Before the coronavirus pandemic, the Virgin Active group was in a strong financial position. But lockdown changed that and, in addition to owing substantial sums to secured and other creditors, the group now owes its landlords approximately £30m. Consequently, the group has had to come up with a restructuring plan.
The plan affects the leases of 45 properties and divides the landlords into five classes. One comprises landlords whose properties are critical to the group’s survival, who will emerge relatively unscathed, although their rents will be payable monthly, instead of quarterly. But the remaining landlords refused to support the plan. They complained that they had not been invited to the negotiating table and were being eaten for “lunch” because they were being required to bear a disproportionate part of the financial pain.
So the group sought approval for its proposals in Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch), pursuant to the cross-class cram-down power introduced by the Corporate Insolvency and Governance Act 2020, now to be found in section 901G of the Companies Act 2006. The provisions permit a restructuring plan to be imposed on a dissenting class of creditors, if two conditions are satisfied. The plan must have been approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the most likely alternative – which in this case was that the company would probably go into administration. And the court must be satisfied that none of the members of the dissenting classes of creditors will be any worse off than they would be in the event of the alternative – ie administration, followed by an accelerated sale of the business.
Sufficient numbers of secured creditors and class A landlords had approved the restructuring plan. But did the proposals pass the “no worse off” test? Class B landlords would receive full rent and service charges going forwards, although many of the properties were over-rented, and, if the company were to go into administration, assignees of the leases would probably negotiate reduced rents. The rents payable to class C landlords would be reduced by 50% for up to three years. However, class D and E landlords would not receive any payments under their leases (although the landlords would receive any rental and service charge payments made by subtenants). But class C-E landlords would all have break rights. And the payments to the landlords proposed in the plan were more than the landlords could be expected to recover in an administration – and would be paid more quickly. Consequently, the judge decided that the restructuring plan offered the landlords a better return than administration.
Should the court exercise its discretion to sanction the restructuring plan? The explanatory notes accompanying the legislation suggest that a restructuring plan must be “just and equitable”. But the judge noted that these words do not appear in section 901G and dismissed the landlords’ complaints about the favourable treatment of the shareholders. There was significant support for the restructuring plan among the creditors as a whole – and, given that the shareholders were providing the funding that would be used to pay the landlords under the plan, and that the landlords would be “out of the money” in the most likely alternative to that plan, the landlords’ complaints did not carry sufficient weight to prevent the court from sanctioning the plan: Re Deep Ocean 1 UK Ltd [2021] EWHC 138 (Ch).
Allyson Colby is a property law consultant
