Court-sanctioned SME Restructuring Plan imposes cram down of HMRC preferential debt

The High Court in London recently sanctioned a Restructuring Plan for Houst Limited despite opposition from HMRC, one of the company’s major creditors. Our Restructuring team explains the significance of the case.

Restructuring Plans were introduced as a Business Recovery and Rescue option in the Corporate Insolvency and Governance Act 2020. While a number of larger entities have already had Restructuring Plans sanctioned under the new regime, Houst Limited is the first SME to do so. The case is significant as it highlights a potential alternative rescue route for SMEs in financial difficulty.

Companies with HMRC debt

The introduction of secondary preferential status for HMRC in December 2020 heightened concern about the feasibility of existing restructuring options such as Company Voluntary Arrangements (CVA) and Administration for companies with significant HMRC debt.

Up to now, HMRC’s position (which is clearly stated in their published criteria and reflected in HMRC practice) is that they will not accept a CVA or restructuring procedure where unsecured creditors are paid a dividend unless HMRC’s preferential liability is fully discharged.

In the Houst Limited case, HMRC adopted this approach and voted against the Restructuring Plan which proposed both a cram down of preferential debt and a dividend for other classes of creditors. However, despite voting against the Plan, HMRC did not otherwise participate in the Court process.

Significance of Houst Limited

Although existing recovery processes such as CVA can be efficient, they do not enable a company to seek court approval for restructuring in the absence of acceptance by creditors. The significance of the Houst Limited case is that it shows Restructuring Plans may be an option for SMEs with significant HMRC liabilities. The judge highlighted that HMRC obtained a better return through the Restructuring Plan than would have been obtained had the business failed.

Hopefully, the outcome in this case may encourage HMRC to take a more commercial approach to voting and consider accepting CVAs and Restructuring Plans, which although they may compromise the return on preferential debt, give a better overall return than the alternative insolvency process.

In a related development HMRC recently issued guidance stating their intention to be more proactive in exercising their voting rights around proposed insolvency arrangements. However, the guidance does not state whether they will reconsider their position on cram down of preferential debt where this results in a better return to HMRC and gives the company the possibility of being rescued.

Future corporate rescue & recovery

When deciding on the best rescue option for an SME in financial difficulty, the  pros and cons of both Restructuring Plans and CVA will need to be weighed up. The type of creditors, and the potential return that can be achieved, will determine the most appropriate rescue mechanism.

As always, the earlier a company in distress obtains professional advice, the better the chances of formulating a successful recovery plan.

For further information on the case opinion or advice in general contact Nicola Rollings or Catherine McKeown in our restructuring team on UKandIRestructuring@aab.uk

Restructuring positives for 2021 and beyond

A year ago, we were trying to consider the financial impact of the coronavirus pandemic when it first fully hit the UK and we were very much still trying to get our heads round new terms, new schemes, new support measures and HMRC extensions.

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Personal Service Companies – Is it time for action?

Chancellor of the Exchequer, Rishi Sunak, has recently implied that Capital Gains Tax (“CGT”) rates will come under increased scrutiny, as the Government attempts to fill the budget deficit caused by the ongoing COVID-19 pandemic. With the Autumn Budget soon approaching, these reforms may now just be a matter of weeks away!

The highest rate of CGT for individuals on the disposal of company shares is currently 20%, a significant difference when compared to Income Tax Rates of up to 46% in Scotland.  This 20% CGT rate can however be reduced even further to just 10%, where the conditions for Business Asset Disposal Relief (“BADR”) are satisfied. It is therefore understandable why CGT rates may be one of the first areas of tax to be reformed by the Government.

Now is therefore the time for anyone holding shares in a company to consider their options, particularly those with shares in their own Personal Service Company (PSC).  Between the potential CGT rates increase, and the upcoming 6 April 2021 changes surrounding IR35 off-payroll reforms (see our webpage here), this decision is even more timely for owners of PSC’s.

Options to be considered to qualify for capital gains tax treatment include:

• Outright sale of company shares
• Informal strike off of the company
• Members Voluntary Liquidation (“MVL”) of the company

Take for example a Limited company wholly owned by Mr Smith. Mr Smith has operated the company for many years as his PSC, offering his expertise to the financial sector on a contractor basis. With upcoming changes surrounding IR35, Mr Smith decides to cease and liquidate his company. On review, Mr Smith qualifies for BADR and therefore, for example a £200k cash distribution made to Mr Smith via liquidation of the PSC, Mr Smith could potentially currently pay just less than £20k of CGT to HMRC.

A MVL is a quick, tax-efficient and relatively straightforward process to wind up a solvent company and distribute the assets to its shareholders. In this example, Mr Smith would complete a declaration of solvency, and then pass the necessary resolutions to appoint a Liquidator. This would usually all be done on the same day and our restructuring and recovery team have the necessary expertise to draft all required documents and act as Liquidator in any MVL appointment.

With PSC’s, the liquidator can often make an interim distribution of the cash funds held by the Company to the shareholders within weeks.  An additional benefit to the MVL process is that assets can be distributed on an in-specie basis, without the need to convert these to cash.  For example, if Mr Smith had purchased a vehicle through his PSC that he wanted to continue to use, then this could be directly distributed by the Liquidator to Mr Smith rather than him having to purchase it from the Company.

It is currently anybody’s guess exactly what the position will look like following the Autumn 2020 Budget, however time is definitely of the essence when considering your options pre-October 2020.  AAB have a wealth of experience in assisting shareholders realise the value of their shares process from start to finish, from acting as liquidators of the company, undertaking reviews of BADR eligibility, through to completion of the BADR claim via Self-Assessment Tax Returns.

Please do not hesitate to contact Stuart Petrie or Duncan Raggett if you would like to discuss any of these matters further.

VIDEO 2: Respond, Review, Restart, Repeat – Plan Ahead Teams

A video series featuring top tips on planning, operating and continuously adapting in the next normal and beyond, from AAB’s Plan Ahead team.

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Restructuring & Recovering for the Future

The impact of COVID-19 on the economy is likely to be long lasting. The UK economy contracted by 2% in the first quarter of the year and analysts expect the figure to be worse for the second quarter as lockdown continues. The Scottish and UK government’s COVID-19 financial support measures have been a massive lifeline to businesses, enabling them to continue and providing the opportunity to come out of lockdown with hope for the future. Even with this support, however, many businesses will struggle to survive and there are a number of matters and options that these businesses should be considering when it comes to restructuring and recovering.  

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COVID-19 – Support for Third Sector organisations

Four weeks ago, the First Minister announced that the Scottish government was establishing a £350 million emergency package of support for communities, which included a £50 million wellbeing fund for Third Sector organisations.

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Coronavirus – Practical Measures You Should be Taking

As we adjust to the changes faced as a result of the coronavirus situation and the ‘new normal’ we have outlined some key considerations you should take as you and your business adapt.

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The Positives of Insolvency – How we help

Recently, members of the R2 team caught up with other insolvency practitioners and solicitors at our annual Scottish conference, which is a more entertaining event than it sounds! Over the course of the conference, the conversation covered all the normal topics of how the market in our various parts of the country was, what impact Brexit uncertainty was having, and a few war stories from recent cases that were worthy of some discussion. 

However, over dinner, chance put us at a table where we were surrounded by people we knew well through our work, and so having had the above conversations with them many times, our conversation moved in a different direction, and onto the subject of why we do what we do. 

The general perception of the insolvency profession seems to be that the work must be depressing, in that we are dealing with businesses and individuals that are struggling financially, under huge amounts of stress, and often having to deliver nothing but bad news to employees losing their jobs and creditors who will not receive all their money back, and potentially will receive nothing back, which will only add to their own business / personal stress. 

It is hard to argue with that view. Regrettably a significant amount of our time is spent on such issues, and only the hardest of hearts can manage to deal with such issues and leave them at the office when they go home. Those at the table agreed that the negative side of the work we undertake does impact on them personally to some degree. 

So back to the question – why we do what we do? For us, the answer is simple: we love to help people. Insolvency events are never easy, but what they inevitably do is draw a line in the sand, crystallising the issues causing stress and worry, and providing the opportunity to move on from them to, hopefully, a better future. 

It can be difficult to see that in some scenarios, but it is always there. Employees losing their jobs is a tough one to see the “good side” of – but the reality is that these events arise at a time when they have to happen, so if we accept that, then the “good side” is making sure people are dealt with professionally and with dignity, carrying out work that allows our welfare state to provide some financial recompense to them that otherwise would not be available, and giving them complete clarity on their position rather than being kept in the dark and worrying about what happens next. 

Even the legal arguments that we get into have their “good side”, as we get the opportunity to hold people to account for wrongdoings that impact on others and get some of the creditors’ money back.  

Across the team, we have lost count of the number of times we have sat in a meeting with an individual who is struggling financially, scared to open the mail as it inevitably includes some letter in red ink telling them how much money they have to pay someone, or answering the telephone to someone chasing for an overdue payment. The impact of a life lived like this on the individual’s mental health cannot be underestimated, and in extreme cases but sadly not isolated cases, with tragic consequences.  

However, again it can be the black hole of uncertainty that is the most scary, and once they understand the insolvency process, the immediate and longer term impact it will have on their life – and most importantly that there is life after insolvency – a light is shone on the black hole and suddenly it isn’t actually as scary as previously thought. 

Our table agreed that the good work that our profession does to support businesses and individuals all too often goes unnoticed by the world at large. The threat of a business closing, and the potential redundancy of dozens of employees, sells papers and makes for clickbait on social media. It is no wonder the world views our profession as depressing.   

There doesn’t seem to be an appetite to tell the story of the family struggling with credit card debts, personal loans and council tax arrears, young children, one of which was severely disabled which meant that the couple had to work reduced hours to deal with the needs of their son (a true story). Whilst the wider issue of whether there should have been more support for that family in the period that led up to their bankruptcy is beyond the remit of an insolvency practitioner, one of our team was able to help them go through the bankruptcy process, allowing them to repay only what they could afford over a set period, and letting them get on with their lives without constant worry about what the postman would be bringing them today or who was making that call where the number wasn’t recognised. 

This article finishes with a plea – if you are struggling with financial problems, please take advice. You will find that if you approach someone properly licenced and experienced in dealing with these situations, they will not be sitting in judgement of you and your business or personal decisions, but rather be keen to help you find a solution to your problems, and if the reality is that an insolvency process is the answer, then they will be looking to carry that process out with a focus on dealing with everyone involved professionally and with appropriate empathy. 

The Corporate Insolvency team at Anderson Anderson & Brown have combined experience of 50 years in dealing with these matters, and with the wider AAB team’s experience in every conceivable area of business the length and breadth of the country, we are clear that we can provide advice specific to any problem you may encounter – you only have to ask. 

If you have any queries please do not hesitate to get in contact with Nicola Rollings, Restructuring and Recovery Senior Manager, or your usual AAB contact.

Insolvency – what are the implications for directors?

We are living in uncertain times and the current financial climate, alongside the turmoil in British politics caused by Brexit, is making it harder and harder for businesses to survive, as shown by the recent high-profile insolvencies of Thomas Cook; Debenhams and Jamie’s Italian.  

It will always be a stressful time if your company is not performing as expected but the key is to not put your head in the sand and ignore the situation. If your company is faced with insolvency, you have a duty not to worsen the position for the general body of creditors and there are a number of matters you should consider: 

Personal Guarantees 

Following an insolvency event, any personal guarantees given by the directors are likely to be called upon. This is especially an issue if any personal guarantees have been secured over personal assets.  

Directors’ loans 

Should there be any outstanding directors’ loans due to the company at the date of any insolvency then these will need to be repaid in full.  

Disqualification/action against directors 

As part of any insolvency process, the Insolvency Practitioner (“IP”) appointed must submit a report to the Insolvency Service on the conduct of the directors.  Should the Insolvency Service deem that the directors have committed any offences then they could be faced with a disqualification from acting as a director for anywhere between 2-15 years.   

Matters that IPs and the Insolvency Service will look at as part of their investigations include: 

• The causes of the insolvency 
• Whether the Company’s accounting records/filings are up to date 
• The level of HMRC debt and how it compares to the company’s other liabilities  
• What the directors did to mitigate the situation for creditors 
• Whether the directors assisted the IP with their enquiries & complied with their obligations. 

They will also investigate to see if any of the following offences, amongst others, have been committed. These are not only grounds for disqualification but can also lead to actions against directors for the recovery of any sums lost by the company: 

• Misfeasance/breach of fiduciary or other duty. 
• Wrongful trading – The continuation of trade when the Company is insolvent. 
• Unfair preferences – The failure to treat all creditors equally by paying some creditors in preference to others.  
• Gratuitous alienations – The transfer or sale of assets at undervalue; thereby putting the full value beyond the reach of creditors.  

A future blog will go into more detail about these offences in due course. 

Any IP will also look to see if the directors got any advice and if so, when, and whether, they acted upon it. The earlier you get advice, the greater the options available to you will be and the more the consequences of any potential insolvency can be managed.   

Our R2 team have the skill and experience to help and guide directors through any financial predicament. We will work with directors in order to achieve the best possible outcome for them, the company and the creditors; whether it be a solvent solution (i.e. the introduction of new finance or the negotiation of breathing space with HMRC/creditors) or an insolvency process.  

 If you have any queries please do not hesitate to contact Duncan Raggett, or your usual AAB contact. 

When companies go bust, who gets what – Part 2

In November 2018, my article “When companies go bust, who gets what?” went live on the AAB website. As with all these things, it had been drafted shortly before publication date, and most crucially before the Chancellor’s budget on 29 October – when he dropped a bit of a bombshell that no-one in the insolvency industry saw coming.

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