Beyond the Ringfence: Restructuring Plans, Tax Losses and the Limits of HMRC’s Challenge

In a key test case on the relevance of tax losses (and more broadly, HMRC) under Part 26A of the Companies Act 2006, Mr Justice Michael Green in the High Court has sanctioned the second restructuring plan (RP2) of Waldorf Production UK Plc (the Plan Company), overriding HMRC’s challenge by using the cross-class cram down power in s.901G. The judgment resolves, at least at first instance, a series of live questions about the limits of HMRC’s ability to challenge restructuring plans and the proper scope of the “no worse off” test.

In Scotland, the parallel restructuring plan in respect of Waldorf CNS (I) Ltd was sanctioned on the same day. Notably, HMRC did not persist with its opposition north of the border once the English judgment was handed down — a pragmatic recognition of the force of Michael Green J’s reasoning, and an indication that the two proceedings were always effectively interdependent.

This note identifies the key implications for practitioners. You can access the judgment here.

Background

RP2 followed the refusal by Hildyard J to sanction Waldorf’s first restructuring plan (RP1) in August 2025 ([2025] EWHC 2181 (Ch)), which failed principally because the Plan Company had failed to engage meaningfully with its unsecured creditors (HMRC and Capricorn Energy (the M&A Creditor)) in formulating that plan. Learning from that, the Plan Company conducted extensive negotiations, including a two-day mediation in October 2025, before promoting RP2.

The key factual difference from RP1 was that RP1 was concerned with putting the Waldorf group (the Group) on a stable platform to pursue a potential future solvent sale, whereas in RP2 there existed a buyer and a signed (albeit conditional) SPA: Harbour Energy plc’s subsidiary (Harbour) agreed to purchase eight Group companies for $205 million less leakage (c. $170 million net), conditional on RP2 extinguishing the Group’s EPL liabilities (which arise from the Energy Profits levy). Harbour publicly identified the Group’s c. $4.6 billion of ring-fence tax losses (valued by Harbour at c. $900 million of tax shielding) as part of the reason why it was purchasing the Group. HMRC remained the only creditor to oppose RP2; all other plan creditors supported it, including the M&A Creditor.

HMRC’s Objections and the Court’s Findings

1. Jurisdiction to Cram Down HMRC

For the first time, HMRC advanced the argument that its constitutional mandate to collect taxes meant the court could not override HMRC’s rational dissent. The judge firmly rejected this. The court held that there is no jurisdictional bar to exercising the cram down power against HMRC, even where HMRC has rationally decided to oppose a plan. To hold otherwise would give HMRC an effective veto over Part 26A restructurings, which cannot have been Parliament’s intent (HMRC is not expressly excluded from the remit of Part 26A) and would fundamentally undermine the rescue culture of the legislation. The Crown is bound by Part 26A by necessary implication: It would make no sense for HMRC, a creditor of most companies in financial difficulty, to be excluded.

The judge, however, did endorse the approach of Leech J in Re Nasmyth Group Limited ([2023] EWHC 988 (Ch)) that the court should scrutinise plans carefully before cramming down HMRC, given its unique status as an involuntary creditor, and grant HMRC’s views “considerable weight” in the discretion exercise.

This is the third occasion in which HMRC has been subjected to a cross-class cram down under Part 26A, following Re Houst (EWHC 1941 [2022]) and Prezzo ([2023] EWHC 1679 (Ch)). Interestingly, HMRC raised no equivalent jurisdictional objection in either of those cases. The contrast with cases such as Re Nasmyth and Re Great Annual Savings, where HMRC’s opposition proved decisive, underlines that the jurisdictional ruling does not open the floodgates: The outcome in each case will remain acutely sensitive to the quality of the plan, the engagement process and the factual no worse off analysis.

2. The ‘No Worse Off’ Test (s.901G(3))

HMRC’s most technically significant objection was that the no worse off test required the court to take into account the wider loss to the Exchequer from Harbour’s future use of the Group’s tax losses to shield its profits, a potential $924 million tax benefit for Harbour.

Legal Issue: The judge, applying Petrofac ([2025] EWCA Civ 821), held that the no worse off test is confined to the financial value of the creditor’s existing rights being compromised by the plan (and associated rights, such as third-party guarantees, also being compromised). The future tax relief Harbour may obtain from the acquired tax losses and the loss of the tax take to HMRC is not a right of HMRC being compromised by RP2. It falls outside the statutory test and is relevant only to discretion.

Factual Issue: Even setting the legal point aside, the judge found as a matter of fact that the Exchequer would not be worse off under RP2. This was the critical battleground in the hearing. HMRC’s expert (Mr Drewe of Forvis Mazars) had estimated a net loss to the Exchequer of $17.9 million under RP2 but only on the assumption of 100% utilisation of both:

• Existing ring-fence tax losses; and
• Forecast decommissioning losses.

The Plan Company’s expert (Mr Leith) gave unchallenged evidence, accepted in cross-examination by HMRC’s own witness, that 100% utilisation of both buckets simultaneously is not achievable, for technical tax reasons relating to how losses must first be set against total income, the displacement of investment allowances and the practical challenges of reorganising assets to align them with loss-holding companies. On all realistic scenarios bar one extreme outlier, the court found that the Exchequer is better off under RP2 than in the relevant alternative (formal insolvency, where HMRC receives near-nothing on EPL liabilities and the Exchequer bears 50% of decommissioning costs via Decommissioning Relief Deeds).

3. Abuse of Process

HMRC argued that the plan was an abuse of process because Harbour, a highly profitable FTSE 250 company that could afford to pay the EPL liabilities, was using Part 26A to extinguish an unwanted tax bill while acquiring $900 million of tax losses.

The judge rejected this. Seeking to compromise a tax liability through a restructuring plan cannot in itself constitute an abuse. The plan was the only means by which creditors could realise value from the group, there being no other viable alternative offers to Harbour’s. The fact that the SPA was conditional on extinguishment of the EPL liabilities reflected Harbour’s commercial terms, not abuse. HMRC also retains separate tools to challenge any abusive use of the tax losses (including the “major change in the nature or conduct of trade” rules in Part 14 of the Corporation Tax Act 2010, targeted anti-avoidance rules and the general anti-abuse rule).

4. Fairness and the Court’s Discretion

This was, in the judge’s view, the real heart of the case. He considered that the tax losses were properly regarded as a “benefit preserved or generated by the restructuring” (per Thames Water ([2025] EWCA Civ 475)) and that it would be “unrealistic and unfair” to ignore their impact on HMRC in the fairness analysis. He declined Mr Bayfield KC’s argument that the tax losses were simply a corporate asset irrelevant to HMRC’s contribution.

However, given his factual finding that HMRC and the Exchequer are better off overall under RP2, the judge found no basis to depart from the commercial deal reached. HMRC was treated equally with the M&A Creditor (both receiving 14% of the respective liabilities that were bring compromised under RP2). No compelling reason existed for HMRC to be treated differently, particularly given that Parliament has not granted HMRC preferential status under Part 26A and HMRC has previously accepted reduced recoveries in other plans and CVAs.

One of HMRC’s key objections was not that the division of consideration to be received from Harbour was unfair as between creditors, but rather that there was scope to extract a better deal from Harbour. HMRC argued that due to its ongoing relationship with the Group and Harbour should RP2 be sanctioned, the EPL liabilities should remain extant and become payable as Harbour utilised the tax losses. This was rejected. The judge held it would be wrong for the court to impose such a fundamental change to the commercially negotiated plan, which would effectively overturn the basis of Harbour’s offer and risk losing the deal entirely. The judge also criticised HMRC’s refusal to attend the October 2025 mediation, finding this “unhelpful” given HMRC’s own complaints in RP1 about inadequate engagement.

5. Past Conduct of the Plan Company

The judge, like Hildyard J before him, was critical of the $76 million dividend that Waldorf paid in October 2022, four months after EPL was introduced, and the Plan Company’s deliberate decision not to pay its EPL liabilities while continuing to trade.

However, he held that these matters did not affect the fairness of RP2 as between the current plan creditors, who bore no responsibility for the past conduct. Potential claims arising from the October 2022 dividend were being assigned to the administrators to pursue for the benefit of plan creditors.

Key Legal Principles

• HMRC Can Be Crammed Down: No jurisdictional bar exists. HMRC’s constitutional mandate and rational objection go to the weight of its views in the discretion exercise, not to jurisdiction.
• “No Worse Off” Test Is Narrow: The test is confined to the financial value of rights being compromised by the plan (and associated compromised third-party rights). Wider Exchequer impacts, including future tax shielding by a purchaser using acquired tax losses, fall outside the test and are relevant only to discretion.
• Tax Losses Can Be “Restructuring Benefits” for Discretion Purposes: The judge declined to treat the tax losses as wholly irrelevant to the fairness analysis. Where tax losses are a major driver of the deal and will have an obvious effect on HMRC, they fall within the benefits preserved or generated by the restructuring.
• The Factual Analysis Matters: Even where the legal argument on the no worse off test would have excluded the tax losses, the court undertook a detailed factual analysis of actual utilisation rates. Practitioners should expect forensic scrutiny of tax loss utilisation assumptions.
• Genuine Engagement Is Required: Per Petrofac, a plan must be the product of genuine engagement with dissenting creditors. HMRC’s own refusal to engage (in mediation) undermined its fairness complaint. Whilst mediation is now strongly encouraged by the courts, practitioners should nonetheless approach the mediation endorsement with eyes open to its practical limitations in a public-body context. HMRC’s stated reasons for non-attendance — the rigidity of its internal authorisation processes, resource constraints and the precedent risk of routinely attending commercial mediations — are genuine institutional characteristics, even if the court found them unpersuasive in the specific circumstances of this case. Going forward, plans engaging HMRC should consider whether early, structured pre-mediation engagement (potentially through written proposals and sequenced responses rather than live negotiation) might achieve the substantive benefit of mediation while accommodating HMRC’s institutional constraints.
• No Floodgates: The judge expressly rejected a floodgates argument. Each case will require the plan to satisfy jurisdictional requirements and demonstrate fairness, with the court applying heightened scrutiny where HMRC is the dissenting creditor.

Implications for Practitioners

• Tax Losses in Distressed M&A: The judgment confirms that Part 26A can be used to structure a sale that preserves tax losses and extinguishes existing tax liabilities, provided the plan is fair, the no worse off test is met and genuine engagement has occurred. Purchasers seeking to access tax losses should factor in both the legal and factual no worse off analysis at an early stage.
• HMRC as Creditor: HMRC’s novel jurisdictional argument has been rejected. It remains, however, a creditor entitled to “considerable weight” in the discretion exercise. Plan companies should engage HMRC early and genuinely, including through mediation where appropriate.
• Scope of “No Worse Off” Post-Petrofac: The test focuses on compromised rights. Consequential impacts on a creditor (e.g., lost future tax revenue, lost competitive advantage) fall outside the test and go only to discretion.
• Terminal vs. Rescue Plans: The judge noted, without fully resolving, the distinction between terminal and rescue plans flagged in Thames and Petrofac. In a rescue plan where HMRC retains an ongoing relationship with the reorganised business, its position in the fairness analysis may differ from a pure wind-down scenario.
• Expert Evidence on Tax: The case demonstrates the critical importance of detailed expert evidence on tax loss utilisation rates. HMRC’s own witness accepting in cross-examination that 100% utilisation was not achievable was decisive.
• Cross-Border Cases Where the Governing Law of Compromised Instruments Differs From the Plan Jurisdiction: The case also illustrates a recurring feature of cross-border restructuring plans — the plan compromised bonds governed by Norwegian law, and the court accepted evidence that those bonds would be released as a matter of Norwegian law upon English sanction. Practitioners should continue to adduce clear expert evidence on the effect of plan sanction under all relevant governing laws, particularly where a dissenting creditor might otherwise seek to argue that foreign law instruments survive.

What Remains Unsettled

Following Hildyard J’s refusal of RP1, Waldorf obtained permission for a leapfrog appeal directly to the Supreme Court, bypassing the Court of Appeal, but ultimately withdrew it once the Harbour offer crystallised. The absence of a Court of Appeal ruling on RP1 means that several of the questions left open by Michael Green J may reach the appellate courts through a different route, whether via a prospective HMRC appeal of RP2 or through future contested plans.

The judge expressly declined to resolve certain questions left open after RP2:

• What the court would have done had it found HMRC/the Exchequer to be worse off overall, i.e., how an HMRC “contribution” via tax losses could properly be reflected in plan terms.
• The precise boundary between “terminal” and “rescue” plans and whether different fairness standards apply.
• Whether, and in what circumstances, the court could or should impose modified plan terms (e.g., a contingent payment mechanism) as the price of sanction. The judge doubted this was permissible for a fundamental change going beyond what was negotiated.

These questions are likely to arise in future plans and, given the significance of this judgment, an appeal by HMRC cannot be ruled out.

Given the constitutional significance of the jurisdictional ruling, and the fact that the leapfrog route to the Supreme Court has already been navigated once in this litigation, it is plausible that any HMRC appeal would bypass the Court of Appeal entirely. Practitioners should treat the present judgment as the definitive first-instance statement of the law, but plan accordingly for the possibility of a Supreme Court ruling that revisits, qualifies or endorses Michael Green J’s analysis.