Using a restructuring plan to compromise HMRC: risks post-Petrofac

Following HMRC voting in favour of, and actively supporting at Court, two successive restructuring plans (RP) where tax claims were expressly compromised (Enzen and OutsideClinic), the first half of this year appears to have marked a positive sea-change in terms of the prospects for the so-called "mid-market" RP: from near inevitable HMRC challenge towards proactive engagement, and even support. Companies now have a path to HMRC support.

Of the seven RPs involving liabilities to HMRC prior to Enzen and OutsideClinic, HMRC voted against four RPs (Prezzo, GAS, Nasmyth and Houst) and actively challenged three (Prezzo, GAS and Nasmyth). At the sanction hearings in Enzen and OutsideClinic however, HMRC indicated that they will now be adopting a proactive approach to engagement with RP companies, and will participate as fully as they are able, supporting doing "deals with companies in the right circumstances where the deal is the right deal". Previously, the risk, cost and impact on cash burn and time "runway" associated with defending the seemingly inevitable in-Court challenge from HMRC (with unpaid tax often a significant exposure, the compromise of which a likely core driver of a mid-market RP) had been one of the primary reasons why mid-market corporates could not get plans, otherwise capable of right-siding their balance sheet, off the ground.

Executive summary

• The basis upon which HMRC will support an RP should not be confused with what HMRC are fairly entitled as a creditor / how their claims can be compromised by an RP in the circumstances. The restructuring industry should be wary of allowing HMRC to elevate the nature of case-by-case uplift deals to the level of what "must" be done in all cases.
   
• HMRC's newly supportive stance was built in great part on how they have extracted premiums to their proposed returns in exchange for support:
   
  • Query whether such uplifts at the gift of senior classes and new money can regularly withstand scrutiny post Petrofac: it may prove increasingly difficult to demonstrate that one out of the money class (such as HMRC in OutsideClinic) merit additional payments (or the "gifting" of restructuring benefits) not on offer to other out of the money / compromised classes. Activist landlord classes, not offered such payments, may see it as a ready basis for attacking RPs on a "fairness" basis.
     
  • The solution will in part be to have robust valuation evidence, resting on firm assumptions, showing who is and who is not in the money, alongside a "plan benefits report" showing that the returns projected for HMRC are "fair" and best case from the beginning (in this case building in uplifts for HMRC at the outset on the basis of fair allocation of RP benefits, following active and early negotiation with HMRC). HMRC will likely need to come to terms with that state of affairs: engage early or risk being unable to secure later uplifts payments for fear of challenges to "gifting" post Petrofac. That likelihood may actually assist in obtaining certainty of an early deal with HMRC.
     
• An interesting logical extension of HMRC's activist support of RPs is that we may even see HMRC becoming an occasional driver of class and voting dynamics in partnership with the RP company. "Locking-up" HMRC support may prove key to how companies can drive mid-market RPs more effectively, and even "cram-up" secured creditors or at least better sensitise demands from financial creditors and new-money. The mid-market style RPs that are more likely to require meaningful Court interaction are those that HMRC does not in fact support.
   
• We provide a high-level guide to managing interactions with HMRC with a view to either their supporting an RP, or the Court sanctioning the RP and imposing the terms on HMRC.

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