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Will Macadam

9Questions is our Q&A series featuring key decision-makers in leveraged finance and distressed debt — get in touch if you know who we should be talking to!

For the latest installment of 9questions, 9fin spoke to Tom Smith KC, the Head of Chambers for South Square, a commercial law chambers in London.

Smith talked to 9fin about the emerging trend of cross-class disputes in English restructurings, how to successfully compromise tax liabilities under Part 26A and what life is like behind the bench as a part-time High Court judge.

1. “Creditor-on-creditor violence” is a hot topic in the US, with fears it could be exported to Europe. How have creditor disputes shaped some of your recent cases?

Creditor-on-creditor disputes have always been part of the restructuring litigation landscape in the UK and Europe, usually turning on the question of where the value breaks in the company or group of companies.

The real development, for the UK and other jurisdictions that use the UK as a restructuring place, has been the restructuring plan jurisdiction and cross-class cram down, which now means that you may have creditor disputes in the same class.

Adler is a great example: you’ve got a situation where a bunch of creditors are all pari passu, who may regard themselves as being part of the same class or at least being in the same boat economically. But one part of that group was able to impose a deal — in-which creditors in the same class are treated differently — on the other part.

That is a new development, which gives rise to this idea that you may now have creditor-on-creditor disputes between people of the same ranking in the capital structure. Depending on what happens to Adler in the Court of Appeal, that’s something that may well continue.

2. You acted for Adler’s 2029 Bondholder group, opposing the company's restructuring plan. What are your key lessons from the case thus far?

The key takeaway for me is that the law and jurisprudence in relation to cross-class cram down is still very much developing and is not yet fully formulated. That’s not surprising given this is a new mechanic introduced into English law in 2020 and the way in which it was introduced was essentially to give the courts this new discretionary power but without much guidance in the legislation. The application of cross-class cram down has therefore been left to the courts to work it out as they go along. It’s inevitable that we’re going to need quite a number of cases before we get to the stage where we can say with sufficient certainty what the principles are.

The Virgin Active case was very helpful and clear in explaining how out-of-the-money creditors are to be dealt with: the position there is that the in-the-money are entitled to determine the allocation of value and out-of-the-money creditors don’t have any entitlement. However, this is still a very much a live issue as to the principles governing the allocation of value between in-the-money creditors.

At present, there is a bit of a divergence in the authorities as to the how the court should go about exercising cross-class cram down. Does it have to ask whether the particular plan in-question is the most appropriate plan or whether it’s the fairest plan? Or, does it look at the questions more narrowly than that and simply ask itself whether the plan is one which a reasonable creditor might approve?

It seems to me the Court has to take the wider approach and needs to look at the matter more holistically, when you’re looking at divisions of value between in-the-money creditors. But that point still needs to be resolved, which may require the Court of Appeal.

3. You also acted for Prezzo as it crammed down HMRC via a Part 26A plan. What’s your take on HMRC’s recent court appearances and rumours of its push for an exemption from Part 26A cram down?

The three cases (GAS, Nasmyth and Prezzo) provide a very interesting illustration of how it is possible to deal with His Majesty’s Revenue and Customs but also what the courts won’t allow.

HMRC has a duty itself to maximise the tax revenue, so it's not surprising that it has started to engage with restructuring plans. With the benefit of hindsight, it may think it should have engaged in the Houst plan. It doesn’t have a legal veto right and, as a matter of practice and discretion, it won’t be treated by the courts as having a veto right either.

Restructuring plans cramming down HMRC stand and fall on how they treat the tax authority: have they treated it fairly? Has the restructuring process been open and transparent?

The Prezzo case demonstrates how it is possible to cram down HMRC. The key takeaway there being to recognise the preferential status of HMRC's debt; as a preferential creditor, it will have an entitlement to receive some of the restructuring surplus and therefore some of the upside of the plan.

In my mind that would have to be the template going forward.

Whether HMRC is able to persuade the Government or Parliament to give it either an exemption or veto in relation to restructuring plans? We’ll have to wait and see. There isn’t any basis for that and, if HMRC were given a veto, that would very much devalue restructuring plans — particularly for smaller companies.

HMRC is often an important creditor but ultimately it is just one creditor and provided it's treated in a way that’s fair, there isn’t any reason it shouldn’t be crammed down. So long as it’s in the interest of creditors as a whole.

I would hope that we don’t see that sort of veto right or exemption introduced into Part 26A.

4. Thinking about the recent Insolvency Service announcement regarding two model laws, the “Article X” and the Enterprise Group law, what are your thoughts on its decision to adopt the latter?

I didn’t regard it as particularly surprising. On the Enterprise Group law, one can understand why that might be thought of as a useful addition. There is a practical question about how much it will be used in practice but there is no downside to incorporating it within UK legislation.

I think the Article X point is much more difficult as that obviously relates to the question of the Gibbs rule: whether that should be removed? And, if it’s going to be removed, what do you replace it with—something akin to a Chapter 15-style process?

The two questions, which I think are still unresolved, are reflected in the fact that the Insolvency Service has pressed the pause button.

For my part, I think it’s something that would benefit from a lot more thought and consideration.

5. What do you make of the larger conversation around the rule in Gibbs and “Article X”?

The Gibbs rule gets a bit of a bad press, somewhat unfairly in my view. What’s important about the Gibbs rule as it applies to restructurings is that it reflects a view that a restructuring is akin to a contractual process and therefore what matters most are the contractual terms and governing law of the particular debt.

While the Gibbs rule says you can only restructure English-law debt through an English law process, the converse of that is English law will recognise and give effect to a foreign law process in respect to foreign-law debt. So, it’s a two-way street and effectively it reflects a view that what matters is the contractual law of the debt rather than the location of the debtor, its COMI and so forth.

I think that is a perfectly legitimate and sensible view where you are dealing with finance structures. It is not right to say it reflects a parochial view because, although one is saying only English law can vary English-law debt, you’re also saying one will recognise foreign-law processes as varying and compromising foreign-law debt.  So for example English law would always recognise a Chapter 11 process restructuring NY law debt.

So I think there is a question about whether it’s right to jettison the Gibbs rule at all and I’m of the mind that debate hasn’t yet been settled. I think there is a powerful case for retaining the Gibbs rule.

The other question is, if one was going to get rid of it, what exactly would one be replacing it with? I think the worst of both worlds would be replacing it with something which is then very open-ended and uncertain about what exactly the position on recognising foreign court decisions is.

6. Do you think the Netherland’s WHOA or Germany’s StaRUG could threaten London’s position as Europe’s restructuring hub?

They could pose a challenge and they do represent alternatives. Perhaps the WHOA is a bit more developed than the StaRUG. Against that, London does retain a large number of advantages when you’re looking at where it’s most beneficial to carry out a restructuring.

There was concern post-Brexit about issues of recognition, enforceability abroad in relation to Schemes and Restructuring Plans. I think it’s fair to say virtually all those fears proved to be unfounded — or there have been workarounds.

We’ve obviously got, as a counterpoint to WHOA and StaRUG, a Part 26A Plan here. Although there are differences, put broadly it offers the same mechanics and there’s quite a lot of case law now developing how Part 26A works.

Fundamentally, London remains a very pragmatic and flexible restructuring jurisdiction with an experienced advisory community and judiciary.

7. Which other cases before the UK courts have you been following this year and what have you gleaned from them?

Although strictly from the very end of 2022 rather than 2023, I would say the Supreme Court decision in BTI versus Sequana dealing with the duties of directors of companies towards creditors where a company is insolvent, or of doubtful solvency.

The Supreme Court decision did not represent a fundamental change in the law or a departure from the existing understanding, but it did confirm that the duties to have regard for the interests of creditors does exist, and clarified the circumstances in which that duty will arise.

This decision will be heavily influential going forwards in guiding the approach taken by directors of debtor companies faced with distress and insolvency, including the critical requirement to have regard for the interests of creditors.

8. At the start of this year you were appointed as a Deputy High Court Judge. What’s life like behind the bench and could you see yourself making the move full-time?

As Deputy High Court Judge, I sit part-time for a number of weeks a year. It certainly gives you a different perspective.

It's obviously a different role deciding cases rather than arguing them. It’s very stimulating. It also gives an opportunity to look at and deal with a wide range of work. I’m not just working on insolvency or even financial cases, the type of work involves anything in the Chancery Division.

So I get to look at a much broader range of work than I would typically deal with as part of my practice as a barrister. I also think it’s helpful for the day job as an advocate to see what works and doesn’t work from the other side of the court.

I think, in terms of the future, I could potentially make the move full-time. But not in the near-future, I’m still going to be at South Square for a few years yet!

9. Lastly, we’re in the doldrums of August and most of the square mile is on holiday. What's your favourite summer getaway in the UK, or abroad?

My favourite is Greece — which is where I’ve just been this year. It was absolutely fantastic, if a little hot. It seemed like most of London was there at the same time but, notwithstanding that, it’s my favourite destination.

Failing that it would be Sydney, where my wife is from. But that’s more of a winter destination than a summer destination.

9Questions — Tom Smith KC, South Square — Adler, Prezzo and Greece

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