Despite the scale of the pandemic and resulting build-up of Covid related rent arrears, currently estimated at around £4.5bn, business restructuring has been relatively muted. This is partly explained by the moratorium on forfeiture and other restrictions on landlords’ remedies, combined with unprecedented government financial support for struggling businesses.
But rent arrears cannot be pushed down the track indefinitely. As restrictions are eased and focus turns to tackling this debt, business restructuring activity will no doubt intensify.
One question is to what extent corporate tenants will use the new Restructuring Plan (introduced last year as Part 26A Companies Act 2006) to write off arrears and reduce future rent as an alternative to a Company Voluntary Arrangement (“CVA”), as signalled by the Plan recently launched by the Virgin Active group and others being explored in the market.
Unlike CVAs, Plans require court approval. Like a CVA, a Plan can be used by a company to force a compromise or other arrangement on its creditors which can include both debt write offs and compromises of future contractual liabilities. To achieve this, in each class of creditors to be compromised, one requires at least 75% by value of those voting to approve the Plan.
The key differentiator is the inclusion of a cross-class cram-down mechanism (CCCD) in Plans, not available in a CVA or other insolvency processes. CCCD is a controversial device by which one class of creditors can vote down a dissenting class if:
(1) the dissenting class will not be in a worse position than in the ‘relevant alternative’, i.e. the most likely outcome for the company if the Plan is not approved; and
(2) an approving class would receive a payment or have a genuine economic interest in the company in the ‘relevant alternative’.
If these conditions are satisfied the court, which retains ultimate discretion, may sanction the Plan.
The ability for a company to use the CCCD to effectively force a Plan on dissenting creditors cannot be overstated. Plans might look distinctly similar to CVAs, where the unaffected unsecured creditors have often held the voting power to approve a CVA which only impacts landlords, but that balance of power in CVAs may be shifting, making CCCD a potent new tool. Since Covid, landlords’ voting power in CVAs has been increasing as a result of Covid related arrears of rent and increases in their estimated losses in the scenario where the CVA is not approved. This potentially gives landlords sufficient power to vote down unacceptable CVAs.
This is where CCCD in a Plan comes in. Here, the company need only ensure it has one class of creditors in the bag to ‘cram-down’ another dissenting class (for example a class of landlords). If the conditions noted above are satisfied, the court can exercise its discretion to sanction the Plan despite the dissent.
And the court sanction offers another benefit to corporate tenants. The growing storm about the terms of “landlord-only” CVAs is well publicised. More landlords are pursuing challenges, as the Regis and New Look hearings last month demonstrate. CVA challenges are made after a CVA is approved and involve substantial time and costs. This can seriously jeopardise the company’s future financing, because that is often conditional on no challenge being made or any challenge being overcome.
A Plan on the other hand is a front-loaded court process. It may involve significant upfront costs, but the court has already shown it can move at speed and the benefit to the company of getting the court’s sanction prior to implementation reduces the risk of subsequent challenge. This is because the process enables landlords and other affected creditors to attend the court hearings (a hearing to convene the creditors’ meetings and a hearing to sanction the Plan) and raise their arguments. This includes arguments about the composition of the voting classes and whether the Plan is just and equitable. If the court decides to sanction the Plan having heard those arguments, then landlords may have less scope and appetite to appeal that decision.
The combined benefits of CCCD and court approval may see Plans become some corporate tenants’ restructuring tool of choice. Landlords should fully engage in any Plan proposals that affect them, to ensure that important issues are identified and addressed at an early stage.