Out-Law News 3 min. read

PFI project company seeks restructuring plan in UK first

The UK’s first restructuring plan proposed by a project company on a private finance initiative (PFI) project has been launched following a convening hearing at the High Court in London. 

The judge granted a convening application filed by Consort Healthcare (Tameside). Through the restructuring plan, Consort seeks to compromise both current and future liabilities arising from a PFI project agreement with an NHS Trust. The hearing to sanction the plan will be held in July. 

It comes as “the industry has seen a significant increase in projects suffering distress in the last few years” said Stuart Barr, infrastructure expert at Pinsent Masons. “While the vast majority of UK PFI schemes run well, with strong public/private relationships, public sector finances remain constrained. Some in the public sector point to long term frustrations and under-performances on the part of their private sector partners. That, plus the “value for money” agenda, has influenced what the private sector might describe as more assertive contact management strategies and behaviour changes from the public sector. Some authorities complain of a lack of active project management by project companies and even allege mis-reporting asset condition and maintenance.”

In this case, Consort is a special purpose vehicle operating as a PFI project entity under a project agreement dating back to 2007. The agreement relates to the construction and management of various buildings and facilities at a hospital operated by Tameside and Glossop Integrated Care NHS Foundation Trust (the Trust). 

The plan follows ongoing disputes, with the issues first arising in 2020. The Trust has been successful in arguing in adjudication proceedings that Consort breached the terms of the project agreement as a result of various construction flaws, including fire safety defects. It meant the Trust was entitled to make deductions of circa £9 million under the terms of the agreement. 

“With many projects now past or approaching the end of construction latent defects periods, we have seen a real uptick in defects claims and protective proceedings in the courts designed to protect parties’ positions. A number of projects have been terminated for default or insolvency as a result of long running disputes and a breakdown of relationships. The Tameside project operates as an example of what can go wrong when some of these issues play out,” said Barr. 

The court heard that the company is expected to become cash flow insolvent by mid-July, with Consort seeking financial support to meet its liabilities to the Trust. Without the plan, the directors of Consort believe that it will have no choice but to go into administration. 

It is the first restructuring plan that seeks to compromise liabilities to the NHS. In fact, the plan is designed to focus on current, accrued and future liabilities under the project agreement. This includes the circa £9million payable to the Trust after the adjudication. It also includes all future payments to the NHS by way of service failure deductions for the remaining 17 years of the project agreement.

Andrew Robertson, restructuring and insolvency expert at Pinsent Masons, said: “It will be interesting to see the court’s overall approach to a restructuring plan which seeks predominantly to compromise liabilities to the NHS, as a public sector creditor. We have seen the court adopt a different approach in sanctioning plans which predominantly targeted HMRC, another public sector creditor, where the courts found that HMRC is a ‘special interest creditor’.”

The plan also proposes certain amendments to the project agreement that will govern the future relationship between the Trust and the company. 

In return, the Trust will receive one lump sum payment as compensation under the plan. This payment will be set depending on one of two options put forward by the company under the plan – the so-called settlement option and sustainability option. These payments equate to between 75% and 85% of the mid-point value of what the company and Trust believe those future liabilities could be. 

The Trust is also being offered a gain share arrangement going forward. This means they will share 50/50 with the company’s subordinated secured creditor any surplus generated by the company once it has met its liabilities. 

The Trust is being offered the opportunity to terminate the project agreement within 30 days of the restructuring plan becoming effective if it does not like the outcome. If this happens, none of the compromises will take effect and the parties will proceed as if the plan was never sanctioned. 

The plan also allows for a scenario whereby the Trust may need to terminate the project agreements if the effect of the plan is to trigger a potential challenge under the public procurement rules. 

Any termination will mean that the Trust can recover the £8million by offsetting against sums to the company under the project agreement. However, termination will also trigger substantial payments by the Trust to the company as compensation. These payments could exceed £100million the company claims. It may also lead to the company entering into administration. 

“It appears that the Trust is going to challenge the plan. One of the key battlegrounds will be the extent to which the court believes it is fair to compromise future liabilities that could be payable to the Trust over the remaining 17 years of the project agreement, and how you value those liabilities. It is clear that there is a lot of uncertainty as to what claims could arise over the remaining years, and we have not seen restructuring plans used to compromise operational liabilities such as this over such an extended period of time” Robertson said. 

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