Key lessons

The decision in Nasmyth is the first example of the court refusing to sanction a UK restructuring plan purely on the basis of discretionary grounds, and provides some useful lessons going forward:

• An appropriate share in the upside

Care should be taken to ensure that where a creditor makes a contribution to the restructuring surplus, as would have been the case for HMRC under the Nasmyth Plan (which relied on HMRC agreeing time-to-pay (TTP) arrangements with the Group), that creditor receives a fair and proportionate share of any restructuring surplus that it helped to create. 

• Good reasons to cram down HMRC

Leech J paid due attention to the types of debts owed to HMRC and confirmed that, while it is possible for HMRC to be crammed down (as was seen in Houst), there must be good reasons to do so and the court should exercise caution in relation to HMRC debts. As HMRC have now shown that they are willing actively to oppose plans which seek to compromise debts owed to them, debtors should consider whether or not to take a risk in proposing a plan without first agreeing the position with HMRC. Ultimately, Nasmyth’s failure to agree a satisfactory position with HMRC prior to proposing the Nasmyth Plan caused a “roadblock” and led to the court’s refusal to sanction the plan.

• Critical creditors

Be prepared to provide sufficient detail and justification for the creditors who appear on a critical creditor list if they are to be paid in full and left unaffected by the plan. Although not itself fatal to the Nasmyth Plan, close attention was paid to the actions of the Nasmyth directors in including certain creditors as critical creditors at the expense of HMRC.

Background to the Nasmyth Plan

The Nasmyth group provide engineering services to the aerospace and defence industries. Nasmyth, the plan company, was the holding company of subsidiaries in the UK and elsewhere, and provided administrative and treasury functions as well as service functions to the wider group (the “Group”).

Creditor Classes

The creditor classes were made up of the following:

• The secured creditors (Classes 1 and 2): The senior secured creditor (“STB”) and junior secured creditor (“JCP”), were each placed in a class of their own. Given existing defaults under the lending arrangements, each had entered into a standstill agreement with Nasmyth pending sanction. Under the terms of the Nasmyth Plan:

• existing defaults under the terms of the respective facility agreements would be waived;

• a temporary restriction on enforcement in relation to defaults arising as a consequence of the plan for a period of three months following sanction would apply to both STB and JCP;

• the maturity date under the junior facility agreement would be extended from 2024 to 2029; and

• the balance of £8 million would be made available by JCP on the existing terms of the junior facility agreement, with £1 million of that being fully committed and made available for drawdown (the “JCP Funding”).

• The secondary preferential creditor (Class 3): HMRC was placed in a class of its own in respect of its preferential claims, totalling £209,703. The Nasmyth Plan proposed to compromise those claims in full in exchange for a payment of £10,000, equivalent to 4.8% of the total claim value.

• The unsecured creditors (Class 4): Amongst others, this class included HMRC as an unsecured creditor (with claims worth £236,154.22) as well as claims brought against Nasmyth by former directors and employees. The unsecured claims would also be compromised in full in exchange for a share in a £10,000 fund (to be split on a pari passu basis).

• Inter-company creditors (Class 5): The claims of inter-company creditors were to be compromised in full with consent.

Notably, HMRC was also owed a further £2,561,499.38 by Group subsidiaries with debts dating back as far as 2020. Earlier TTP arrangements had been agreed with HMRC but defaulted on. Most recently, the Group subsidiaries had submitted a proposal for a TTP arrangement to HMRC prior to proposing the Nasmyth Plan but, as we shall come on to, the proposals were rejected by HMRC prior to the sanction hearing.

Other features of the Nasmyth Plan and the Relevant Alternative

• Critical Supply Creditors: The Nasmyth Plan included a list of critical creditors (the “Critical Supply Creditors”) who, as the name suggested, were considered by Nasmyth to be critical to the future operation of the company and would therefore be paid in full. This list was more than halved in value (from £1,034,578.96 to £431,223.68) by the time of the sanction hearing following Leech J’s agreement with HMRC that the list lacked sufficient detail, and requirement that creditors should be entitled to see a full explanation of why certain creditors should be treated as critical creditors in the Explanatory Statement. Even then, at sanction Leech J disagreed with the continued inclusion of a “brand ambassador” in the list of Critical Supply Creditors.

• Shareholders: The Nasmyth Plan did not propose any compromise to the rights of members, nor was it proposed that the shareholders provide any form of cash injection. However, as a condition of the JCP Funding, if the plan were sanctioned the majority shareholder of Nasmyth (an affiliate of RCapital Limited (“RCapital”)) would transfer all the shares held in Nasmyth to another company associated with RCapital for the consideration of £1.

• Relevant alternative: Nasmyth relied on two reports prepared by BTG, which supported the view that the relevant alternative would be administration, with the value breaking in the junior secured debt and returns as follows:

 Opposition – Fairness and Roadblocks

At the creditors’ meetings on 3 March 2023, all of the classes voted in favour of the Nasmyth Plan, with the exception of HMRC as a preferential creditor, who voted against. This meant that, in order for the Nasmyth Plan to be sanctioned, the court would have to agree to exercise its power (under section 901G of the Companies Act 2006) to “cram down” HMRC as a dissenting class creditor.

Conditions A and B

The “No worse off test” (Condition A)

Firstly, the court needed to be satisfied that, in the event that the Nasmyth Plan was sanctioned, HMRC would be no worse off than it would be in “relevant alternative” (s. 901G(3)). 

The relevant alternative put forward by Nasmyth was administration. However, although HMRC did not provide alternative valuation evidence, counsel for HMRC put forward various arguments to the effect that the most likely outcome were the plan not sanctioned was that JCP would continue to support Nasmyth, and it would not go into insolvent administration.

Leech J found that there was “considerable force” in HMRC’s arguments. However, at the beginning of the third (and final) day of the sanction hearing, Nasmyth submitted further evidence that on the previous evening the board of directors had resolved to place the company into administration if the Nasmyth Plan was not sanctioned, citing one of the reasons being that JCP had reaffirmed its position that it would not continue to provide support unless the plan were sanctioned. While Mr Justice Leech appeared to agree with opposing counsel that the directors seemed to have “jumped the gun” by passing such a resolution, he accepted that it was the genuine view of the directors. He was satisfied that Nasmyth had proven on the balance of probabilities that the relevant alternative was administration, and that HMRC would therefore be no worse off under the plan than in the relevant alternative. 

Had an “in the money” creditor class voted in favour (Condition B)?

The second condition was easily met, as each of the secured creditors (STB and JCP) had voted in favour of the Nasmyth Plan at their respective creditor meetings (s. 901G(5)). The parties were also in agreement that each of the secured creditors would have a genuine economic interest in an administration. 

Should the court’s discretion be exercised?

Mr Justice Leech echoed his earlier views (made in Re AGPS BondCo [2023] EWHC 916 (Ch)), that there is no presumption in favour of sanctioning a plan, simply because Conditions A and B have been met. The court must still exercise its discretion when deciding whether or not to sanction a plan.

HMRC actively opposed the Nasmyth Plan at both the convening and sanction hearing, on the basis that it was unfair and the requirement for TPP arrangements to be agreed with Group subsidiaries would serve as a “roadblock” which would prevent the plan from taking effect as intended. Two individual unsecured creditors  (the former CEO and a former long-term employee ), who had each issued claims against Nasmyth in 2022, also both argued that the Nasmyth Plan was unfair. In considering the opposition, Leech J identified the following themes.

1. The “Out of the money” creditors

Previous decisions had indicated that little weight should be given to the views of dissenting creditors who were “out of the money” or had no genuine economic interest in the company. Nasmyth maintained the view that, in an administration, value would break in the junior secured debt. As HMRC would receive no return in administration, they had no genuine economic interest in the company. Leech J disagreed.

Applying the relevant test set out by Trower J in Re DeepOcean¹, Leech J was satisfied that HMRC retained a genuine economic interest, reasoning that:

• HMRC would remain as one of the largest creditors of the Group and there was no dispute between the parties about the amounts owed.

• The parties had also accepted that the success of the Nasmyth Plan, if sanctioned, would depend upon HMRC agreeing TTP arrangements with the Group’s subsidiaries. There was no obligation on HMRC to do so, and HMRC might instead take the view that they would have a greater likelihood of agreeing satisfactory TTP arrangements with administrators seeking to sell the Group as a going concern.

• Both the JCP Funding and the agreement of TTP arrangements with HMRC, upon which the Nasmyth Plan was based, would provide significant financial benefit to Nasmyth and would both contribute to the restructuring surplus.

Accordingly, the court could properly attribute weight both to HMRC’s vote against the plan and to its interests. Additionally, the court found that even though the two unsecured creditors who opposed the plan were out of the money, they had a legitimate interest in opposing the plan and the court was entitled to take their views into account in the general exercise of the court’s discretion.

2. Fair distribution of the benefits of the Nasmyth Plan – the Restructuring Surplus

Leech J stated: “The Court should not refuse to sanction a restructuring plan under Part 26A as a matter of principle because HMRC will be crammed down if the plan is sanctioned.”²

Put otherwise, the fact that HMRC opposed the plan was not alone a sufficient reason for the court to refuse sanction, as had previously been shown by the decision to sanction the Houst restructuring plan (Re Houst [2022] EWHC 1941 (Ch))under which HMRC was crammed down.

However, Leech J ultimately accepted that it would be unfair to sanction the Nasmyth Plan and allow the debts owed to HMRC to be crammed down; it was notable that HMRC’s share in the restructuring surplus would be tiny by comparison to JCP (who would be paid in full over time) and in absolute terms (noting that other “out of the money” creditors would also be paid in full). This was despite the fact that HMRC would, if it agreed to TTP arrangements, contribute to the restructuring surplus. 

Particular attention was paid to the fact that Nasmyth had decided not to treat HMRC as a Critical Supply Creditor, with Leech J noting that it was “striking” that HMRC had not been treated as such when compared with some of the other creditors that had been included on the list. Leech J questioned the actions of the Nasmyth directors in prioritising payments to some of the Critical Supply Creditors above HMRC, even after a resolution was passed to place the company into administration. In fact, the “directors and secured creditors appear to have seen the plan as a convenient opportunity to eliminate debts…owed to HMRC for a nominal figure and to use the plan to put pressure on HMRC to agree new TTP terms. In my judgment, this is not a purpose for which Part 26A should be used”.

The Nasmyth Plan was otherwise found not to be unfair to the opposing individual creditors, Mr S and Mr H.  

3. Roadblocks – Failure to agree TTP arrangements before proposing the Nasmyth Plan

The issue for the court was whether the Nasmyth Plan would be rendered inoperative or inoperable in practice (a “roadblock”) if, once sanctioned, HMRC refused to agree to TTP arrangements. Leech J’s understanding of the position was that, if HMRC did not agree and instead took steps to enforce its existing liabilities, the individual subsidiaries and the Group would not survive. Nasmyth did not challenge this view, relying instead on the basis that there was nothing to suggest that HMRC would not agree to TTP arrangements.

The failure to agree TTP arrangements with HMRC before proposing the Nasmyth Plan ultimately proved to be the company’s biggest hurdle, and it was unsuccessful in convincing the court that it would not cause a roadblock. Leech J expressed the view that “It is a matter of real concern that the directors remain willing to take the risk that HMRC will not agree to TTP arrangements (in a manner that is satisfactory to HMRC) even if the Court sanctions the plan. If I had sanctioned the Plan unconditionally, this would undoubtedly put pressure on HMRC to agree terms…As I have already indicated, I do not consider this to be an appropriate use of Part 26A.”³

4. Other factors

Leech J was not satisfied that Nasmyth had demonstrated that there was a pressing need to sanction the plan, nor that the future of the company was no longer in the hands of the directors. The fact that JCP had not served a demand, in addition to there being c. £8m of headroom available under the existing JCP Facility, suggested that there was no risk of an imminent administration appointment if JCP continued to provide support to the Group. Even if the Company did file a notice of intention, Leech J could see no reason why JCP could not provide continuing support to allow the directors time to come up with a new strategy. 

There was also no suggestion that, in the event that the company (noting it was a holding company with eight employees) went into insolvent administration, the subsidiaries would not be able to continue trading. This potentially raises the question of whether the court might have considered things differently, had the plan company been a trading entity with several employees. 

Following the court’s refusal to sanction the Nasmyth Plan, the company has since entered into administration and announced a “pre-pack” sale to an affiliate of the existing majority shareholder.

Authored by Mary Beth Frater and Margaret Kemp.

References