IN THE MATTER OF HOUST LIMITED

Under Part 26A of the Companies Act 2006, cross-class cram-down requires satisfaction of the no-worse-off condition, approval by the requisite in-the-money class, and the court’s general discretion to sanction the plan.

• Artificially created in-the-money classes should be resisted, but a genuinely impaired class may support cram-down even where it is unanimous and contains one creditor.
• The scheme-sanction framework applies with modifications. Little weight should be given to votes of out-of-the-money classes.
• Fairness requires examination of the distribution of restructuring benefits, the relevant-alternative priorities, the justification for different treatment, and the source of new value. Departure from those priorities is not automatically fatal.

Houst Limited, a property-management company affected by the Covid-19 pandemic, applied for sanction of a restructuring plan under Part 26A of the Companies Act 2006. Adam Johnson J had previously convened six meetings of creditors and shareholders: the Bank supported the plan, while HMRC, the sole secondary preferential creditor, opposed it. The plan proposed new capital, debt reductions, payments to certain creditor classes, and a cross-class cram-down.

The court had to determine whether the statutory conditions for cram-down were satisfied and whether, in the exercise of its general discretion, the plan was fair and should be sanctioned.

The restructuring plan was sanctioned.

1. Statutory conditions. The court applied the three-question framework identified in Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch): whether the dissenting class would be no worse off, whether an in-the-money class had approved the plan by 75% in value, and whether the court should exercise its general discretion. HMRC were likely to receive 20p/£ under the plan, compared with approximately 15p/£ in the relevant alternative. They were therefore no worse off. The Bank was the only creditor with a genuine economic interest in the relevant alternative and its support satisfied Condition B.

2. Artificial attempts to create an in-the-money class to anchor cram-down should be resisted, particularly where the class is not impaired. That concern did not apply where the class was genuinely in the money, adversely affected by insolvency, and substantially impaired under the plan. Unanimous support, or the fact that the class contained only one creditor, did not prevent the jurisdiction being exercised. Unlike the position considered in Virgin Atlantic Airways Ltd [2020] EWHC 2376 (Ch), the Bank had not entered into a lock-up or support agreement and could have withdrawn its support.

3. Discretion and procedural fairness. The four-stage scheme approach from Re Noble Group Limited [2018] EWHC 3092 (Ch) remained relevant, with modifications for Part 26A. The statutory requirements were met, the explanatory materials were adequate, and the error in the covering letter was immaterial. The classes were fairly represented. Little weight was given to votes from out-of-the-money classes. The chair was entitled to reject Laundryheap’s claim for voting purposes, consistently with Re Dee Valley Group plc [2018] Ch 55.

4. Conditions A and B were necessary but not sufficient. The absence of active opposition was relevant. The court also had to assess whether the restructuring surplus was fairly distributed between consenting and dissenting classes. The relevant-alternative priority structure was an important reference point, but departure from it was not automatically fatal. The source of the new value was also relevant, particularly where it came from new capital rather than assets available in an administration.

5. The preferential treatment of critical creditors was justified because continued trading depended on their being paid. The enhanced return to the Bank reflected the minimum required for its support. Although HMRC lost priority relative to the relevant alternative, it received a better outcome, had not challenged the evidence or opposed sanction at the hearing, and all creditors would be worse off if the plan failed. The court therefore exercised its discretion to sanction the plan.