On Wednesday of this week Richard Smith J sitting in the Insolvency and Companies List of the Chanery Division handed down judgment in favour of Prezzo Investco Limited’s (‘the Company’) application for a restructuring plan with controversial cram down provisions on dissenting creditors including the largest creditor by value of £9.9m, HMRC. The Company is the operating company of the well-known highstreet restaurant chain and the sanctioning of the restructuring plan (‘the RP’) means that the remaining sustainable Prezzo restaurants will be able to continue trading.
The RP was made under Part 26A of the Companies Act 2006 with the order made following submissions at a sanction hearing on 30.06.23. The RP is now binding on all creditors of the Company and its subsidiaries including any dissenting creditors and those that abstain from voting at the earlier plan meetings. Marcus Croskell has been part of the team of barristers assisting within the process for the Company.
The Company had had a difficult recent trading history. Even prior to COVID-19, the Company was struggling after it expanded rapidly and acquired too many sites including spin-off food-led businesses. At that time it was owned by funds managed by TPG who acquired the entire share capital in Prezzo Limited (as it was then) via its acquisition vehicle, Prezzo Holdings Limited (‘Prezzo Holdings’). It was forced to close 91 of its 300 restaurants and entered into a company voluntary arrangement (‘CVA’) on 23.03.18. A CVA allows an insolvent company to pay its creditors over a fixed period and continue trading.
However, COVID-19 then had a devastating impact on the business as it did so many hospitality businesses with staff furloughed and the business made dormant.
This led to substantial debts and the sale of the business to CI Milan Limited in December 2020. CI Milan Limited acquired all shares and certain financial indebtedness issued by Prezzo Holdings. However, a number of sites were still loss making and administrators were appointed to prepare a pre-pack administration sale of the business and assets of Prezzo Limited. This sale took place in February 2021 and led to the creation of the Company and Prezzo Investco Limited (‘Prezzo Investco’). In turn, the Company acquired the business and assets of Prezzo Limited, but with a deferred payment of some of the debts to 31.12.23.
Since that acquisition, the Company continued to struggle with its existing debt burden and drop in trade due to the cost of living crisis with it operating 148 sites at the beginning of 2023. The Company took action and closed 51 sites by April 2023. 47 sites ceased trading on 24.04.23 as widely reported in the national press.
Recent inflationary pressures on this restaurant chain have been substantial. Dough has risen in cost by 15%, pizza sauce has increased in price by 28%, mozzarella by 18% and spaghetti by 40%. These costs are able to be overcome at the sustainable Sites, but the loss making sites created such a substantial financial distress on the group that such action had to be taken to make it viable and ultimately solvent. The Company now operates 97 sustainable sites.
The RP is being entered into by the Company’s parent company to avoid events of default which might trigger the surrender of leases of sustainable sites within the group endangering jobs.
The impact of the relevant alternative to the RP, which was likely to be a pre-pack administration of the Company, would have been the same for many creditors. As unsecured creditors, such as local authorities for loss making sites would have received no return in either scenario and were therefore deemed to be ‘out of the money’ in all the circumstances. Pursuant to the RP any liabilities owed to loss making site unsecured creditors such as rent to landlords or business rates and council tax to local authorities have now been applicable will be irrevocably and unconditionally compromised, discharged and released. For this reason such an RP under the Companies Act 2006 is controversial.
The law under which the RP was being sought arose following the impact of COVID-19. S.7 and Sch. 9 of the Corporate Insolvency and Governance Act 2020 introduced as amendment to the Companies Act 2006 (‘the Act’) arrangements and reconstructions for companies in financial difficulties which can be approved by its creditors. As the House of Commons library briefing paper explains this pandemic-era measure was introduced to assist companies which struggled financially:
“A new restructuring plan to help viable companies struggling with debt obligations. Courts can sanction a restructuring plan (that binds creditors) if it is “fair and equitable”. Creditors vote on the plan, but the court can impose it on dissenting creditors (known as “cross-class cram down”)”
The requirement is that 75% majority in value of each voting class must approve the RP. Therefore, there is no need for a simple majority for creditors in favour, it is derived entirely by value.
Part 26A introduced a new concept under s.901G of the Act will be relevant here namely a “cross-class cram down” provision that allows the High Court to sanction the plan as binding even if a dissenting group in a class of creditors or members results in the plan not being agreed by 75% in value of that class. Thus, obstructive creditors cannot hold the process to ransom if they will no worse off under the plan and where the class(es) that did approve the plan have a “genuine economic interest” in the Company even if the plan did not proceed. The cram down provision for a dissenting class has been considered at length and approved in Virgin Active Holdings Ltd. In that matter the cram down provision was approved despite there being a substantial number of classes of creditors that voted overwhelming against the proposal.
Here Richard Smith J held that there was no need in the context of a restructuring plan for the concept of arrangement to require consideration to be provided to out of the money creditors. Those creditors have been deemed by Parliament if no worse off under the relevant alternative than under the RP that the compromised position would also mean they receive no money under the plan.
The particular importance of this judgment was the cramming down of HMRC. Following judgments in The Great Annual Savings Company (also known GAS) and Nasmyth Group Limited, there appeared to be an increased ephasis on public interest in the court’s decisions and particular weight given to HMRC’s opposition to such restructuring plans. The court now appears to be saying (if satisfied the plan is fair) it will not allow any such public interest arguments to prevent or impede its discretion.
If you have any questions about restructing plans or would like assistance with any insolvency matter from Marcus Croskell or another member of our team of barristers, please contact the clerks on 01473214481 or use the contact form here.
 Company no. 13150097
  EWHC 1246 (Ch)< Back to Articles