Re Houst Ltd

This is an application under Part 26A of the Companies Act 2006 to sanction a restructuring plan for Houst Limited. The court applied sections 901F and 901G CA 2006 and the established Part 26A tests: Condition A (the "no worse off" test), Condition B (support from an in-the-money class) and the court's general discretion.

The judge accepted the valuation and "relevant alternative" analysis in the Begbies Traynor report and concluded HM Revenue & Customs, the sole dissenting class, would not be worse off under the plan than in the relevant alternative. The bank, as the in-the-money secured creditor, supported the plan, satisfying Condition B.

On the exercise of the court's discretion the judge balanced departure from insolvency priority against the source and purpose of the restructuring surplus (principally a members' capital injection), the practical need to preserve trading (including payments to critical suppliers and employees), the absence of evidential challenge from HMRC, and the likely worse outcome should the plan be refused. For these reasons the court sanctioned the plan.

Background and parties: The company provides short-term holiday-let property management and became cash-flow and balance sheet insolvent following the Covid-19 pandemic. Begbies Traynor prepared a valuation report assessing the likely returns to creditors in the "relevant alternative" (an accelerated sale or pre-pack administration). The main creditors comprised a bank holding fixed and floating charges, HM Revenue & Customs (preferential creditor), loan note holders and trade creditors; shareholders were invited to provide a capital injection.

Nature of the application: The company applied for the court to sanction a restructuring plan under Part 26A CA 2006 (sections 901F and 901G), following convened creditor and member meetings. The plan involved a members' capital injection, reduction and staged repayment of the bank debt, funds to produce fixed dividends to HMRC and unsecured creditors, payment in full to certain critical creditors and employees, conversion options for loanholders and heavy dilution of existing shareholders.

Issues framed by the court:

• Whether Condition A (no creditor in the dissenting class would be any worse off than in the relevant alternative) under section 901G was satisfied, specifically as to HMRC.
• Whether Condition B (the plan has been agreed by at least 75% in value of a class that would receive a payment or have a genuine economic interest in the relevant alternative) was met.
• Whether, even if Conditions A and B were satisfied, the court should in its discretion sanction the plan, having regard to fairness, class composition, representation at meetings, the distribution of the restructuring surplus and any "blots" or defects in the plan.

Court's reasoning and resolution: The court accepted the BT valuation evidence (unchallenged by creditors) of likely distributions in the relevant alternative and found HMRC would likely receive about 20p/£ under the plan versus about 15p/£ in the relevant alternative, satisfying Condition A. Condition B was satisfied because the bank, the only creditor likely to receive a payment in the relevant alternative aside from HMRC, voted in favour.

The court considered statutory compliance, class composition and representation, and treated out-of-the-money classes as of little weight. On discretion the judge acknowledged the plan departs from insolvency priority but held the principal source of value was new capital by members which enabled improved recoveries and the company to trade. The court found the treatment of critical creditors, shareholders and unsecured creditors was justified by the need to preserve trading and by the new value provided, and noted HMRC had not adduced evidence to contest valuations or sought negotiations. Balancing these factors and the risk of a worse outcome for all creditors if the plan were refused, the court exercised its discretion to sanction the plan.

The application to sanction the restructuring plan is allowed and the court sanctioned the plan. The judge found that Conditions A and B under section 901G were satisfied (HMRC would be no worse off and the bank supported the plan) and that, in the exercise of the court's discretion, sanctioning the plan was appropriate because the restructuring surplus derived principally from a members' capital injection which enabled improved recoveries and the preservation of the business, there was no evidential challenge to the valuation of the relevant alternative, and refusing the plan would likely produce a worse outcome for creditors.