An Anglo/Irish perspective
With restructuring plans in England increasing in popularity as a means of flexible business rescue and examinership in Ireland well established, all stakeholders need to engage with businesses in order to maintain a seat at the table. None more so than tax authorities, whose support or rejection of a business's plan could have a dramatic impact on the success of any rescue, as well as their ability to recover a proportion of tax due without losing out to other creditors. This article considers the unique position of tax authorities when a company proposes a rescue strategy, both in the UK and Ireland.
Tax authorities in both jurisdictions enjoy privileged positions in the insolvency payments priority waterfall and have always played important roles in insolvency processes. Now it seems that these roles will increase in significance as HMRC (the UK tax authority) and the Revenue Commissioners (the Irish tax authority) will be required to engage even more directly than before.
Recent cases in England have shown that HMRC needs to actively challenge restructuring plans in order to successfully oppose them.
Cases such as Re Houst [2022] EWHC 1941 (Ch) and Re Prezzo Investco Ltd [2023] EWHC 1679 (Ch) have established that it is possible both in theory and in practice to cram down preferential debts owed to HMRC in English restructuring plans. In Re Houst, although HMRC did not attend the sanction hearing, it both voted against the plan and set out its objections to the plan in writing. Nevertheless, the court was willing to exercise its discretion and cram down HMRC. In doing so, the court regarded the fact that HMRC did not attend the sanction hearing to oppose the plan as a relevant factor.
Following Houst, HMRC has attended sanction hearings to oppose multiple restructuring plans, such as Re Nasmyth Group Ltd [2023] EWHC 988 (Ch), Re Great Annual Savings [2023] EWHC 1141 (Ch), and Prezzo. When HMRC is in attendance, the court gives considerable regard to its views and, in the right circumstances, HMRC's opposition has been successful (see Nasmyth Group Ltd and Great Annual Savings).
HMRC does not always oppose restructuring plans, as Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch) shows. We understand that HMRC is intending to issue guidance shortly, which will provide a useful steer to companies considering compromising tax debt as part of a restructuring plan. A parallel can perhaps be drawn here with the FCA, which issued guidance on restructuring plans, schemes of arrangement and company voluntary arrangements in June 2022.1 As with the FCA guidance, we would expect HMRC to emphasise the importance of the debtor engaging with it early in the process.
In Ireland, the Revenue Commissioners has always played a pivotal role in corporate restructurings and its views have quite correctly been treated with significance by the court. It is often the case that the attitude taken by the Revenue Commissioners to a restructuring can set the tone for its overall success or failure.
In examinership (Ireland's chief rescue process), the support of one impaired class of creditors was previously sufficient to enable the examiner to seek court approval for his or her scheme of arrangement. It was irrelevant whether that class was in or out of the money on a liquidation analysis.
As a result of recent legislative changes implementing EU law, this position has been amended and the court has discretion to approve a scheme:
The Revenue Commissioners enjoys different preferential statuses under Irish company law (e.g. super-preferential and preferential) such that it will very likely be an "in-the-money" creditor for the purposes of voting in an examinership.
As voting approval under the examinership regime is now limited to those that can satisfy an economic interest test, the Revenue Commissioners' preferential status and its importance in approving examinership proposals will invariably come into further focus.
In 2021, Ireland introduced the Small Companies Administrative Rescue Process (SCARP) to facilitate the restructuring of companies with a turnover not exceeding €12 million and a balance sheet not exceeding €6 million predominantly on an out-of-court basis.
Importantly, the Revenue Commissioners has the ability to opt out of the process which can facilitate cross-class creditor cram-down for suitable candidate companies. To date, the Revenue Commissioners has actively engaged with the process and been supportive of it, provided it is satisfied with the candidate's prior fiscal compliance. However, the ability to opt out when exercised clearly has the potential to prevent or derail what might otherwise be a successful restructuring.
Changes to the law in both England and Ireland have resulted in their tax authorities playing an increasingly active role in restructurings. In both jurisdictions, the tax authorities' views are treated with significance by the court and will increasingly be central to success. It is therefore clear that early engagement with the relevant tax authority remains an important first step in any restructuring.