Following the landmark decision by Justice Trower in Re DeepOcean 1 UK Ltd,1 Justice Snowden delivered another important judgment on the use of cross-class cram downs as he sanctioned the Virgin Active2 restructuring plans.
This is only the third time the cross-class cram down mechanism has been used as part of the new (but increasingly popular) Part 26A restructuring plan (DeepOcean and Smile Telecoms being the first two instances), and the first time that a significant number of creditor classes voted against the proposed compromise.
The judgement is particularly significant for landlords, as the Part 26A restructuring plan is emerging as a viable mechanism to restructure lease obligations alongside the more traditional tool, the company voluntary arrangement (which, as confirmed by the recent New Look3 judgement, remains a useful alternative in the right circumstances). The Virgin Active ruling could effectively act as a ‘green light’ for tenant companies to seek a cram down of landlord claims alongside those of other creditors.
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.