Background

Houst Limited, an SME that provides property management services for short term holiday lets had been left cash flow and balance sheet insolvent by the pandemic. 

It proposed a restructuring plan to return to solvency and provide a better outcome to all creditors than an administration alternative.

All classes of creditors and shareholders voted in favour of the plan save for UK tax authority, HMRC, unwilling to give up its preferential status. Cross-class cram down of HMRC was needed to sanction the plan.

Decision 

The court sanctioned the plan on the basis that:

• Condition A The dissenting creditor, HMRC, would be no worse off in the administration alternative than under the plan as shown by the valuation evidence.
• Condition B The plan had been approved by the bank, the only other creditor that would have a genuine economic interest in the alternative. 

Discretion That the order of priority or 'payment waterfall' was altered by the plan did not stop the judge from exercising his discretion. A capital injection by new members was largely generating the "restructuring surplus" which would not be available in an administration. HMRC was the only creditor that stood to be disadvantaged and they had chosen not to actively oppose the plan. They also stood to receive more under the plan than in the relevant alternative.

Key takeaways 

The court's cost-conscious approach in Houst may encourage the use of restructuring plans by other SMEs, particularly given the ability to bind dissenting preferential (and secured) creditors under a restructuring plan (unlike a CVA).

Find out more 

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.