English High Court approves Prezzo restructuring plan amidst opposition

Legal firm Mayer Brown comments on the ruling.

The English High Court exercised its discretion to approve a restructuring plan proposed by Prezzo Investco Limited, the parent company of popular Italian casual dining chain, Prezzo Trading Limited despite opposition from HMRC, which had both secondary preferential claims and unsecured claims. 

Despite the opposition, the Court ruled in favour of Prezzo Investco's plan and authorized the cram-down of HMRC's debt.

Commenting on the case, legal firm Mayer Brown said that it is important to note that the Court rejected the suggestion that, as a matter of principle, a restructuring plan should not be sanctioned without the discharge of (or proper provision for) HMRC preferential liabilities incurred during the planning process. 

“However, the Court will remain astute to the risks that: a plan can be used as an "instrument of abuse"; and sanctioning such a plan may be construed as giving a "green light" to companies to use Part 26A to cram-down unpaid tax bills.”

“It is also interesting to note that the Court confirmed that, in the context of a restructuring plan, the concept of an "arrangement" does not require some form of consideration to be provided to "out of the money" creditors.  This differs from a scheme of arrangement, which has traditionally been interpreted as requiring some element of "give and take" between a company and its scheme creditors.”

“For creditors looking to oppose a restructuring plan (or scheme), this case is a useful reminder that it may be necessary to cross-examine the plan company's evidence on key points of contention.” Mayer Brown said.

Prezzo Investco was grappling with serious financial difficulties, exacerbated by the impact of the Covid-19 pandemic and rising prices. The company relied on funding from secured loan notes issued to its majority shareholders, which were then on-lent to its trading subsidiary, Prezzo Trading Limited, under a secured loan agreement. The proposed restructuring aimed to address the liabilities of both the parent company and its subsidiary, allowing the business to continue trading instead of opting for administration.

Under the terms of the approved plan, the principal and interest due to the secured loan noteholders (the majority shareholders) would remain intact. HMRC, as a secondary preferential creditor, would receive a cash payment equivalent to the value of the floating charge assets, less the estimated costs of administration. Furthermore, after negotiations, the plan also provided for an additional preferential creditor payment of £2 million to HMRC. However, no return was provided for any other plan creditor.

The plan secured approval from the required majority at two of the plan meetings, but it faced resistance from the preferential creditor class (comprising HMRC) and the other creditor class. HMRC conceded that the statutory conditions to cross-class cram down were met, leaving the exercise of the Court's discretion as the pivotal factor in the approval process.