Long-awaited HMRC restructuring plan guidance issued

Steven Cottee of Pinsent Masons, who specialises in business restructurings, was commenting after HMRC issued long-awaited guidance setting out how it will deal with restructuring plan proposals.

“While the guidance is not as detailed as was hoped, it should result in fewer contested restructuring plans and drive costs down and ultimately lead to more restructuring plans being sanctioned,” Cottee said.

Restructuring plans were provided for by the UK government in 2020 under the Corporate Insolvency and Governance Act. Although the restructuring tool had been talked about for some years, the proposals were rushed through parliament, initially to provide a tool for business to escape from financial crisis arising as a result of lockdown measures.

The process for obtaining a restructuring plan is very similar to the well-established "scheme of arrangement" regime, with stakeholders split into classes in respect of both their treatment under the proposal and for voting purposes. However, unlike a scheme of arrangement, a restructuring plan allows for dissenting classes of stakeholders to be bound in certain circumstances. This is known as "cross-class cram-down".

HMRC enjoys an elevated status as a secondary preferential creditor on insolvency for PAYE, VAT and certain other taxes. Notwithstanding the power of the courts to provide for a cross-class cram-down, the views of HMRC in relation to any restructuring plans are crucial in order to minimise the risk of a contested process. This was seen in the recent cases of Nasmyth and Great Annual Savings where HMRC succeeded in opposing the restructuring plans proposed.

Cottee said: “The new guidance emphasises the importance of engaging with HMRC’s debt management team transparently and as early as possible once a decision is made to propose a restructuring plan. Businesses and their advisers will need to explain to HMRC why the plan is needed, what new finance is being provided, and set out why the plan has a realistic chance of succeeding.”

“In particular, HMRC will scrutinise whether payments are being made to business-critical creditors ahead of HMRC and seek justification from proposers of restructuring plans for those arrangements,” he said.

Cottee said it is also clear from HMRC’s new guidance that winning its support for a restructuring plan will be more difficult if the proposer of that plan has breached previous ‘time to pay’ arrangements.

“HMRC will also look very closely at all payments to creditors to ensure creditors are being treated fairly from the point a restructuring plan is issued,” Cottee said. “This is likely to mean that liabilities to all creditors including HMRC that are being created from the launch of such a plan should be paid in full or treated equally.”

HMRC said it would also expect companies seeking a restructuring plan that are part of a wider group to “have reasonably apportioned debt or risk within the group”. It added that it would also be less likely to support restructuring plan proposals if the plan contains restrictions that prevent it from “taking action to recover unpaid liabilities arising in the future”. HMRC has said it will also need to be satisfied that the restructuring plan has a realistic chance of success for it to win its support.

Cottee said: “Overall, this is a positive development in the evolution of restructuring plans, and, at a time of rising UK insolvencies, the issuance of this guidance is timely as it should result in more businesses in financial difficulty being rescued on a going concern basis, which can only be good news for the wider UK economy.”