Re Naysmith Group

The court considered an application under Part 26A Companies Act 2006 to sanction a restructuring plan and to order a cross-class cram down under sections 901F and 901G. The judge accepted that the threshold conditions in section 901A were met and that the company had proved the relevant alternative (insolvent administration) for the purposes of the No Worse Off test (Condition A). Although Conditions A and B were satisfied in substance, the court exercised its discretion not to sanction the Plan because the Plan depended on HMRC agreeing group-wide time to pay arrangements which HMRC had rejected, and because the proposal would effect a substantial cram down of HMRC preferential tax claims for a very small return. The judge also identified concerns about the operational effectiveness of the Plan (a material "roadblock"), the allocation of the restructuring surplus to the secured lender and new owner, and certain classifications of critical supply creditors.

Background and parties: Nasmyth Group Ltd (the Company) applied for directions to convene creditor meetings and then for the Court to sanction a proposed restructuring Plan under Part 26A Companies Act 2006. The Plan contemplated full recovery for secured lenders (STB and JCP), small pari passu payments of £10,000 to preferential and unsecured creditors, and the transfer of the majority shareholder's shares. Opponents included His Majesty's Revenue and Customs (HMRC), an unsecured creditor (Mr Peter Smith) and an unsecured employee-claimant (Mr Christopher Henson).

(i) Nature of the application: an application for sanction of a restructuring Plan and, if necessary, a cross-class cram down under section 901G where at least one class (HMRC as preferential creditor) dissented.

(ii) Issues framed by the court:

• whether the court had jurisdiction (threshold Conditions A and B under section 901A);
• whether Condition A (No Worse Off test) and Condition B of section 901G were satisfied for any dissenting class; and
• the exercise of the court's discretion to sanction the Plan, including whether any "blot" or "roadblock" rendered the Plan inoperable and whether the distribution of the restructuring surplus was fair, with attention to HMRC's treatment and the classification of critical supply creditors.

(iii) Court's reasoning and conclusions:

• jurisdiction and threshold conditions: the judge reaffirmed the earlier Convening Judgment and remained satisfied that the threshold conditions under section 901A were met;
• Condition A (No Worse Off): applying the judicial three-stage approach (identify the most likely relevant alternative, assess consequences, compare returns), the court accepted the company's evidence (including late evidence of a board resolution) that the most likely relevant alternative was insolvent administration and accordingly concluded on the evidence before it that preferential and unsecured creditors would not be any worse off under the Plan than in that alternative;
• Condition B: the secured creditor classes assented and that was sufficient to satisfy Condition B for the purposes of exercising the cram-down power;
• discretion and roadblock: notwithstanding satisfaction of Conditions A and B, the court exercised its discretion not to sanction the Plan because it depended on HMRC agreeing group-wide time to pay arrangements which HMRC had rejected, leaving the Plan inoperable in practice (a material roadblock). The court emphasised the need for care before cramming down tax debts and was not prepared to use Part 26A to place pressure on HMRC to concede;
• other factors: the court accepted the directors' evidence (no cross-examination) that they resolved to pursue administration if the Plan failed, but also noted lack of direct evidence from JCP/RCapital and concerns about how the restructuring surplus would be allocated to those parties; the court also scrutinised classification of certain critical supply creditors (notably the treatment of a former director) and struck a cautious tone about the company's priorities.

Conclusion: the court declined to sanction the Plan because it would be rendered inoperable and unfair in the absence of satisfactory TTP arrangements with HMRC and for the additional discretionary reasons explained in the judgment.

The company's application for sanction of the restructuring Plan is refused. Although the court was satisfied that the statutory threshold conditions (section 901A) and the requirements of section 901G (Conditions A and B) were met on the evidence, the court exercised its discretion not to sanction the Plan because it was dependent on HMRC agreeing group-wide time to pay arrangements which HMRC had rejected (a material "roadblock"), and because it would unfairly cram down significant HMRC preferential tax claims for a negligible return without adequate safeguards.