Insolvent Security

Although this is not an offshore case, it is an interesting and recent decision out of the Chancery Division of the High Court in London where the Court ordered security for costs in the sanctioning of a restructuring plan under part 26A of the Companies Act 2006.

Background

An NHS trust requested that the respondent company provide security for costs in a legal case regarding the sanctioning of a restructuring plan under the Companies Act 2006, Part 26A. The trust and the company had previously entered into a 34-year Private Finance Initiative project agreement in 2007, where the company developed a hospital, spending over £100 million financed through debt. The trust was to pay ongoing service charges to the company, with a “compensation on termination” (COT) payment stipulated in case of early termination, based on the value of the company’s remaining rights and obligations.

The company proposed the restructuring plan while in a dispute with the trust over its performance obligations. The trust opposed the plan, and both parties agreed that if the plan was not sanctioned, the company would enter administration, leading to a 48-month re-tendering process for the services. If the plan was sanctioned, the trust intended to terminate the agreement, resulting in a 24-month re-tendering process. The trust sought security for costs amounting to £926,000, representing 70% of its estimated legal costs.

Findings

The application was granted in part.

In considering security for costs in Part 26A proceedings, the court acknowledged differences between these proceedings and ordinary litigation, as highlighted in previous cases like Virgin Active Holdings Ltd and Smile Telecoms Holdings Ltd. While a company proposing a Part 26A plan is necessarily in financial distress, the court emphasised that this does not create a presumption that the plan will be sanctioned. Instead, the court must exercise discretion based on the specific circumstances. The court rejected the idea that a different approach to costs should apply in Part 26A cases compared to ordinary litigation. The dispute over the plan was seen as similar to typical adversarial litigation, with the investment funds backing the company likely expecting a substantial benefit if the plan were approved, potentially at the trust’s expense.

The court evaluated the possibility that requiring security for costs might stifle the restructuring plan. It found that the investment funds backing the company had sufficient assets and liquidity to provide security, as they had already financed the plan’s associated costs. However, the court acknowledged that these funds would assess the situation based on a “risk versus reward” calculation. There could be a point at which the funds might choose to stop further contributions, potentially jeopardising the plan. Therefore, the court did not assume the funds would necessarily provide the full security amount requested.

The company argued that the compensation on termination (“COT”) payment from the trust would exceed any costs the company might owe the trust, allowing the trust to use its set-off rights under the project agreement to cover these costs. The trust had a good chance of receiving a costs award whether or not the plan was sanctioned. However, if the plan were sanctioned, the trust faced a real risk of not being able fully to offset its costs against the COT payment, potentially leading it to terminate the agreement. This could result in a shorter twenty-four month re-tendering period, potentially reducing the COT payment.

The court decided to exercise its discretion to require the company to provide some security for costs. While the company argued that the risk of the trust not being able to set off costs was low, the court focused on the risk that the company might not be able to pay the trust’s costs if ordered. The trust was entitled to security for its full costs but considering the potential costs award and the possibility of set-off, as well as concerns about stifling the plan, the court ordered the company to provide security for half of the £926,000 requested.

Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch)