed for the court to agree to sanction the plan – to do so, would fetter the court’s discretion to cram down.
This means, that HMRC does not have to be treated as a critical creditor in all cases, but that does not mean that their position can be ignored. The decision as to which creditors to pay (or not) will have to be decided on a case-by-case basis.
The judge also recognised HMRC’s special status as preferential creditor, and as we know from other cases, their view does carry significant weight and cram down of crown debt will only be ordered where there is good reason to do so, but as Prezzo demonstrates the Court is willing to cram down HMRC where the restructuring plan offers the fairest outcome.
Will HMRC challenge the next restructuring plan so fiercely? That depends on the plan, but we think they might choose their fights carefully.
Although there has been a lot to say about HMRC opposing restructuring plans, they did vote in favour of the Fitness First restructuring plan that was recently sanctioned. This is perhaps less surprising when you know that under the plan HMRC receives payment in full, but it does demonstrate that HMRC is willing to take an active role in supporting restructurings in the right case, something that is to be welcomed.