Restructuring Plans (“Plan(s)”) were introduced by the Corporate Insolvency and Governance Act 2020 (“CIGA”) as a rescue tool for companies in financial difficulty to compromise debt and other liabilities owed to secured and unsecured creditors and its members, with the court’s sanction.
One of the main features of a Plan is the ability for the court to sanction the Plan (if certain conditions are satisfied) even if one or more classes of creditors and/or members vote against it; as happened in Re Virgin Active . Although the challenge to Virgin Active’s Plan was unsuccessful, landlord creditors were one of the classes of creditors consulted and permitted to participate and vote on the Plan in the meetings ordered by the court at the convening hearing.
In the High Court decisions concerning Smile Telecoms Holdings Limited  EWHC 387 (convening hearing) and  EWHC 740 (sanction hearing) (“Smile Telecoms”), matters were taken a stage further. For the first time a company applied to exclude certain potential classes which were compromised by the proposed Plan from voting on the Plan on the basis that they had no genuine economic interest in the company. The court made the necessary order and therefore only a meeting of the class of creditors with a genuine economic interest in the company (being a single class comprising the super senior lender in this case) needed to be convened to approve the Plan. This meant that creditors who were out of the money in the relevant alternative were not even given the opportunity to vote on the Plan.
In Smile Telecoms, the company applied for an order to convene a meeting of a single class of creditors to consider and approve the proposed Plan. Smile Telecoms’ evidence (accepted by the court) showed that if the Plan was not approved, then the only realistic alternative would be for the company to be placed in administration.
Smile Telecoms contended that only one class of creditors had a genuine economic interest in the company in the relevant alternative (the super senior lender) and therefore only a single meeting of that class would be required.
Decision at the Convening Hearing
>Based on the relevant comparator report and valuation evidence, the Court concluded that it was clear that all classes of creditors bar the super senior lender were out of the money and that the evidence established that this was not a marginal case. Therefore, only that class of creditors had a genuine economic interest in the company, and as such, only a single meeting of that class needed to be convened. Miles J made the appropriate order. The class only had a single member, and as a matter of principle, it was held there was no issue in having a meeting of a class with a single member.
At the subsequent sanction hearing, Snowden LJ approved the principles the court applied at the convening hearing in deciding the company’s application. This included the court’s ability to conclude that the company’s evidence is not sufficiently complete or satisfactory, for example where inadequate notice is given or where objections raised need further evidence or investigation. In those circumstances, creditors would not be excluded from the meeting to vote on the Plan.
Although the senior lender creditor (who was out of the money) voiced its opposition to the Plan through correspondence with the company (which was presented to the court at both the convening and sanction hearings) it did not put in expert evidence or attend the convening or sanction hearings. The court was critical of this approach and the creditor’s failure to produce expert evidence if it wanted to challenge the company’s evidence.
The steps the court said dissenting creditors should take are:
obtain financial information from the company, making an early application for disclosure if necessary;
obtain expert evidence and potentially produce a joint expert report;
ensure the expert attends court for cross-examination;
attend the hearing; and
address any arguments raised.
This will provide little comfort to landlords who unsuccessfully challenged the Virgin Active Plan, having undertaken the above steps at great expense.
Another point raised by the company at the sanction hearing, but not required to be decided, was the meaning of “compromise or arrangement” in the context of a Plan. The company said this should be interpreted as including the surrender or expropriation of rights, rather than requiring some “give and take” as set out in the case law on Schemes of Arrangement, in circumstances where creditors would receive nothing in the relevant alternative. As the point was left undecided, it does at least mean that companies proposing a Plan should be inclined to include an offer (however small) in return for the proposed compromise/arrangement.
What does this mean for out of the money landlords or other creditors?
The importance of creditors thoroughly interrogating proposed Plans to establish whether the relevant alternative put forward by the company (and the impact that has on whether it has a genuine economic interest in the company) can be challenged, cannot be overstated.
In addition to the strength of the company’s evidence in Smile Telecoms, the judge took account of the fact that the company had served its application supported by extensive evidence on all interested parties, yet (as noted above) the senior lender had not put in contrary evidence or attended court to oppose the application. As the evidence in that case was not considered marginal, opposing the application may not have achieved a different outcome. However, in other cases this, and the other steps outlined above, will be fundamental to persuading the court to convene a meeting of classes of creditors the company is seeking to exclude and/or to challenge a Plan.
The Government’s Interim Report on CIGA found that Plans are seen as “largely successful”, though concerns were expressed about adequate protection for dissenting creditors. The costs of challenging a Plan were “seen as excessive which hinders the policy objective of protecting dissenting creditors”. As the court decisions demonstrate, however, creditors who do want to challenge a Plan need to obtain urgent expert (often involving 2 experts) and legal advice, as well as participate in the court proceedings. The appetite to do so following the outcome in Virgin Active remains to be seen