When considering a restructuring plan which involves the cross-class cramdown provisions in section 901G of the Companies Act 2006, the court must be satisfied that none of the members of the dissenting class would be any worse off than under the relevant alternative.
In In the Matter of Fitness First Clubs Ltd [2023] EWHC 1699 (Ch), the High Court has approved a restructuring plan which required landlords to accept reduced rent or no rent at all for a three-year period.
Five of the nine classes of creditors did not vote in favour of the plan to the required 75% majority in value. They were landlords of premises used by the company for its business of operating gyms under the name “Fitness First” and included Lazari Properties and the Crown Estate.
The company had 36 open gyms, mainly in London. It had encountered significant financial difficulties recently, largely owing to the Covid-19 pandemic and associated lockdowns, followed by changes in consumer habits which meant that membership numbers had not returned to pre-pandemic levels. Funding from its major shareholder, the only secured creditor, enabled it to keep afloat, but such funding would only continue if the plan was sanctioned by 30 June 2023.
The plan restructured the company’s liabilities, principally by reducing the rent payable on its leases. The secured creditor and HMRC were the only “in the money” creditors in the event of an insolvency. The landlords were “out of the money” in such circumstances. The company argued that the landlords would be better off under the plan than under the relevant alternative, which was administration and an accelerated M&A process. Lazari argued that the company would continue to trade.
Under the plan the leases were divided into six classes – A, B1-3, C and D – and accorded differential treatment depending on their profitability and importance to the business, as approved in Virgin Active [2021] EWHC 814 (Ch). The company’s parent company was excluded from the plan, and guarantees provided by it to the landlords would also be varied to reflect the plan provisions.
The conditions for an order under section 901G were satisfied: the secured creditor and HMRC had a genuine economic interest in the company in the event of the relevant alternative to the plan – which was as the company contended – and the landlords would not be any worse off than under the relevant alternative. All of the landlords were “out of the money” and so their views carried little weight. The court exercised its discretion to approve the plan.
Louise Clark is a property law consultant and mediator
