Who’s using
restructuring plans?
Who can use the RP procedure?
A company which “… has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern” may make an application to use the RP process. There’s a requirement that the business has experienced or is likely to experience financial stress.
Overseas companies may use the RP procedure in the event that they have a sufficient connection to the UK.
The RP procedure was introduced in June 2020. Since its introduction, we’ve seen it used by, amongst many others, Virgin Atlantic Airways, DeepOcean, Virgin Active and Prezzo. The process can be used for both SMEs and large corporates, as demonstrated in our case study below. The first use of the RP legislation was to secure the future of an SME business in distress.
Case study: Houst Limited, 2022
In July 2022, the High Court delivered judgment sanctioning the RP proposed on behalf of holiday lettings and private house rental company Houst Limited and its subsidiaries.
Operating in eight countries and employing 300 people via independent contractors, Houst specialise in providing property management services for short-term and holiday lettings. Because of the effects of the coronavirus pandemic on the tourist market, the company experienced a significant reduction in demand. As a result, it asked us to provide advice on its options. After consideration, Houst concluded that the proposed RP was in the best interests of all creditors and members.
HM Revenue & Customs (HMRC), as the secondary preferential creditor, voted against the plan, considering that it was the only creditor disadvantaged by it. On the basis that HMRC was no worse off in the relevant alternative, Houst requested that the Court use the cross-class cram down process and sanction the RP.
In judgment, the Court considered that, whilst they could ask Houst to start again, and negotiate with HMRC, this would be highly undesirable. The costs and delay would impose a disproportionate burden on the Company as an SME business. The Court also considered that the plan would, in fact, be in HMRC’s best interests, to be recovering more tax. Its best interests therefore laid in sanctioning the plan.
The decision represented the first use of the RP legislation introduced by CIGA 2020 to secure the future of an SME business in distress. It was also significant as it’s the first occasion that the RP procedure has included the cross-class cram down of HMRC, the UK tax authority.
The decision confirms the RP process is a viable tool for SMEs in addition to large corporates. It highlights the importance of early engagement with creditors – particularly HMRC – to try and negotiate a compromise before seeking to use the cross-class cram down.