Company – Reorganisation – Sanction – Defendant plan companies in financial difficulties – Claimant landlords granting rent concessions for certain leases on undertakings in side letters not to seek further compromise – Defendants seeking court’s sanction for restructuring plans – Claimants seeking injunctions excluding particular leases from restructure – Whether court having jurisdiction – Whether appropriate to compromise claimants’ rights under side letters – Applications for injunctions dismissed – Application to sanction restructuring plans granted
The defendant companies were part of a group which operated cinemas in ten countries. The business of the group was severely adversely impacted by the Covid-19 pandemic and government restrictions.
In 2023, the defendants renegotiated certain leases with the claimant landlords, who agreed to substantial rent reductions together with other concessions. The defendants gave undertakings, by side letters, not to seek further to compromise their liabilities under the relevant leases by way of a restructuring plan.
The defendants continued to suffer severe financial difficulties and obtained the court’s permission to convene meetings of creditors for the purposes of considering and approving proposed restructuring plans. They argued that, if the plans were not sanctioned, the plan companies were likely to be placed into administration in which case the creditors would be materially worse off. The plans were fair to all classes, and there was no good reason why they should not be sanctioned.
When they failed to obtain the requisite majority in each meeting of creditors, the defendants applied under sections 901F and 901G of the Companies Act 2006 for orders sanctioning four restructuring plans.
The claimants applied for injunctions to enforce the defendants’ undertakings and to remove the relevant leases from the plans. They argued that by promoting a restructuring plan to compromise liabilities under or by reference to the relevant leases, the defendants had breached their undertakings.
Held: The applications for injunctions were dismissed. The application to sanction the restructuring plans was granted
(1) Part 26A of the Companies Act 2006 introduced a new regime to facilitate the rescue of struggling companies. One of the threshold conditions for restructuring plans in section 901A was that the company had encountered or was likely to encounter financial difficulties affecting its ability to carry on business as a going concern. Another was that the purpose of the compromise or arrangement was to eliminate, reduce or prevent, or mitigate the effect of any of those financial difficulties.
The court’s jurisdiction did not arise unless those conditions were met: healthy companies could not seek to compromise their debts under Part 26A simply because it might be in their commercial interests to do so.
There was potentially a serious tension between the equitable jurisdiction to enforce a negative covenant to exclude particular creditors and the pari passu principle of equality of treatment. Restructuring plans of the present kind were a form of collective proceeding for the benefit of the creditors as a whole and were an aspect of insolvency law.
(2) The pari passu principle was a fundamental principle of insolvency law and embodied a public policy. Where the threshold conditions for a plan designed to avoid a formal insolvency were satisfied and the pari passu principle was engaged, any application to enforce the contract to exclude relevant creditors would generally have to give way to that principle and the courts would be slow to enforce agreements which operated to undermine that policy.
The court had to consider whether the enforcement of the promise would infringe the public policy embodied in the pari passu principle; the question was whether the contract represented a good reason or proper justification for excluding the relevant creditors from the plan. That was in essence the same exercise the court had to undertake when considering fairness under the plan jurisdiction.
The exclusion of creditors from a restructuring plan (at least where the alternative was insolvency) without good reason or proper justification might well render it unfair to the creditors who were included. The default requirement was that creditors be treated in accordance with the pari passu principle. The claimants were not entitled to an injunction effectively as a matter of right.
(3) Each of the claimants had a contingent claim in damages for breach of the relevant terms of the side letters. They were therefore “creditors” of the relevant plan companies under Part 26A.
Alternatively, the covenants in the side letters were ancillary to the renegotiated commercial terms agreed by the claimants and the plans were seeking to compromise them as part of the compromise of those commercial terms. As such, the relevant rights under the side letters were capable of being compromised under the plans.
Where, as here, a restructuring plan was being proposed as an alternative to a formal insolvency procedure, the court was required to identify the rights that creditors would have in the insolvency proceedings, rather than their rights if the company were to carry on its business in the ordinary course.
It followed that the court had to consider whether the terms of the side letters justified the exclusion of the relevant leases, having regard the position in which they and other landlords would be in the relevant alternative.
(4) On that approach, if the claimants were to be excluded, they would be placed in a significantly better position compared to the other landlords of sites falling within the same categories. There would be a prima facie infraction of the pari passu principle
The side letters were ancillary to the renegotiated leases: if enforced they would insulate those leases from non-consensual compromises through a plan. But the consequence of enforcing them would be that the claimants would be in a significantly better position commercially than they would have been in the relevant alternative.
The side letters contained promises made in the past (before the formulation of the plans) and to give effect to them would not facilitate or enhance the prospects of the plan succeeding, any more than giving effect in their original forms to the historical promises made to creditors in the leases generally would do.
(5) The plan companies now faced imminent administration, absent the plans. On the evidence, the plans were developed in the course of 2024 in response to the worsening financial predicament of the UK group. The losses now sought to be imposed on all creditors arose from that common misfortune.
In the exercise of the court’s discretion, the plans would be sanctioned, notwithstanding the terms of the side letters.
Tom Smith KC, Henry Phillips and Annabelle Wang (instructed by Kirkland and Ellis LLP) appeared for the plan companies/defendants; Ben Shaw KC (instructed by RLS Solicitors Ltd and Cripps LLP) appeared for the objecting creditors/claimants.
Eileen O’Grady, barrister
