Virgin Active has been in the news recently, as it has proposed restructuring plans which rely on the new legislation found in the Corporate Governance and Insolvency Act 2020.
In this insight, we will explain:
- what restructuring plans are;
- why they are being used (as opposed to CVA's);
- what is the process for a restructuring plan;
- the various ways in which landlords can object to the restructuring plans; and
- some of the wider issues that landlords need to consider.
What is a restructuring plan?
Section 7 of and Schedule 9 to the Corporate Insolvency and Governance Act 2020 (CIGA 2020) introduced a new Part 26A into the Companies Act 2006 entitled "Arrangements and reconstructions for companies in financial difficulty". Part 26A provides for a company to enter into a "restructuring plan" with the approval of its creditors or members.
Whilst the provisions of the CIGA 2020 are new, they simply extend the scope of an existing process codified in legislation since the 1800's, known as a scheme of arrangement. The old law relating to schemes of arrangement will also apply to restructuring plans.
However, whilst schemes of arrangement can apply to any compromise or arrangement between a company and its creditors, a Part 26A restructuring plan is only available in order to eliminate, reduce, prevent or mitigate the adverse effect on a company's ability to carry on business as a going concern caused by serious "financial difficulties" that the company encounters or is likely to encounter. There is no statutory guidance that limits the meaning or scope of "financial difficulties" which, on the face of it, can be given a broad interpretation.
Why are restructuring plans being used instead of CVA's?
Restructuring plans are being used for two main reasons:
- unlike a Company Voluntary Arrangement (CVA), restructuring plans can be used to compromise secured claims (such as bank facilities, mortgages etc); and
- whilst a CVA proposal will be implemented if it is approved by at least 75% (by value) of the company's creditors who respond in the decision procedure, the requirement for approval of a Part 26A restructuring plan is for a 75% majority in value of each voting class (for which see below). However, Part 26A restructuring plans benefit from a "cross-class cram down" provision that allows the court to sanction the plan as binding even if a dissenting group in a class of creditors or members results in the plan not being agreed by 75% in value of that class. This provision prevents investors from being able to block the restructuring plan. These provisions only apply where those investors will be no worse off under the plan, and where another class of investors that would have a "genuine economic interest" in the company even if the plan did not proceed approves the plan.
As such, the restructuring plan can be wider in scope than a CVA and may also be more effective in overcoming creditor objections.
What is the Process?
In broad terms, the process is as follows:
- Seeking court permission to hold meetings
- Serving explanatory statement on creditors
- defining class composition
Holding Creditor Meetings
- meetings are held for each class of creditor
- company seeks confirmation of the Court to the restructuring plan
- possibility of cross-class cram down
The first stage in the process of implementing a plan is that the company, any creditors or member or any administrator or liquidator appointed over the company may apply to court for directions to summon a meeting of creditors or class of creditors in order to consider a restructuring plan.
The company must therefore divide the creditors into classes. A class must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. This is established in two ways:
- whether the creditors have similar rights (as opposed to interests) going into the restructuring plan (e.g. all unsecured landlords are likely to have similar rights going into the restructuring plan); and
- whether the creditors have similar rights coming out of the restructuring plan (e.g. if all the unsecured landlords were to receive 50% of their rent then they are likely to have similar rights coming out of the restructuring plan).
Each class of creditor will vote on the proposal. Normally speaking there will be multiple meetings of classes of creditors.
The requirement for approval of a Part 26A restructuring plan is for a 75% majority in value of each voting class. There is no need for an additional simple majority in number of creditors in favour, as is required to approve a scheme of arrangement.
Court sanction and cram down
The final stage of the process is for the court to hold a hearing to sanction the restructuring plan. If the requisite majorities are obtained at the meeting of creditors summoned pursuant to the court's convening order the court may exercise its discretion to sanction the restructuring plan.
A restructuring plan may be sanctioned using a cross-class cram down notwithstanding that it has not been approved by 75% in value of a class of creditors or members (the dissenting class). In order for the court to grant sanction two conditions must be met:
- Condition A is that the court is satisfied that, if the restructuring plan were sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of "the relevant alternative". For these purposes, "the relevant alternative is whatever the court considers would be most likely to occur in relation to the company if the restructuring plan were not sanctioned".
- Condition B is that the restructuring plan has been approved by at least one class of creditors or members who would receive payment or have a genuine economic interest in the company in the event of "the relevant alternative".
If approved by the Court, the restructuring plan will be binding on all creditors (who are covered by the plan).
How can I object to a restructuring plan?
There are two main opportunities to object to a restructuring plan:
The first opportunity to object to a restructuring plan is to attend the meetings of creditors (either in person or by proxy) and vote against the proposals.
The second opportunity to object to a restructuring plan is to attend the Court hearing and object to the sanction of the restructuring plan. There are three main grounds for objection:
- that there has been a procedural impropriety in the way in which the restructuring plan has been managed;
- that the classes have been incorrectly constituted. This is a technical legal argument, which involves analysing whether or not the classes of creditors have been properly constituted;
- it would be unfair to sanction the restructuring plan. This unfairness may arise from the competing interests of creditors (e.g. some creditors may also have shares in the company in question, thus they may be voting in favour of the restructuring plan with mixed motives) or that the overall impact is unfair.
If any of these grounds of objection are made out, it is open for the Court to refuse to sanction the restructuring plan. It would be usual for creditors to hire a legal team to make representations on their behalf at this final hearing.
In light of the emergence of these new types of restructuring plans, landlords may also wish to consider what additional protections they can secure for themselves in their leases.
It may be an advantage to a landlord to have the ability to forfeit the lease should a restructuring plan be proposed. The good news is that many of the standard forfeiture clauses already cover this scenario. If the forfeiture clause allows forfeiture where the tenant: "takes any step in connection with any voluntary arrangement or any other compromise or arrangement for the benefit of any creditors of the Tenant or any guarantor", this should be sufficient to cover restructuring plans. The reference to "other compromise or arrangement" is designed to cover schemes of arrangement; and restructuring plans are simply derivatives of schemes of arrangement.
It may well be sensible for rent concession letters to automatically terminate on the proposal of a restructuring plan or a CVA. This is even more important if the rent concession is by way of variation to the lease itself.