Background
Waldorf CNS (I) Limited ("Waldorf") and its group of companies are engaged in the exploration and recovery of oil and gas on the UK Continental Shelf. By 2024, the business was in serious financial distress. The imposition of the Energy Profits Levy (the "EPL") had resulted in significant financial pressure on Waldorf with two companies in the same group, including the ultimate parent company, being placed into administration in June 2024.
A refinancing with bondholders and a time-to-pay agreement with His Majesty's Revenue & Customs ("HMRC") bought some breathing space, but following a failed sale process, discussions were held with secured creditors to achieve a financial restructuring that would compromise some of the Waldorf's debts in a manner that would make a sale possible. Eventually, an offer was received from a subsidiary of Harbour Energy plc ("Harbour Energy") to acquire the shares in certain group companies, subject to full and final settlement of all claims by third-party creditors. That offer was effectively the bedrock for a restructuring plan being presented for approval by the Court in both England and Scotland (known as "sanction"). The plan was presented for approval to the High Court in London and to the Court of Session in Edinburgh. The latter decided the question of sanction earlier this month in Waldorf CNS (I) Limited, Petitioner [2026] CSOH 57.
The Creditors
The debt position of Waldorf is complicated but the main creditors and what they were owed is as follows:
- WEF Bondholders - this group creditors were owed debts arising under a guarantee in respect of secured bonds issued by Waldorf Energy Finance plc. These are referred to throughout the proceedings as the WEF Bondholders. Put simply, they had lent money to the group through a bond structure and held security over company assets.
- Super Senior Bondholders - a further group of creditors held debts arising under two separate super senior bond issues totalling approximately USD 68.7 million. These creditors ranked above the WEF Bondholders in priority and also held security.
- HMRC (Energy Profits Levy) - the third principal category of debt was owed to HMRC under the Energy Profits Levy payable in terms of the Energy (Oil and Gas) Profits Levy Act 2022, with aggregate liability estimated to exceed USD 85.25 million. Unlike the bondholders, HMRC where an "involuntary" creditor as the tax liability arose automatically by operation of law. Importantly, those liabilities did not fall within the category of preferential debts in a winding up.
The Legal Framework: The Restructuring Plan
A restructuring plan under Part 26A of the Companies Act 2006 (the "2006 Act") is a useful tool that allows a financially distressed company to propose a compromise with its creditors and, in certain circumstances, to impose that compromise even on creditors who vote against it. This latter feature is known as "cross-class cram-down" and is what makes Part 26A significantly more flexible than older scheme-of-arrangement procedures.
The process works in two stages. First, meetings of each class of creditors are convened and members vote on whether to approve the plan. If a number representing 75% in value of the creditors or a class of creditors, present and voting, agree a compromise or arrangement, the Court may sanction the compromise or arrangement. Sanction is not automatic as the Court retains a discretion and will scrutinise the plan for overall fairness to all creditors and compliance with procedural requirements.
Where a class of creditors votes against the plan, the cross-class cram-down provisions in s 901G of the 2006 Act come into play. The provision applies where a class of creditors has not agreed the compromise or arrangement by the required 75% majority, but where two specified conditions are met, the fact that the class has dissented does not automatically prevent the Court from sanctioning the plan. Those two conditions are:
- Condition A: the Court must be satisfied that, if the plan were sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the "relevant alternative."
- Condition B: the plan must have been agreed by a number representing 75% in value of at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
The "relevant alternative" means whatever the court considers would be most likely to occur if the plan were not sanctioned. In practice, that will usually be some form of insolvency, and in this case, an insolvent liquidation.
HMRC's Objections
The plan was approved overwhelmingly by the WEF Bondholders (98.3% of votes cast) and unanimously by the Super Senior Bondholders. HMRC rejected the plan. HMRC then raised objections in both the English and Scottish sanction hearings. Two main arguments were advanced.
Can the Court cram down HMRC at all?
HMRC initially argued that section 901G did not confer power on a court to impose a plan on a dissenting tax authority. If correct, HMRC would effectively hold a veto over any restructuring plan that sought to compromise tax liabilities.
The High Court rejected this argument. In the sanction hearing before it, Michael Green J held that a court should not refuse to sanction a restructuring plan under Part 26A as a matter of principle because HMRC will be crammed down if the plan was sanctioned. The legislation was devoid of any intention to exclude HMRC from its scope. To make such an exclusion would be contrary to the "rescue culture" espoused by Part 26A. Michael Green J drew support from the fact that HMRC can be bound by Company Voluntary Arrangements and Individual Voluntary Arrangements and noted that sanction had previously been given to plans in which HMRC were subject to cram-down (by reference to Re Houst Limited and Re Prezzo Investco Limited).
While there was no automatic prohibition, given HMRC's unique position as an involuntary creditor, the Court should scrutinise the plan with care and should not cram down HMRC unless there were good reasons to do so.
Lord Lake, sitting in the Outer House of the Court of Session, accepted and adopted the approach taken by Michael Green J, confirming that debts owed to HMRC can competently be crammed down under Part 26A
How is the "no worse off" test to be applied?
HMRC's second argument was more nuanced. Even accepting that cram-down was possible in principle, HMRC argued that when assessing whether it was "no worse off" under the plan than in the relevant alternative, the Court should look not just at what HMRC would recover in respect of the EPL liability, but at the broader impact on the public purse. In particular, account should be taken of the significant tax losses that would be transferred and which would enable Habour Energy (the buyer) to offset these against its own tax liability. Harbour Energy's own annual accounts referred to the proposed purchase "adding c.$900 million in value through UK tax losses," meaning the Exchequer could lose substantial future tax revenue even if HMRC recovered more on the EPL debt itself.
Michael Green J rejected this wider approach. He followed the English Court of Appeal's decision in Saipem SPA v Petrofac Limited, in which the Court held that the starting point for applying the "no worse off" test is a comparison between the value of the existing rights which a creditor has against the company in an insolvency, and the value of the new or modified rights given under the restructuring plan. The Court was of the view that HMRC would receive more under the plan than it would recover in an insolvent liquidation. Condition A was therefore satisfied.
Fairness and Discretion
Even after satisfying the statutory conditions, the Court retains a discretion and must be satisfied that the plan is fair overall. While the English Court of Appeal in Saipem requires only a comparison of rights against the plan company when applying the "no worse off" test, its judgment noted that any broader prejudice a creditor might suffer as a result of the plan could be considered by the Court in the exercise of its discretion as to whether to grant sanction. The overall financial consequences for HMRC could therefore be taken into account at this stage.
HMRC argued that it was, in effect, contributing the whole of the EPL liabilities together with the assets constituted by the tax losses. Unlike the other creditors who had made a deliberate commercial decision to lend, HMRC was making a disproportionately high contribution to the plan and receiving a disproportionately low payment in return.
HMRC's position amounted to saying that Harbour Energy ought to have paid more for acquiring the company, but the Court held that the plan reflected the only deal available to realise value for creditors and was the best guide to assessing value. As HMRC would be better off under the plan than in the relevant alternative (even taking account of the tax losses) fairness did not require that HMRC should receive a greater share of the proceeds of sale or that EPL liabilities should not be extinguished. Further, the Court noted that HMRC has other instruments to tackle abusive tax avoidance in the appropriate circumstances.
Lord Lake considered it a significant factor that the deal reflected in the plan had been negotiated by parties over an extended period in recognition that it would have to be shown to be fair, and that it was the only deal on the table. He endorsed the approach employed by the High Court, and having overruled both objections for HMRC, granted sanction for the plan.
Conclusion
The Court has now confirmed that HMRC does not hold a special right to block a restructuring plan simply because it is an unwilling creditor. That status might attract particular judicial scrutiny, and the courts in both jurisdictions have made it clear that it will examine this position carefully. Weighing wider considerations such as the overall impact on tax revenues is a relevant consideration in this regard. However, while the tax authority's views on the matter will be afforded "the greatest respect and weight", they are not seen by the Court as imposing an automatic veto.
Once a company can demonstrate that the statutory conditions for cross-class cram-down are met and that the plan is genuinely fair in all the circumstances, the Court will not be easily dissuaded from sanctioning the plan. Nevertheless, practitioners advising companies in distress and those advising HMRC (and similar institutions) should focus on making sure that the wider considerations/collateral impact of the plan do not contradict the statutory test provided in Part 26A to the 2006 Act.
