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Lawbite: More Pain for Landlords as High Court Sanctions Virgin Active’s Restructuring plans

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

25-05-2021

Virgin Active Holdings Limited and Others, Re [2021] EWHC 1246 (Ch)

The High Court has sanctioned the restructuring plans of three Virgin Active Group companies (“the Plan Companies”) despite the majority of classes of creditors failing to vote in favour.

This is only the second time that a Part 26A Restructuring Plan has been sanctioned by the Court and the first time that a Restructuring Plan has adopted a structure similar to the now all too familiar “retail” CVA which has become commonplace.  Coming in amongst the New Look (see our LawBite on the case here) and Regis (see our LawBite on the case here) CVA challenge decisions, this case will worry many landlords as it offers an alternative way for tenants to restructure their lease liabilities.

Most significantly, a Restructuring Plan, or so called “cross-class cram down” can be imposed, or “crammed down” on descending classes of creditors who vote against the Plan.  Potentially more concerning for landlords was Snowden J’s clarification that classes of landlords need not be invited to vote on a Restructuring Plan at all where they are “out of money”, ie where none of the members of the class have a genuine economic interest in the company.

Background

The Virgin Active Group owed over £200 million to a number of Secured Creditors.  Its second most significant group of creditors was its Landlords, 46 in total, with a total of 67 leases and £30 million of unpaid rent.  There were also a number of other General Property Creditors, generally former landlords with AGAs or GAGAs.  The Virgin Active Group suffered a significant drop in income due to the pandemic and gave evidence that it would run out of money during the week commencing 10 May 2021 if the Restructuring Plan was not approved.

The Plan terms

Under the terms of the Plan, liability to Secure Creditors was not impacted at all, although the terms of the Plan Companies’ facility agreement were varied, including a significant relaxation of the  financial covenants. 

In a process that has become familiar in CVAs, the leases were divided into five classes (A-E) and received differing treatment under the Plan depending on a particular site’s profitability. 

Classes A and B were profitable sites, C were marginal and D and E were loss making.  Class A landlords would have their rent arrears paid in full, with the contractual rent remaining unchanged (but payable monthly). Class B landlords had all rent arrears written-off (as did Class C-E Landlords), and continued to receive the full contractual rent (monthly). Class C landlords were paid 50% of contractual rent, but Class D landlords and E landlords were paid no rent.  Class C to E Landlords, ie those that did not receive the full contractual rent, were given a landlord right to terminate each lease upon notice.

The Statutory Framework

The restructuring plan was introduced into Part 26A of the Companies Act 2006 in June 2020, by the Corporate Insolvency and Governance Act 2020.

In order to use this new process, the threshold conditions required to be met by the Plan Companies are that:

(a)  the company has encountered or is likely to encounter financial difficulties that are affecting or will affect its ability to carry on its business as a going concern (S.901A(2));

(b)  the compromise or arrangement is proposed between the company and its creditors or a class of them and the purpose of the compromise is to reduce, prevent or mitigate the financial difficulties (S.901A(3)).

The court was satisfied on the evidence that both conditions were satisfied by the Plan Companies.

Each class of creditors (the Secured Creditors, the five separate Landlord classes and the General Property Creditors) voted on the Restructuring Plans.  Only the Secured Creditors and the Class A Landlords, ie those that were essentially unaffected by the Plans, voted in favour.  None of the other classes voted in favour of the Plans by the required statutory majority of 75% by value. 

Accordingly, the Plan Companies asked the Court to exercise its discretion to sanction the Plans and “cram down” the dissenting creditors under section 901G of the Companies Act.

Section 901G allows a Restructuring Plan to be sanctioned where one or more classes of creditor do not vote in favour provided that the following conditions are satisfied:

1.    the Court is satisfied that none of the dissenting classes would be any worse off than they would be in the event of the relevant alternative (ie whatever the Court considers would be most likely to occur if the plan were not sanctioned – in this case a trading administration followed by an orderly sale of the business) (Condition A); and

2.    that the plan has been agreed by 75% in value of a class of creditors who would receive payment or have a genuine economic interest of the company (Condition B); and

3.    in all the circumstances, the Court is satisfied that it should exercise its discretion to sanction the restructuring plan.

The Outcome

There was no dispute that Condition B was satisfied.  The two issues in dispute were therefore whether the “no worse off” test (Condition A) was satisfied and also whether the Court should exercise its discretion to sanction the Plan.

Issue 1the relevant alternative. Mr Justice Snowden was clear that what he had been asked to determine was what was the “most likely” alternative to the Plan. This was essentially the same exercise that the Court would be asked to carry out when applying the “vertical comparator” test in an unfair prejudice challenge to a CVA. 

The Landlords raised a number of challenges on this issue, including that the likely outcomes for the Landlords in the relevant alternative was based on a valuation report which was not provided to them and which they alleged was “inherently unreliable”.  However the fact that the Landlords did not adduce their own valuation evidence to contradict that provided by the Plan Companies meant that this point could not be seriously advanced. 

The challenge pursued with most vigour was by Class B Landlords who it has been assumed would forego their rent arrears as part of an assignment on a sale by the administrators in the relevant alternative. The Class B Landlords argued that their negotiating leverage would allow them to hold out for payment of the arrears, meaning that they would be worse off under the Plans than in the relevant alternative.  Mr Justice Snowden accepted on the facts that was not impossible, but concluded it was not what was “most likely” to happen, ultimately concluding that each dissenting class of Plan Creditor would be no worse off under the Restructuring Plan.

Issue 2 – the Court’s general discretion.  There is little guidance in statute on what factors are relevant when the Court exercises its discretion in sanctioning a Restructuring Plan - the Court has a very wide power.  It can override the wishes of a class meeting even if 100% of creditors in that class vote against a plan, but equally it can refuse to sanction a plan on the basis that it is not just and equitable to do so even where the conditions are met. On the facts, the Court exercised its discretion to sanction the Plans.

In what may provide some limited comfort to landlords, Snowden J did seek to temper comments in DeepOcean, by confirming that “one should be careful not to read too much into the comments in DeepOcean that a plan company that satisfies conditions A and B in section 901G will have a fair wind behind it”, making clear that the satisfaction of conditions A and B would not of themselves be sufficient in all cases.

Key points

  • Out of money Creditors - Perhaps of most concern to landlords will be the analysis of section 901C(4).  Having reached the conclusion that the relevant alternative was an administration, in which unsecured creditors would be “out of the money” (save for the prescribed part) Snowden J reiterated that the Court may order that a company is entitled not to invite a class of creditors to a meeting if none of them have a genuine economic interest in the plan company.  The Plan Companies could have chosen therefore to exclude the dissenting Landlord classes from the process entirely, although presumably they chose not to do so to avoid a dispute at the convening meeting stage.
  • Will the Restructuring Plan replace the CVA? Only time will tell, but it seems likely that the two processes will be used as alternative and/or complimentary restructuring options.

The ability to “cram down” dissenting creditor classes with a Part 26A Restructuring Plan means that they are more likely to be utilised in circumstances where the total value of the landlord creditor votes would exceed 75%, making it unlikely that a CVA would be approved.  Equally, a CVA is generally quicker to implement and more cost effective, given that it does not need to be sanctioned by the Court in the same way and will likely continue to be the restructuring tool of choice for smaller companies looking to restructure their leasehold liabilities.