A number of restructuring plans have been actively opposed by creditors (including property owners and HM Revenue & Customs) with differing results, resulting in a growing body of case law.
Cram down controversy
One of the reasons that restructuring plans have been seen as contentious is the court’s power to impose a “cross-class cram down”. This means that, although each class of creditor must vote in favour of the plan by a 75% by value majority in order for it to be approved, section 901G of Part 26A provides a mechanism for the court to cram down dissenting classes of creditors so that the plan can nevertheless be sanctioned.
There are two statutory requirements before a court can use the cross-class cram down:
First, no member of the dissenting class can be worse off under the plan than they would be in the “relevant alternative”, being what the court considers is most likely to occur if the plan is not sanctioned (usually liquidation or administration). This is known as the “no worse off” test.
Second, the plan must be approved by at least one class of creditors that has a genuine economic interest in the relevant alternative. This has been taken to mean that they are “in the money” creditors, i.e. they would receive a payment in the relevant alternative.
The exercise of the cross-class cram down is a matter of discretion for the court at the final hearing, when it will decide whether or not to sanction the restructuring plan. If it was intended that the cross-class cram down power would be used sparingly, this has not proved to be the case – it has become a standard feature of those restructuring plans that focus in particular on compromising leasehold liabilities.
Opposing creditors
In May 2021, Virgin Active’s three linked restructuring plans were sanctioned by the court (Re Virgin Active Holdings Ltd and others [2021] EWHC 1246 (Ch)). These were the first to seek to compromise lease liabilities, and they were opposed at court by dissenting property owner creditors.
When sanctioning the plan, the judge made a number of important findings, which appeared to put significant hurdles in the way of creditors seeking to convince a court not to exercise its discretion to cram down dissenting creditor classes.
If a creditor wants to dispute that the “no worse off” test had been satisfied, the judge suggested they should adduce their own valuation evidence to demonstrate that a sale of the business and its assets through administration or liquidation would provide them with a better return. This presented difficulties for creditors, due to the short timescales (usually a matter of weeks) between plans being launched and sanction, costs and “information asymmetry” – when all of the relevant financial information needed to produce a valuation was in the hands of the company.
The fact that creditors had not received financial disclosure from the company as early as they would have liked was not found to be a sufficient reason to attribute less weight to the company’s own valuation evidence.
Crucially, the judge also found that the views of “out of the money” creditors will carry little or no weight when sanctioning the plan.
Discharging the burden
In April this year, the court refused to sanction a restructuring plan put forward by the engineering company Nasmyth Group, following opposition from creditors including HMRC (In the matter of Nasmyth Group Ltd [2023] EWHC 988 (Ch)).
This was the first example of a court refusing to sanction a restructuring plan based purely on discretionary grounds even though the requirements for a cross-class cram down had been met. In doing so, the court appeared to depart from the approach adopted in Virgin Active in a number of respects.
Even though HMRC provided no valuation evidence and was found to be an “out of the money” creditor, the judge was satisfied that it nevertheless retained a genuine economic interest and so HMRC’s views carried some weight. This was because HMRC would remain one of the company’s largest creditors and the success of the plan would depend on it agreeing “time to pay” (TTP) arrangements with the company’s subsidiaries. If agreed, this would contribute to the company’s restructuring surplus.
Moreover, the court considered that the plan was rendered inoperable because the company had failed to agree TTP arrangements with HMRC, and this created a so-called “roadblock”.
The following month, in May this year, judgment was handed down in respect of a restructuring plan proposed by the Great Annual Savings Company (GAS) under which, like Nasmyth, HMRC would have been crammed down (In the matter of the Great Annual Savings Company Ltd [2023] EWHC 1141 (Ch)).
In relation to the “no worse off” test, again HMRC did not put forward its own valuation evidence; however, it argued that the valuation put forward by GAS in support of the plan was too pessimistic. In light of these criticisms, the court concluded that GAS had not discharged its burden of satisfying the court that HMRC, on the balance of probabilities, was no worse off under the plan.
GAS had argued, following Virgin Active, that because HMRC had not put forward its own valuation evidence, the court should accept the valuation proposed by GAS. The court did not agree, describing this as “too restrictive an approach”, concluding that it was not the case that it would always be necessary for an opposing creditor to put forward its own expert evidence.
Fighting fit
Since Nasmyth and GAS, there have been a number of property-focused plans, including that proposed by Fitness First (In the matter of Fitness First Clubs Ltd [2023] EWHC 1699 (Ch)).
In that case, prior to the launch of the plan there had been no engagement with property owner creditors to help them assess the plan or see if bilateral agreements could be reached in order to avoid the plan altogether.
The final hearing of the plan was listed for 12 June. A group of property owner creditors sought an adjournment on the basis that the company had failed to provide sufficient disclosure of financial information or engage sufficiently with affected creditors.
Notwithstanding the company’s claim that it was facing an imminent cash flow shortfall, the judge agreed to adjourn the hearing for two weeks, taking the company beyond what was said to be the point at which it would enter a negative cash flow position. At the same time, the judge ordered that the company was to engage in a disclosure exercise with creditors and respond to their requests for documents.
Ultimately, Fitness First’s plan was sanctioned, but a number of important lessons can be learnt from the case.
First, the company was criticised for its lack of engagement and failure to provide timely disclosure of information. In the judge’s words: “Legitimate complaint can be made as to the lack of engagement with the landlords and the resistance to the provision of information.”
Second, after the plan was sanctioned, the company sought an order requiring that the opposing creditors should pay its costs of the final hearing and the adjournment; however, the judge gave this very short shrift.
In relation to the opposing creditors’ costs, the judge commented that their objections “were not frivolous”, and that they had “assisted the court”. The judge also commented that there had “been a certain lack of reasonableness on the part of the company in responding to requests for information”. However, the judge ultimately concluded that the group’s objections had not been “substantial enough to justify making an order for costs against the company”.
What next for restructuring plans?
Following the judgment in Fitness First, and the decisions in Naysmyth and GAS before that, it will be interesting to see whether companies proposing restructuring plans will now have to make greater efforts to engage and share financial information with creditors, and then satisfy the court that it should exercise its discretion to sanction the plan, or else risk sanction being refused or, at the very least, judicial criticism, costs and an adjournment of the sanction hearing while they follow a proper process. For property owner creditors, there is a lot to think about.
An earlier version of this article appeared in EG on 29 August 2023.
Authored by Mathew Ditchburn and Ben Willis.
