Where next for HMRC? Breakthrough for mid-market restructuring plans

Since their introduction at the start of the pandemic, there has been considerable excitement about the new restructuring plan tool, which is an extremely powerful tool for companies in distress to restructure their balance sheet without the stigma and negative impact of insolvency.

Despite this, restructuring plans have not had widespread use to date. Initially they were limited to large and complex situations and there was debate in the market whether a restructuring plan could be used in a cost effective manner for SMEs. The recent restructuring plan for Houst Limited answers this clearly in the affirmative.

Read about restructuring plans and other statutory compromise tools here.

The Houst plan is significant for two reasons:

First true mid-market restructuring plan

Houst’s liabilities comprised bank debt of £2.8m, debt to HMRC of £1.8m, loan notes of £3.3m and around a further £3m of other creditors including suppliers and customers. The size of the debts being compromised confirms our view that a restructuring plan can be done cost effectively for mid-market companies.

Position of HMRC

HMRC as a preferential creditor was placed in its own class. It objected to the plan and was made subject to a cross class cram down. The judge made clear that it was not sufficient to object on principle, a viable alternative would need to be shown. HMRC will need to consider the position it takes on future restructuring plans and decide whether it is willing and able to take a more activist role in challenging restructuring plans.

In doing this, HMRC will need to find a way to put forward a viable alternative proposal, which may be difficult for a creditor that is not in a position to view the situation as a commercial investment, so may not be able to generate the same level of payment to creditors funded through new investment.

HMRC are facing a large issue post-pandemic. Many businesses are carrying significant arrears as well as additional debt under various government schemes. HMRC must strike the balance between recovering taxpayer money and ensuring that they are not prejudiced against other creditors, with the fact that an aggressive or non-cooperative approach may result in business failures, undermining the benefits of government support for businesses.

We are hearing in the market of an increase in winding up petitions threatened or issued by HMRC. This could be to send a message to lending banks that they will not wait in line while banks ensure that their position is adequately covered. Alternatively, this could be the start of a generally more pro-active approach, in which case we can expect to see an increase in the number of companies facing increased challenges and needing to restructure to avoid insolvency.