The Virgin Active restructuring plans
Virgin Active gyms are a familiar sight in many UK cities. However, with COVID-19, revenues dropped dramatically and by February 2021, it became apparent that a restructuring of the group’s capital structure would be required.
To restructure the debts of the Virgin Active group, three inter-conditional restructuring plans (the Plans) were proposed by Virgin Active Holdings Limited, Virgin Active Limited and Virgin Active Health Clubs Limited.
Each Plan company had seven classes of creditors for voting purposes: secured creditors, landlords divided into classes A to E and general property creditors (primarily former landlords with residual claims).
The Plans contemplated that the secured creditors would not suffer any reduction in the amounts owing to them. However, the terms of the relevant £200 million senior facilities agreement would be amended to relax the financial covenants, extend the maturity date and defer interest payments, among other things.
The compromise offered to landlords varied depending on the categorisation of the leases (based on operating profit): (i) Class A and B leases essentially remained unaffected, with provisions for payment of rent arrears and a right to determine the leases in exchange for payment of 120 per cent of their estimated returns in an administration; (ii) Class C leases were subject to rent reductions and releases of rent arrears; and (iii) Class D and E leases were effectively rendered valueless with landlords given the right to determine leases in exchange for payment of 120 per cent of their estimated administration returns.
Any lease guarantees provided by members of the Virgin Active group would be varied to align them with the varied lease obligations. In line with cases involving schemes of arrangement and company voluntary arrangements, the Plans did not seek to deprive the landlords of their forfeiture remedy.
Cross-class cram down
Over the course of the lengthy hearings, Justice Snowden heard submissions from the Virgin Active group and the secured lenders in support, as well as by an ad-hoc group of landlords in opposition to the plans (the AHG Landlords).
At the creditor meetings, only the classes of the secured creditors and the Class A Landlords achieved the requisite statutory majority of 75 per cent by value to approve the Plans.
However, Part 26A of the Companies Act 2006 enables the Court to exercise its discretion to sanction a restructuring plan notwithstanding that certain classes of creditors may dissent, provided Conditions A and B are met:
- Condition A is met if the Court is satisfied that if the restructuring plan was sanctioned, none of the members of the dissenting class would be any worse off than they would be in the “relevant alternative”.
- Condition B is satisfied where the restructuring plan has been approved by a class of creditors who would receive a payment or have a genuine economic interest in the plan company, in the relevant alternative.
The “relevant alternative” is whatever the Court considers would be “most likely” to occur if the plan was not sanctioned. Virgin Active contended that if the Plans were not sanctioned, the group would have to file for administration.
The Court’s decision
In sanctioning the Plans, Justice Snowden noted that there was no dispute that Condition B was satisfied as the Plans had been approved by the secured creditors and the Class A Landlords. However, the Court needed to consider whether Condition A (also known as the “no worse off” test) was satisfied and whether the Court should exercise its discretion to sanction the Plans.
In considering Condition A, the Court must identify the “relevant alternative” that is “most likely” to occur and then identify its consequences for the dissenting classes. The relevant alternative itself does not need to be a scenario that is more likely than not to occur.
In considering the “relevant alternative” Justice Snowden dismissed the submissions of the AHG Landlords that the Plan companies should have explored other options and that the Plans were negotiated in a way that was unfair to other creditors. Justice Snowden noted that the relevant question to consider was what would be the “relevant alternative” at the date of the sanction hearing if the Plans were not sanctioned. The judge was accordingly satisfied that the cash flow of the group was such that if the Plans were not sanctioned, the group would likely file for administration.
Justice Snowden then considered the consequences of the “relevant alternative” for dissenting creditors. The AHG Landlords submitted that the “no worse off” test could not be satisfied on the basis that (1) the estimated outcome for creditors as proposed by the group was inherently unreliable as a result of the underlying “desktop” valuations that were used (rather than market testing), and (2) it was not possible for the Court to be satisfied that the conclusions were accurate or reliable given the limitations of the information used in the group’s financial forecasts.
Addressing the criticisms from the AHG Landlords, Justice Snowden noted that the utility of Part 26A should not be undermined by lengthy valuation disputes and potential interlocutory hearings and that the protections of dissenting creditors given by the “no worse off” test (and the Court’s general discretion) be preserved.
Justice Snowden clarified that Plan companies have no absolute obligation to conduct a market testing process in any event. He also noted the potential unfairness, practical difficulties and expense of conducting a market testing exercise during the pandemic.
In considering each dissenting class of creditor, Justice Snowden was satisfied that each dissenting class would be “no worse off” under the Plans than in the “relevant alternative” of administration.
The Court’s discretion
In considering the Court’s discretion to sanction the Plans, Justice Snowden reflected on the judgment of Justice Trower in Re DeepOcean and whether it would be “just and equitable” to sanction the Plans. Referring to the comment made by Justice Trower in Re DeepOcean that a plan would have a “fair wind behind it” if Conditions A and B were met, Justice Snowden made clear that there is no rebuttable presumption that a plan would be sanctioned simply by virtue of having fulfilled those conditions.
The AHG Landlords submitted that the Plans were not “fair” or “just and equitable” because in the “relevant alternative”, the group’s shareholders would rank behind the landlords but under the Plans, the shareholders would be able to partially retain their value and so this ran contrary to basic principles of insolvency law. Further, the AHG Landlords argued that they should have been allocated some equity in the group as part of the Plans or been given an opportunity to advance new money to the group.
In considering the case law, Justice Snowden referred to the approach summarised by Justice Mann in Re Bluebrook Ltd4 that “in promoting and entering into a scheme, it is not necessary for the company to consult any class of creditors … who are not affected, either because their rights are untouched or because they have no economic interest in the company” and stated that the authorities take the view that it is for the creditors who are “in the money” to determine how to divide up any value or potential future benefits of the business and so any objections which the AHG Landlords had to the agreement between the Plan companies and the secured creditors carried “no weight”.
In considering the creditors who are “in the money” and those who are “out of the money”, Justice Snowden accepted that the value in the group “broke” in the class of secured creditors who, as a result of their security, would be entitled to all of the value of the business of the Plan companies in the relevant alternative to the exclusion of the dissenting classes of creditors.
In light of the fact that the dissenting classes of creditors were “out of the money” and accordingly had no “genuine economic interest” in the group, Justice Snowden concluded that the Plan companies could have relied on section 901C(4) to promulgate the Plans without inviting those classes to vote and so avoided the need to rely on the Court’s cross-class cram down jurisdiction in any event.
Comment
Justice Snowden’s decision is the most wide-ranging and detailed judgment on the newly emerging case law relating to restructuring plans. It confirms the flexible nature of restructuring plans and, unfortunately for landlords, its utility to compromise lease obligations.
As expected, valuation evidence will play a critical role in restructuring plans. The Virgin Active plans highlighted the difficulties faced by creditors in challenging the company’s submissions in light of the need to organise and fund the submission of competing valuation evidence in a short timeframe and with (likely) limited access to information.
- [2021] EWHC 138 (Ch).
- [2021] EWHC 685 (Ch), [2021] EWHC 933 (Ch).
- [2021] EWHC 1209 (Ch).
- [2010] BCC 209.
In-depth 2021-147
