Virgin Active : Restructuring Plans : Fit for Purpose?
Mr Justice Snowden’s decision in the Virgin Active Restructuring Plan was issued on 12 May 2021. It approved the proposed plans, despite Landlord opposition, and merits reading by IPs.
Landlords will see this decision as yet another one that undermines their investment interests. Restructuring professionals, on the other hand, need to understand the flexibility that the courts are extending by the series of decisions we are now receiving in relation to the new restructuring plan. It is of course worth observing that the Scottish Courts have not yet issued any substantive guidance in relation to restructuring plans, but we would expect them to broadly follow the English High Court by way of approach.
Virgin Active was more accurately an application to approve a series of restructuring plans in relation to group companies, which had performed strongly until the Covid crisis. The second and third lockdowns created a liquidity crisis for the company and was likely to result in liquidity covenants being breached with secured lenders.
A restructuring package was agreed with financial creditors. Discussions with landlords do not seem to have taken place until after a financial restructuring was broadly agreed.
Unsurprising, in most classes of landlord, landlords were unprepared to support the Restructuring Plan, in terms of which their rights to recover arrears and recover rent at previously agreed levels were compromised.
In terms of s.901(f) of the Companies Act 2006, when 75% of the value of creditors in a particular class support a restructuring plan, the court may sanction the plan even although other classes of creditors did not support the plan; hence the description “cross-class cram down”.
The court dealt with substantial opposition from landlord creditors. It indicated there were three questions it had to ask: (a) would “members of the dissenting class be any worse off than they would be in the event of the relevant alternative”; (b) was the restructuring plan being approved by 75% of those voting in a class that would receive a payment; and (c) “should the court exercise its discretion?”
There was substantial dispute about the terms of the relevant alternative report. What matters in terms of principle is that the court concluded that the landlords were “out of the money” in the relevant alternative administration. They were therefore no worse off and the court should exercise its discretion to cram down across class.
This is a useful decision in setting out exactly how the court will approach an opposed restructuring plan application. There is helpful guidance for practitioners preparing or obtaining relevant alternative reports, and discussion that will inform the breadth and depth of financial information being provided. While restructuring plans may sometimes be rarer in Scotland because of less sophisticated creditor arrangements (particularly in the midmarket), where financial restructuring is required they are a tool that practitioners ought to have in mind and understand.
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (email@example.com).This briefing note is current as at 18 May 2021 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).