High Court sanctions Virgin Active restructuring plans

The High Court in London has sanctioned Virgin Active restructuring plans despite objections from landlords and a lack of support for the plans from most classes of creditor.

This eagerly awaited decision adds to the growing body of case law supporting the use of this new and flexible restructuring tool.

• In a significant test of the new "cross-class cram down" mechanism, the court has rejected objections from landlords and exercised its discretion to sanction the Virgin Active restructuring plans.
• First use of restructuring plans to restructure landlord liabilities; lays down a marker for their wider use going forwards.
• Virgin Active Holdings Ltd & Ors, Re [2021] EWHC 1246 (Ch)

This landmark judgment affirms the usefulness of restructuring plans as a holistic restructuring solution to address both financial and operational liabilities, such as landlord liabilities.

Following this decision, we expect struggling businesses to seek to put in place restructuring plans in increasing number.

What is a restructuring plan?

A restructuring plan is a new restructuring tool introduced into Part 26A of the Companies Act 2006 in June 2020 by the Corporate Insolvency and Governance Act 2020. It constitutes an "arrangement" or "compromise" between the company and its stakeholders and will result in a reduction or reshaping of the liabilities owed to those stakeholders.

The process for a restructuring plan is very similar to the well-established "scheme of arrangement" regime, with stakeholders split into classes in respect of both their treatment under the proposal and for voting purposes. However, unlike a scheme of arrangement, a restructuring plan allows for dissenting classes of stakeholders to be bound in certain circumstances. This is known as "cross-class cram down".

Background

The Virgin Active group is a well-established operator of health clubs. Virgin Active's finances suffered significantly as a result of Covid-19 and the restrictions imposed on health clubs and gyms. In a rescue effort, Virgin Active sought to restructure the financial and operational liabilities of its European and Asia-Pacific businesses.

The restructuring plans

To implement the restructuring, three companies within the Virgin Active group launched restructuring plans (the VARPs). The VARPs sought to restructure the plan companies' liabilities owed to seven classes of creditors, summarised as follows:

• Secured creditors;
• Existing landlords, split into classes A to F; and
• General property creditors, such as those to whom guarantee liabilities were owed.

In a first for restructuring plans, the plan companies sought to use this regime to restructure their property liabilities. In a similar way to that seen in a typical company voluntary arrangement, the VARPs categorised their operational liabilities into classes, based largely on the profitability of the relevant lease, with each class then subject to different treatment. The aim of this was to restructure the companies' leasehold portfolio into something more sustainable. This operational restructuring sat alongside a financial restructuring which would see new money provided by the shareholders and commitments and compromises given by the secured lenders. Together this would provide for a holistic restructuring of the plan companies' liabilities.

Sanction and cross-class cram down 

The VARPs were strongly objected to by an ad hoc group of landlords who raised arguments against the VARPs at both the convening hearing and the sanction hearing.

As the plan companies failed to obtain votes in favour from 75% in value of creditors in the majority of creditor classes, it was necessary for the plan companies to ask the court to exercise its discretion to sanction the VARPs in any event, using the cross-class cram down mechanism. 

Under section 901G of the Companies Act, a restructuring plan can still be sanctioned by the court where one or more classes do not vote in favour of the plan, provided that the following conditions are met:

• none of the dissenting class would be any worse off than they would be in event of the relevant alternative – in this case, administration; and
• the plan had been approved by at least one class of creditors who would have had a genuine economic interest in the relevant alternative.

While the majority of creditor classes voted against the VARPs, a key fact in this case was that the secured lenders and the plan companies' "Class A" landlords voted overwhelmingly in favour. The evidence before the court was that on an administration the value would "break" in the secured debt such that none of the landlords, or other unsecured creditors, would receive any return, save for in respect of the prescribed part. The return to all creditors under the VARPs was therefore higher than they would receive on an administration.

The judge, Mr Justice Snowden, was satisfied on the evidence before the court that none of the members of any of the dissenting classes would be any worse off under the VARPs than in that relevant alternative. It was not disputed that the VARPs had been approved by at least one class of creditors who would have had a genuine economic interest in the relevant alternative given the support of the secured lenders.

In considering the court's general discretion to sanction the VARPs, Mr Justice Snowden considered at length the treatment of "in the money" versus "out of the money" creditors. This provides helpful guidance on the importance of the differing interests of those creditors who are "in the money", such as the secured lenders in this case, as compared with those creditors who are "out of the money", such as the landlords and other unsecured creditors here, when considering the distribution of the benefits of the restructuring.

Dismissing the objections of the landlords, Mr Justice Snowden determined that the court should exercise its discretion to sanction the VARPs utilising the cross-class cram down mechanism.

What next?

The restructuring plan regime is still very new but we now have a handful of cases which show it to be a useful and flexible tool. The sanction of the VARPs illustrates that restructuring plans have wide-ranging use, including in the restructure of lease liabilities. While the cases we have seen to-date have involved large-scale operations, this case illustrates that restructuring plans can provide a holistic solution for businesses looking to address their operational as well as their financial liabilities, and we anticipate that they will begin to be used across the market to address a variety of situations.

This latest decision is, however, a further blow for landlords who also faced defeat in the challenge to the New Look company voluntary arrangement (CVA). The success of the companies in each of the New Look and Virgin Active cases highlights that, for now at least, CVAs and restructuring plans both remain viable tools for companies seeking to restructure their liabilities.