The English law restructuring tool, the Part 26A Restructuring Plan, is being used for the first time to restructure the financial indebtedness of an SME. Houst, a U.K-based hosting and management platform for Airbnb and other sites, is restructuring liabilities of £5.2 million using the tool.
The English High Court, this week, issued an order convening the meeting of six classes for the group’s restructuring plan, following submissions from Marcus Haywood of South Square Chambers on behalf of the company. The company is advised by Irwin Mitchell as legal advisor and Begbies Traynor is the plan administrator.
“I believe this is the first true use of an RP for an SME business which, in my opinion, was always going to require a mid-market law firm and a mid-market insolvency practitioner firm to assist, particularly due to pricing and the financial constraints a business of this size might have,” Kunal Gadhvi, partner at Irwin Mitchell, told Reorg. “This is a case of a viable company with a good underlying business, whose trading was very much affected by the Covid-19 pandemic, using the tool to restructure and continue trading”.
Should Houst be successful in having its plan sanctioned, the restructuring industry could see a significant increase in the use of the tool in the middle market, where costs have been a significant barrier to date. Reorg has typically seen the tool used to restructure large capital structures, such as that of
Virgin Active, where the debt compromised exceeded £100 million and advisor fees also exceeded £1 million.
Traditional pinch points for restructuring plans, where costs can accrue rapidly, include:
- Preparing detailed explanatory statements and practice statement letters;
- Contacting misaligned and disjointed creditor classes; and
- Defending challenges from dissenting creditors, particularly when launched in court.
The plan meetings for the company are scheduled for Monday, June 20. The sanction hearing is due on July 15.
Background
The group explained that it was cash flow insolvent, caused by the impact of the Covid-19 pandemic on the travel and hospitality industry. Revenue felt to about £5.5 million in 2020 from £12 million in 2019.
The group was unable to service its current loan obligations to its bank. Further, three of its creditor classes (including HMRC, a previous landlord and a former call center provider), had presented statutory demands and were threatening to issue winding-up petitions.
The plan’s objective is to provide a capital injection to return the group to solvency and allow it to continue to trade. This includes a minimum £500,000 cash injection from shareholders immediately, followed by a further £250,000 to be paid over three years. The company, previously known as Airsorted, is backed largely by venture capital and institutional investors.
The group’s plan creditors were:
- The bank, as secured creditor;
- HMRC, as secondary preferential creditor;
- Trade creditors;
- Convertible loan holders; and
- A connected company creditor (who would receive nothing).
The only alternative to the scheme, as considered by the group’s directors, was a pre-pack administration, which would return less value to creditors. Justice Adam Johnson took a degree of pragmatism in addressing the issue of class composition, allowing ordinary and preferential shareholders to vote together.
The company does not appear to have used a lock-up agreement structure prior to plan meetings, and at this stage it is unclear if the cross-class cramdown power in the tool will be used to bind dissenting creditor classes.
--Shan Qureshi, Connor Lovell