What is a cram down?
In brief, a “cram down” is a Court’s approval of a company’s restructuring plan to pay its debts, that is given even if the creditors that are owed money (the creditors) do not approve.
Whilst they have been in operation in the USA for a number of years, historically this type of agreement was dealt with in the UK as ‘Scheme of Arrangements’.
In schemes of arrangement, creditors were divided into classes (based on their rights, which may vary across a company’s creditor base) and each class would then vote on the proposed scheme with a majority of 75% being required to be met for it to be approved. If the minimum majority was met by all classes then the Court decided whether or not to sanction it.
As such there were significant barriers to successfully implementing a scheme of arrangement and they were very rarely utilised over the preceding years
Following the introduction of the Corporate Insolvency and Governance Act of 2020 a new Part 26A of The Companies Act 2006 which referred to “Arrangements and Reconstructions of Companies in Financial Difficulty” (Restructuring Plans) the new “Cram Down” mechanism became law in the UK.
What this means is that even if there are dissenting classes of creditors who reject the company’s proposal but would be no worse off under the restructuring plans, they cannot prevent it from proceeding.
The first case recorded under the new provisions was “DeepOcean” approved in January 2021 but more recently the High Court sanctioned such a restructuring plan proposed by Prezzo Investco Limited despite significant opposition from HMRC.
This decision was significant insofar as prior to this there had been two cases GAS and Nasmyth in which HMRC successfully opposed restructuring plans seeking to compromise its preferential claims.
HMRC were also crammed down on Houst’s restructuring plan so it’s currently two wins and two losses for HMRC!
Our thoughts
The introduction of a legally binding restructuring plan without the need for different classes of creditors to all agree, provides companies that may be struggling financially with another option outside of formal traditional routes such as CVA and Administrations and is welcomed.
However, whilst the Prezzo decision shows that HMRC does not have full control of the process in all cases, it does not mean that their position can be ignored and the decision as to which creditors to pay (or not) will continue to be decided on a case-by-case basis.
The Court did recognise that HMRC’s special status as a preferential creditor does still carry significant weight and cram down of HMRC debt will only be ordered where there is good reason to do so. This is a key aspect when considering whether a “cram down” is appropriate and likely to be approved.
The legislation is still in its infancy and I am sure there will be further case law as the plans mature. In this case though, Prezzo managed to demonstrate the Court is willing to cram down HMRC where the restructuring plan offers the fairest outcome.
For any advice on financial distress including business restructuring and possible insolvency get in touch with our expert team at enquiries@cowgills.co.uk
Disclaimer
The information was correct at time of publishing but may now be out of date.
