Houst Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 22 July 2022 |
| Neutral Citation | [2022] EWHC 1941 (Ch) |
| Docket Number | Case No: CR-2022-001644 |
| Court | Chancery Division |
[2022] EWHC 1941 (Ch)
Mr Justice Zacaroli
Case No: CR-2022-001644
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
Rolls Building
7 Fetter Lane
London EC4A 1NL
Marcus Haywood (instructed by Irwin Mitchell LLP) for the applicant company, Houst Limited
Hearing date: 15 July 2022
Further evidence and submissions: 18 and 20 July 2022
APPROVED JUDGMENT
This is an application to sanction a restructuring plan under Part 26A of the Companies Act 2006 in respect of Houst Limited (the “Company”).
The relevant background is succinctly set out in the judgment of Adam Johnson J dated 14 June 2022 giving reasons for convening meetings of creditors and shareholders: [2022] EWHC 1765 (Ch). The following is a summary only of the matters relevant to this application.
The Company's business is the provision of property management services for short term/holiday lets. Property owners who wish to let their properties to guests on a short-term basis sign up to the Company's online platform. The Company lists their properties on various websites and manages the bookings and logistics. It earns revenue from a share of the amounts paid by customers for booking the properties.
The Company's business was severely affected by the Covid-19 pandemic. It is both cash flow and balance sheet insolvent. Three creditors have threatened winding-up petitions, and the Company is not in a position to pay the debts claimed by them. The evidence as to the Company's financial position consists principally of a report prepared by Begbies Traynor (“BT”), who are the proposed plan administrators, dated April 2022. Their conclusion is that if the restructuring plan does not proceed, then there would most likely be an accelerated marketing process leading to a sale in administration (i.e. a pre-pack administration). I will refer to this, consistent with the terminology in Part 26A, as the relevant alternative. BT's report summarises the likely value of the Company's assets and likely distribution to creditors in that event.
1) The Company's assets subject to a fixed charge in favour Clydesdale Bank Plc (the “Bank”) consist of intangibles and goodwill and investments. These are estimated to realise £300,000 in the relevant alternative. This is based on a comparable transaction entered into by the Company itself in February 2020, when it purchased the “Hostmaker” business out of administration. This is considered by BT to be a more reliable guide to value than a discounted cashflow analysis, since the significant level of distress of an accelerated sale process would not lead prospective buyers to consider value based on the latter.
2) The Company's assets subject to a floating charge consist primarily of debts due from other group entities, trade debtors, balances with payment service providers, prepayments and an R&D tax debtor. The book value of these, leaving aside inter-company debts, is in the region of £1 million. For reasons set out in BT's report, these are estimated to release substantially less (approximately £180,000) in the relevant alternative.
3) Inter-company debts have a book value of £6,159,000, but are estimated to realise only £83,000. At the hearing this was supported by a one page table summarising the likely recovery from each of the debtor companies in the group. After the hearing a more detailed analysis of the likely value of these debts (and the other assets of the Company) was provided by BT.
4) No consideration was given in BT's report to the possibility of any value being realised from claims against third parties in the relevant alternative. I was assured at the hearing that consideration had been given to this, and that there was no reason to believe that there would be any such claims. This has been confirmed in further evidence provided by BT following the hearing. I am satisfied that the Company's dire financial position is a direct consequence of events outside its control – principally the pandemic and its effect on the market – and that there is no reason to suspect that the creditors would benefit in the relevant alternative by reason of claims against third parties.
5) The Company's liabilities consist of the following:
a) £2,779,000 owed to the Bank.
b) £1,775,000 owed to HMRC. This would rank as a preferential debt in the relevant alternative.
c) £3,298,000 owed to convertible loan note holders.
d) £1,643,000 owed to trade creditors.
e) £326,000 owed to critical suppliers.
f) £494,000 owed to a connected creditor.
g) £658,000 of customer liabilities.
The Company has two classes of shareholders: ordinary unsecured shares and Series A preferential shares. These are held by a relatively small group of people and institutions.
In the relevant alternative there would only be two creditors who would receive any recovery. The Bank has a fixed and floating charge over the Company's assets and undertaking. It would be likely to recover (after costs of realisation) approximately £225,000 from the sale of assets subject to a fixed charge, resulting in a dividend on its debt of 7p/£. HMRC's preferential debt has priority in respect of the remaining assets, subject to the Bank's floating charge. They would be likely to receive a dividend of 15p/£ on the realisation of all other assets, leaving nothing to satisfy the rest of the debt due to the Bank or the claims of any other creditors.
No creditor has sought to challenge the evidence or conclusions in BT's report. In the absence of such challenge, and with the benefit of the clarification provided by the evidence filed following the hearing, I am satisfied that BT's report fairly summarises the likely outcome for all creditors in the relevant alternative.
The plan
The restructuring plan is relatively straightforward, and involves the following elements:
1) The shareholders have been invited to participate in a capital injection. Certain of them have agreed to advance a minimum of £500,000 (with a potential increase to £750,000 within three months). In return the Company will issue new preference shares which will have the effect of diluting all existing shares (both the ordinary unsecured shares and the Series A preferential shares, all of which will be converted into ordinary unsecured shares) to approximately 5% of their current participation in the overall equity of the Company;
2) The Bank's debt will be reduced to £750,000, of which £250,000 will be repaid within two weeks of the effective date, and the remainder repaid over three years (resulting in a dividend of approximately 27p/£);
3) The Company will make monthly contributions into two funds:
a) A secondary preferential creditor payment fund, at the rate of £12,000 per month for a year, and then £20,000 for a further two years). This will be used to fund a dividend payment to HMRC of 20p/£;
b) An unsecured creditor payment fund, at the rate of £8,000 per month for a year, and then £21,000 per month for a further two years). This will be used to fund a dividend payment of 5p/£ to all unsecured creditors entitled to receive a payment.
4) Liabilities owed to customers, critical suppliers and employees are to be excluded from the plan, and paid in full. That is because, in each case, the Company considers that non-payment would have a significant negative impact on the ability of the Company to trade and thus its ability to generate cash to contribute to the two creditor funds.
5) Loanholders will have the option to convert their debt into pre-dilution equity (in accordance with their existing rights), or to participate in the dividend to unsecured creditors. To the extent that loanholders opt to convert their debt into equity, the size of the unsecured creditor payment fund will be reduced so as to maintain a fixed dividend of 5p/£ to all of the creditors participating in it.
6) The inter-company creditor will receive nothing under the plan.
7) If the Company fails to make any of the monthly contributions to the two creditor funds, the plan administrators have the right to terminate the plan, in which case the rights of all creditors revert to what they would have been had the plan not been sanctioned.
8) There are provisions for agreeing claims of creditors, and for the reference of disputes to an expert.
The plan meetings
Adam Johnson J convened six class meetings, the outcomes of which were as follows:
1) The secured creditor meeting. The Bank is the only member of this class, and it voted in favour of the plan.
2) The secondary preferential creditor meeting. HMRC are the only members of this class, and they voted against the plan. I consider the position of HMRC in more detail below.
3) The trade creditors meeting. Six trade creditors, constituting approximately 15% of the total amount owed to trade creditors, voted at this meeting. Five of them, constituting 78% by value of those voting, voted in favour of the plan. The claim of the creditor who voted against the plan (“Laundryheap”) was accepted only as to part. Had it been accepted in full, then the vote in favour of the plan would have been reduced to 57% by value of those voting. I consider the position of Laundryheap in more detail below.
4) The loan holders meeting. Two loan holders, constituting approximately 15% of the loan holders by value, voted at this meeting, and voted in favour. The proxy of a third loan holder was rejected for technical reason. It too was supportive of the plan and had its vote been counted then the meeting would have been attended by loan holders holding 59% of the total amount by value of loan holders.
5) A meeting of the connected party, who voted in favour.
6) A meeting of members. Notwithstanding that there were two classes of shares (series A preferred shares and...
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