Key takeaways
The High Court has for the first time awarded security for costs in respect of a challenge to a proposed English restructuring plan.1
This judgment may encourage dissenting creditors in contested restructuring plan proceedings to make their own applications for security for costs which could lead to potential delays and/or disruptions to the process. However, dissenting creditors should be aware that the exercise of discretion in this case was tied closely to the specific facts of the matter.
Background
Consort Healthcare (Tameside) PLC (Consort) had proposed a restructuring plan comprising three classes: (1) the Tameside and Glossop Integrated Care NHS Foundation Trust (the Trust) (who had entered into a contract with Consort to design, build and maintain new hospital facilities for the Trust); (2) the guarantor/insurer of Consort’s GBP93m secured bonds; and (3) a minority shareholder of Consort which held loan stock. The primary purposes of the restructuring plan would have been to amend the Trust contract to seek to settle outstanding claims thereunder, modify the obligations of that contract going forward, remove the Trust’s step-in rights with respect to the contract, and require the Trust to replace its own management consultants (who Consort alleged were the driving force behind a fractious relationship with the Trust) with new consultants funded by Consort.
The Trust challenged the proposed plan. In making its application for security for costs, it noted that (a) each of the other plan creditors (who were expected to support the plan) were having their costs funded by the sponsors of Consort, Infra Red Capital Partners (the Sponsors), and (b) security for costs was required to “level the playing field” as it would be inequitable for the Trust to be put at risk of being unable to recover its costs from Consort, who had noted that it expected to be cash flow insolvent absent the restructuring plan.
Meetings of the plan creditors were convened by the High Court on 20 May 2024 but the restructuring plan process has now been stayed following the making of the security for costs order, with Consort noting that it believes it will be unable to provide the required security.
The decision
Restructuring plans vs ordinary adversarial litigation
It was common ground that the court had the jurisdiction to grant the request for costs security. One of the possible gateways under the Civil Procedure Rules for the court to grant security for costs is that there is "reason to believe that [the company] will be unable to pay the defendant's costs if ordered to do so" (CPR 25.13(2)(c))) and Consort had stated that it was likely to be imminently cash flow insolvent. Consort however argued that restructuring plans should be seen as “fundamentally different” to ordinary commercial litigation, given that restructuring plans are premised on counterparties in financial difficulty seeking to resolve that distress.
Mr. Justice Richards acknowledged the differences between Part 26A restructuring plan proceedings and ordinary adversarial civil litigation but noted that in this specific case the differences were “relatively slender”. Consort's proposed plan arose out of a previous adversarial contractual dispute between Consort and the Trust, and it was “realistic” to view the restructuring plan as an attempt by the other two plan creditors to secure a more favourable outcome for themselves than an adjudication of the contractual dispute (which had already taken place) could give them.
Financial distress and security for costs
The judge also noted that, whilst he had found that Consort had encountered "financial difficulties" for the purposes of satisfying the requirements under Part 26A of the Companies Act 2006 for accessing a restructuring plan process, this did not mean that Consort was completely without financial resources, at least insofar as costs were concerned. For these purposes, it was necessary to look beyond Consort to its backers. Mr. Justice Richards noted that courts looked critically at what could be regarded as "self-serving assertions" that a company's backers or owners were unwilling or unable to provide the necessary funds. Instead, the court looks at the probable availability of such funds by reference to the company's underlying financial position and its relationship with its backers/owners.2 In the present case, the judge considered that the Sponsors could reasonably be expected to put up security for Consort's costs based on their available assets and liquidity, their previous funding of Consort to finance the restructuring plan process (in an amount of approximately GPB4.9m) and the other plan creditors, which suggested that the restructuring plan was in the sponsor's own commercial interests.
"Stifling" the restructuring plan
However, where a plan company is being funded by third parties, the judge acknowledged there would of course be a “tipping point” where the funders would prefer to risk losing what they have already contributed rather than run the risk of contributing further funding. The court therefore had to consider whether any order for security for costs had the potential to "stifle" the restructuring plan.
Quantum of security for costs
When considering the quantum of the security to be awarded and in the context of avoiding a disproportionate outcome, Mr. Justice Richards awarded security for costs in the amount of £463,280.13, being 50% of the amount originally requested by the Trust. In deciding on this figure, the judge observed that (a) if the restructuring plan was not sanctioned, the Trust had no material risk of non-payment of costs as it could exercise set-off rights under its contract with Consort; and (b) where the risk of non-payment did arise (e.g. where the restructuring plan was sanctioned), the Trust is unlikely to be awarded all of its costs in any event. As such, awarding 50% of the amount requested appropriately addressed the “balance of prejudice” in this case.
Notwithstanding the above reasoning, it should of course be noted that, given the stay of the proposed restructuring plan and the reasons Consort has given for that stay, it is possible that the Sponsors' "tipping point" was in fact reached as a result of the security for costs award granted in this case.
Footnotes
1. Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch)
2. Goldtrail Travel Ltd v Onur Air Taşimacilik AŞ [2017] UKSC 57
