The proposed plan
Houst is a UK-based provider of hosting and management services for holiday rental sites, and employs around 300 people worldwide. While profitable prior to the COVID-19 pandemic, the nature of its business means that it has been severely impacted by the various lockdowns, resulting in cashflow insolvency and significant liabilities owing to its creditors (£5.2m in current liabilities and £3.7m in contingent liabilities, including £2.7m to Clydesdale Bank and £1.7m to HMRC).
The proposed plan would involve a £500,000 capital injection from certain shareholders, with the aim of returning the company to solvency by reducing the sum outstanding to Clydesdale by an immediate £250,000 payment, followed by a further £500,000 to be paid over three years. The plan would also involve monthly contributions by the company to plan creditors via two funds (a “secondary preferential creditor payment fund” and an “unsecured creditor payment fund”), such payment funds to be administered by the proposed plan administrators Begbies Traynor.
The company’s directors consider that the only alternative to the plan would be an accelerated M&A process culminating in a pre-pack administration, which would result in a worse outcome for all stakeholders. The company proposed at its convening hearing that its creditors be divided into five classes to vote on the plan, with its shareholders constituting a separate (and single) class. The company considers that only Clydesdale and HMRC would be “in the money” in the relevant alternative.
||Outcome under the proposed plan
||The company’s only secured creditor. Would receive an immediate £250,000 payment followed by £500,000 paid over three years
||Secondary preferred creditor. Would be paid dividends out of secondary preferential creditor payment fund
||Unsecured creditors, which include Citiclient and Almaviva. Would be paid dividends out of unsecured creditor payment fund
|Convertible loan holders and loan note holders
||Would be given the opportunity to participate in the capital injection under the plan in exchange for new preference shares and have their existing debt converted into ordinary shares. Those not electing to participate can either have their debt converted into ordinary shares or can remain unsecured creditors and be paid out of the unsecured creditor payment fund
||Owed an unsecured debt of around £500,000; would receive nothing under the plan (but would ultimately benefit from its parent’s survival)
New shares would be allotted and issued in exchange for further capital injections. Certain preference shares would be converted into ordinary shares
On 14 June 2022, the High Court approved six separate meetings for voting on the plan as proposed by the company. At the plan meetings, the members and four of the creditor classes voted in favour of the plan – HMRC voted against the plan.
The sanction hearing
The sanction hearing took place on 15 July 2022 in front of Zacaroli J.
At the hearing, Zacaroli J requested further information in relation to the work that had been done to determine that HMRC would receive only 15 pence in the pound in the relevant alternative (versus the 20 pence that it is due to receive under the plan), as well as further information on the share incentives proposed to be given to the company’s founder and CEO under the plan, and asked that this be provided by the company in the next few days. Judgment has been reserved until this information has been provided.
Zacaroli J expressed concern that HMRC stood to receive only a slightly higher dividend under the plan than it would under the relevant alternative, while Clydesdale stood to achieve a materially better outcome – HMRC would receive around 20 pence in the pound under the restructuring plan (whereas it would receive at least 15 pence in an administration) while Clydesdale would receive 27 pence in the pound under the restructuring plan (versus only 8 pence in an administration). In addition, trade creditors would receive 5 pence in the pound under the restructuring plan, whereas they would receive nothing in an administration as a result of their status as unsecured creditors. Zacaroli J said that it appeared that value would be transferred from the company’s members to its secured lender as part of the deal, in the hope that the company would be able to repay HMRC and its unsecured creditors over time and as a result of its successful trading following the transaction, and noted that the company’s founder would retain a 40% stake in the business following the restructuring.
One of the points that Zacaroli J flagged for consideration was whether it is fair for the plan to effectively subvert the priority rule that would apply in the relevant alternative. In an administration and as a result of its secondary preferential creditor status (which entitles it to be paid ahead of floating charge holders and ordinary unsecured creditors, but behind fixed charge holders and expenses of the administration (read our article on the re-introduction of HMRC as a preferential creditor under the Insolvency Act 1986 here), HMRC would stand to receive the full amount that is proposed to be paid to the trade creditors under the plan. Under the proposed plan, trade creditors will receive payments from the unsecured creditor payment fund which will necessarily reduce amounts available to repay HMRC.
HMRC had voted against the plan at the relevant plan meeting, and had raised some issues via correspondence in relation to the dividends proposed to be paid to the trade creditors, but had not appeared at the sanction hearing to oppose the plan, nor had it filed any formal objections to the plan. At the sanction hearing, Marcus Haywood, as Counsel to the company, referenced Snowden LJ’s judgment in the Smile Telecoms restructuring plan earlier this year in which it was held that, rather than “unhelpfully” raising issues in relation to the fairness of a plan via correspondence, leaving the company and the court to resolve such issues, a dissenting creditor should instruct counsel to oppose the plan and submit alternative evidence to support this.
We await the judgment with interest. If the company is able to persuade the court that HMRC would indeed receive less in an insolvency than it would under the plan, and the plan is sanctioned on that basis, the plan will result in the “cram” of HMRC, a preferential creditor. It will also be interesting to see whether the court is as critical of HMRC’s failure to appear at the hearing and file objections to the plan as it was of the challenging creditors in Smile Telecoms.
Authored by Naomi Parmar.