Re Nasmyth Group Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Leech |
| Judgment Date | 28 April 2023 |
| Neutral Citation | [2023] EWHC 988 (Ch) |
| Court | Chancery Division |
| Docket Number | CR-2023-000238 |
[2023] EWHC 988 (Ch)
Mr Justice Leech
CR-2023-000238
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Marcus Haywood and Ms Stefanie Wilkins (instructed by Pinsent Masons LLP) appeared on behalf of the Applicant Company
Ms Charlotte Cooke (instructed by His Majesty's Revenue and Customs) for His Majesty's Revenue and Customs
Mr Simon Passfield (instructed by Averta Employment Lawyers LLP) for Mr Peter John Smith
Mr Christopher John Henson in person
Hearing dates: 24, 25 and 26 April 2023
APPROVED JUDGMENT
This judgment was handed down remotely at 1pm on 28 April 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
I. The Application
By Claim Form dated 17 January 2023 Nasmyth Group Ltd (the “ Company”) applied for an order for directions for the convening and conduct of meetings of certain of the Company's creditors (the “ Plan Meetings”) for the purposes of considering and if thought fit approving a proposed restructuring plan (the “ Plan”) under Part 26A of the Companies Act 2006.
On 14 February 2023 the convening hearing took place before me (the “ Convening Hearing”) and I made an order (the “ Convening Order”) giving the Company liberty to convene five meetings of creditors (the “ Plan Meetings”) to consider and, if thought fit, approve the Plan. I also gave a judgment in which I explained the reasons for making the Convening Order and giving the relevant directions (the “ Convening Judgment”): see [2023] EWHC 696 (Ch).
On 3 March 2023 the Plan Meetings took place and the Chair of the Plan Meetings, Mr Mark Fry of Begbies Traynor Group PLC (“ BTG”), recorded that the Plan had been approved by a majority of all other classes of creditors voting at each Plan Meeting apart from the preferential creditor class of which the sole member was His Majesty's Revenue and Customs (“ HMRC”). The Plan Company then applied to the Court to sanction the Plan and to order a “cross-class cram down” in relation to HMRC. On 24, 25 and 26 April 2023 I heard the Company's application and Mr Marcus Haywood and Ms Stefanie Wilkins appeared for the Company.
Two creditors appeared by counsel at the hearing. Ms Charlotte Cooke appeared on behalf of HMRC and Mr Simon Passfield appeared on behalf of Mr Peter Smith, one of the unsecured creditors. Mr Christopher Henson, another unsecured creditor, appeared in person. Mr Smith challenged the outcome of the Plan Meeting of unsecured creditors on the basis that his claim should not have been valued at £1 by Mr Fry. Mr Henson challenged the outcome of the same Plan Meeting on the basis that he was given inadequate notice of it and unable to vote.
Mr Smith, Mr Henson and HMRC all opposed the sanction of the Plan because it was unfair. HMRC also opposed the sanction of the Plan because there was “blot” or “roadblock” preventing the Plan from taking effect, namely, that it was dependant on HMRC entering into “time to pay” (“ TTP”) agreements or arrangements with a number of the Company's subsidiaries and HMRC has now rejected their proposals.
Although I found that the threshold Conditions A and B were satisfied on the evidence then before the Court in the Convening Judgment, I made it clear that this was the basis of my findings and that it would be open to any opposing creditors to put in further evidence and challenge those findings at the sanction hearing: see [27]. I also pointed out that the two blots or roadblocks which I had identified might have been resolved by the sanction hearing. But in the event that they were not, it was open to HMRC and Mr Smith to raise those issues again: see [35] and [36].
The Company's evidence in support of the sanction of the Plan was given by Mr Nicholas Robins, one of its directors, and he made six witness statements dated 6 February 2023, 10 February 2023, 10 March 2023, 31 March 2023, 19 April 2023 and 25 April 2023. I will refer to them as “ Robins 1”, “ Robins 2”, “ Robins 3”, “ Robins 4”, “ Robins 5” and “ Robins 6”. No application was made to cross-examine him by counsel for any of the opposing creditors.
HMRC filed two witness statements from Mr Luke Malin, an officer in the Enforcement and Insolvency Team, dated 13 February 2023 and 23 March 2023 (“ Malin 1” and “ Malin 2”) and a witness statement dated 20 April 2023 from Mr Sheamie Donnelly, who is head of Large & Sensitive Debt in HMRC's Debt Management directorate. Mr Smith filed a witness statement dated 24 March 2023 and Mr Henson filed a letter 22 March 2023 and a Skeleton Argument annexing some additional materials. Mr Haywood did not apply to cross-examine any of them.
BTG prepared two expert reports on the instructions of the Company dated 3 February 2023 and 10 March 2023 respectively and I will refer to them as the “ First BTG Report” and the “ Second BTG Report”. The Company relied on them to demonstrate that the “ No Worse Off Test” (as I define it below) was satisfied. None of the opposing creditors chose to file or rely on expert evidence to challenge BTG's conclusions directly.
II. Background
I set out the essential background in the Convening Judgment at [4] to [16] which I will not repeat here. I also adopt the same defined terms and abbreviations which I used in that judgment. But given the issues which arose at the sanction hearing it is necessary for me to set out some of the background in more detail. I begin with the sale of shares in February 2022 and the associated re-financing of the Company.
(1) The Equity Sale
Mr Smith's evidence was that on 15 October 2003 he founded the Company and that he owned 86.4% of the equity, Mr Simon Beech owned 9.5% and Mr Maurice Edmonds owned 4.1%. From March 2018 onwards he encountered serious health problems but his evidence was that this did not prevent him from being an effective Chief Executive Officer (“ CEO”) of the Group if appropriate adjustments were made.
In the Convening Judgment I recorded that the Group began to experience financial difficulties during the Pandemic and instructed Kroll to assist it to arrange a debt refinancing or equity sale. Mr Smith's evidence was that this resulted in a dramatic slowdown in international trade with manufacturing hit particularly hard and that the Group encountered cashflow issues as a result of one of its largest customers, INCORA (which I understand to be a procurement arm of Rolls Royce), failing to file accounts on time.
Mr Smith's evidence was that there were many bidders interested in the Group and the First BTG Report recorded that Kroll received 10 indicative offers but when it was not possible to refinance the Group, management revisited the equity offers which it had received and invited the top three parties (including RCapital) to participate in a second stage. The report also recorded that all three offers were revised during the bidding process and as a result of further due diligence RCapital amended their offer to zero cash on completion of the sale but increased the overall consideration to £2m to be satisfied by the issue of loan notes. The authors of the report also made the comment that whilst management did not agree with all of RCapital's commercial concerns, they accepted this compromise. In the First BTG Report, BTG's conclusion was that Kroll had undertaken an “an extensive and thorough marketing process” with the result that “the total equity value of the Group was shown at the time to be £2m at best (on the basis that consideration was paid by way of a conditional loan note)”.
Mr Smith gave evidence that RCapital required Mr Beech and him to acquire Mr Edmonds' shares shortly before the acquisition because he had recently retired and this left Mr Smith with 90% of the shares in the Company and Mr Beech with 10% of the shares. The Company accepted that Mr Smith and Mr Beech had bought Mr Edmonds' shares but challenged Mr Smith's evidence that RCapital required them to do so. In my judgment, nothing turns on this evidential dispute and I do not have to resolve it.
On 21 February 2022 Mr Smith and Mr Beech sold 80% of the shares in the Company to Lettbel, a special purpose vehicle controlled by RCapital, and on completion Lettbel owned 16,000 A shares (or 80%) Mr Smith owned 2,000 C shares (or 10%), Mr Beech owned 1,000 B shares (or 5%) and Mr Stuart Fyfe, who appeared at the Convening Hearing but did not oppose the sanction of the Plan, held another 1,000 B shares (or 5%). Mr Smith remained the CEO of the Company and the Group, Mr Beech remained the Chief Operating Officer (“ COO”) and Mr Fyfe became the Chief Financial Officer (“ CFO”). On 25 January 2022 Mr Smith had entered into a service agreement terminable on 12 months' written notice under which he received a salary of £260,000.
As I have stated, RCapital changed its bid and Mr Smith and Mr Beech did not receive any cash consideration for the sale of their shares but loan notes issued by Lettbel instead. In particular, Lettbel issued notes to Mr Smith with a face value of £1,440,000 and loan notes with a face value of £360,000 to a family trust (the “ Loan Notes”) although they only became payable once the JCP Facility had been repaid in full. Mr Passfield took me to the share purchase agreement and also to Lettbel's Articles of Association which contained an earnout or “ ratchet” provision under which Mr Smith's entitlement to shares increased from 10% to 20% if the equity value of the Company reached £30 million and increased to £49 million.
Lettbel's articles also contained bad leaver provisions which provided that if Mr Smith committed a “ C Share...
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