Waldorf RP2: Restructuring Plans are Back on the Table

Waldorf's recently sanctioned plan goes some way to addressing certainty concerns and clears the way for the next phase of restructuring plans.

The company's second English restructuring plan and parallel Scottish plan were both sanctioned on 5 May, facilitating the sale of the majority of the group to Harbour Energy. HMRC was the only dissenting creditor and has sought permission to appeal. Key judgment takeaways are:

• There is no jurisdictional bar to the court exercising its cross-class cram-down power against HMRC, even where it has rejected a plan (HMRC argued that its status and constitutional mandate to recover the payment of taxes meant that, where HMRC has rationally resolved to vote against a plan, the court should be unable to approve a plan or exercise cross-class cram-down). According such a veto to HMRC was not Parliament's intention and would be inconsistent with the rescue culture embodied in this area of law. However, the judge agreed with Leech J in Nasmyth that the court should not cram down HMRC unless there are good reasons to do so.
• A narrow interpretation of the liabilities that are relevant for the purpose of considering the "no worse off" test is appropriate, per Petrofac. The test must be confined to the creditor's existing rights that are being compromised by the plan. Any wider rights, interests or liabilities that are not being compromised by the plan are outside the scope of the "no worse off" condition. As such, the tax losses that Harbour planned to utilise (the effect of which, HMRC argued, would put it in a worse position overall than when compared with the terminal insolvency of the group) could not be taken into account for the purposes of the "no worse off" test. In any case, the judge found that HMRC would not be worse off under the plan than in the relevant alternative.
• Just because a plan seeks to cram down tax liabilities does not make it an abuse of process or unfair. There was no real basis for alleging that the plan constituted an abuse of process. Furthermore, the extent to which Harbour will be able to use the tax losses is unclear, due to volatility in the oil and gas market and resulting fluctuations in the financial results of companies operating in that sector.
• In the context of Part 26A, HMRC should be treated like any other ordinary unsecured creditor. Part 26A does not offer HMRC any sort of "preferential" status. Whilst HMRC was effectively arguing that it should be treated akin to an essential trade creditors (which are usually left outside of a restructuring plan because the payment of their liabilities is essential to the ongoing operation and survival of the business), the reality is that there is no logical reason as to why it should have been treated differently to the other unsecured creditors in this case. The judge was not persuaded by its reasoning for not participating in the mediation process (which was that it did not have the resources to participate and its internal decision-making processes did not lend themselves to getting immediate instructions during the course of a mediation) and stated that it could not criticise a lack of engagement with creditors during RP1 and subsequently prevent the meaningful engagement it had originally sought by refusing to participate in the mediation.

The remaining three classes of plan creditor voted in favour, having agreed on the proposed distribution of sale proceeds in a two-day mediation following Waldorf's first failed restructuring plan. HMRC put forward five grounds of opposition. At the heart of HMRC's argument was (i) the extent to which tax losses (which Harbour intends to use to shield future profits from tax post-transaction) could be taken into account for the purpose of the "no worse off" test; and (ii) the idea that it was unfair and an abuse of process that Harbour (which had the liquidity to pay Waldorf's tax liabilities) could acquire valuable tax losses and insist that HMRC's debt was extinguished in return for a payment equal to 14% of the outstanding liabilities. Whilst the court had some sympathy for one element of HMRC's argument – namely, that the preservation and sale of tax losses as assets of the Waldorf group should be treated as a contribution by HMRC to the benefits preserved or generated by the plan and go to the question of whether the plan is fair – it rejected every single ground of its opposition in sanctioning the plan.

A possible appeal notwithstanding, four new restructuring plans are on the way – with New Fortress Energy, Las Iguanas, Poundstretcher and TG Jones all scheduled to be heard over the next couple of months – and it looks like Part 26A is gearing up for another busy summer.

Author: Charlotte Evans, Senior Expertise Lawyer.