The phrase “cross-class cram down” describes a restructuring tool introduced by the Corporate Insolvency and Governance Act 2020, now located in section 901G of the Companies Act 2006. The mechanism is still in its infancy but is already making its presence strongly felt, as the landlords affected by Mr Justice Snowden’s landmark decision in Re Virgin Active Holdings Ltd and others [2021] EWHC 1246 (Ch) will testify.
The health club chain had been in a strong financial position before the coronavirus pandemic. But the closure of its premises during lockdown left it on the brink of collapse and it owed its landlords rents totalling nearly £30m. So it devised a restructuring plan in conjunction with its shareholders and secured creditors, containing compromises typically found in company voluntary arrangements, which would enable it to survive but would leave many of its landlords, who were separated into different classes, considerably worse off.
Rescue plan
Because their health clubs were the most profitable, class A landlords emerged almost unscathed from the plan. But the arrears of rent due to all the remaining landlords were written off. The properties in class B were relatively profitable before the pandemic, and their rents were to be paid in full going forwards. But the properties in class C were the least profitable and the properties in classes D and E were loss-making before the pandemic. So the health chain proposed to halve the rents payable to class C landlords for three years and to extinguish all its liabilities to class D and E landlords (although class E landlords would be entitled to any rents, service charges and insurance contributions paid by subtenants). In return, landlords would be entitled to restructuring plan payments and class C, D and E landlords would be granted break rights enabling them to end their leases.
Many of the landlords opposed the restructuring plan. They complained that they were being required to bear a disproportionate part of the financial pain and, having been excluded from the negotiating table, that they were being “eaten for lunch”. But section 901G of the 2006 Act enables the court to impose a restructuring plan on one or more classes of dissenters, if two conditions are satisfied.
The plan must have been approved by a number representing 75% in value of those voting in any class that would receive a payment, or that has a genuine economic interest in the company, in the event of the most likely alternative – which is usually administration or liquidation. In addition, the court must be satisfied that none of the members of any dissenting class will be any worse off than they would be in the event of the most likely alternative – which in this case was that the health club chain would probably go into a trading administration in which the most profitable parts of its business would be sold.
No worse off
Sufficient numbers of secured creditors and class A landlords had approved the restructuring plan. But did the proposals pass the “no worse off” test? The predicted outcomes for creditors in a trading administration were based on reports and a desktop valuation produced in reliance on information provided by the health club chain, which enabled the landlords to argue that there had not been any marketing process and that the court could not be satisfied that no creditors would be worse off, given the scope and limitations of the report produced by the accountants overseeing the process and the information on which their report was based.
However, the court ruled that there is no absolute obligation to test the market as part of a corporate restructuring. Snowden J was not persuaded that the funding would be available to do so or that market testing would result in a materially more reliable valuation, given the uncertainty prevailing in the marketplace. There was nothing to impugn the material before the court and the dissenting landlords had not produced any evidence contradicting forecasts that restructuring plan payments would be higher and would be paid sooner than any dividend in administration. Consequently, the rescue plan offered the landlords a better return than administration.
Court’s discretion
The legislation provides no guidance whatsoever as to what is relevant when the court is deciding whether to approve a restructuring plan. The accompanying explanatory notes suggest that the court can refuse to sanction plans that are not “just and equitable”. But these words are not to be found in section 901G and the judge ruled that they were of no real assistance.
Snowden J explained that it was for those who would be “in the money” in an administration to decide how the value of the business and its assets should be divided between them. Furthermore, Re DeepOcean 1 UK Ltd [2021] EWHC 138 (Ch) had established that the court can approve a plan in which substantial value is given to some, but not all, “out of the money” creditors, if there are good commercial reasons for doing so.
The dissenting landlords would be “out of the money” if the company were to go into administration. And the shareholders were providing new money, at material risk to themselves, some of which would be used to fund the restructuring plan payments to the landlords. So the landlords’ complaints about the shareholders’ retention of equity in the restructuring did not carry sufficient weight to prevent the court from sanctioning the plan.
Key points
- The High Court has approved a controversial restructuring plan that relied on “cross-class cram down” to compromise lease liabilities
- The plan – which makes use of techniques typically used in CVAs – was fiercely opposed by dissenting landlords, who will be considerably worse off as a result and might have succeeded in blocking a CVA
- But it was approved because it offered the dissenting landlords a better return than administration
Allyson Colby is a property law consultant
