Will CVAs make a comeback?
It would often be the case that CVAs would leave most other creditors substantially unimpaired. Property owners found that, although they voted against a CVA proposal, it would be passed by the votes of others. This is because all creditors vote on a CVA as a single class, and it will be approved if 75% by value of all the creditors voting do so in favour of the proposal.
Since the end of 2020, the use of CVAs as a restructuring tool has certainly tailed off. That is partly because of the raft of protections for occupiers introduced by the government during the pandemic, including that year’s Corporate Insolvency and Governance Act 2020.
Combined with this is the effect of Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch); [2021] PLSCS 96, a case in which it was made clear that so-called “vote swamping” (where a CVA is approved by the votes of large swathes of creditors who are unaffected by the CVA) would provide strong grounds to conclude that a CVA was unfairly prejudicial. This may make CVAs a significantly less attractive option in future.
Introducing the restructuring plan
Restructuring plans were brought into law by the 2020 Act, as a new Part 26A to the Companies Act 2006. Since their introduction there have been some high-profile restructuring plans involving property occupiers, including Virgin Active and NCP.
Restructuring plans allow businesses facing financial difficulties to reach an agreement or compromise with creditors. However, unlike a CVA:
- A plan must be approved by the court at a sanction hearing.
- Creditors voting on a plan do so in classes. In each class of creditors, 75% by value of those voting must vote in favour in order for it to be approved. However, the procedure also allows for a “cross-class cram down”, where the court has the power to sanction a plan even if there are dissenting creditor classes.
How does the cross-class cram down work?
The court can cram down dissenting classes if the following conditions are met:
- None of the members of the dissenting class would be any worse off than they are in the “relevant alternative”, which is what the court considers most likely to occur if the plan is not sanctioned (usually administration). This is referred to as the “no worse off test”.
- The plan has been approved by at least one class of “in the money” creditors, meaning they would receive a payment in that relevant alternative.
This is potentially bad news for property owners, because even if they vote against a plan as a class of creditors, it may nonetheless be sanctioned, as happened with the Virgin Active plan (Re Virgin Active Holdings Ltd and others [2021] EWHC 1246 (Ch)).
How does a plan work?
The restructuring plan process is very different to that of CVAs. In the case of a CVA, a proposal is issued to creditors, a vote takes place not less than 14 days later at a creditors’ meeting, and the chair’s report is then issued confirming the outcome. A creditor may challenge a CVA by issuing court proceedings within 28 days of the chair’s report.
The restructuring plan process is quite different:
- The company proposing the plan will first issue a practice statement letter, containing fairly limited information regarding its proposals.
- It will then apply to court for a convening hearing.
- Before the convening hearing, the company issues an explanatory statement, providing a much greater level of detail. This will usually be accompanied by a valuation report and a relevant alternative report. The purpose of these reports is to explain what will happen if the plan is not sanctioned, for example the company is put into administration and the business sold.
- At the convening hearing, the court will decide whether the proposed classification of creditors is appropriate, order meetings of creditors to vote on the plan, and lay down a timetable for the final sanction hearing.
- At the sanction hearing, the court will hear any challenge to the plan and any application to cram down dissenting creditors and decide whether to approve the plan. The whole process can take as little as three months and any creditor wishing to challenge the plan will need to have its case fully prepared in time for the sanction hearing.
Challenging cross-class cram downs
A creditor can challenge a cross-class cram down, first, on the basis that the relevant alternative posited by the company is inaccurate. In order to dispute the relevant alternative, a creditor will need to obtain their own relevant alternative and valuation reports.
To be able to produce credible reports challenging the company’s position, a creditor will need to obtain sufficient disclosure of financial information from the company. For that reason, a creditor may find that the company is reluctant to disclose more than the bare minimum, or that it does so as late in the process as possible; therefore, a creditor will need to be prepared to apply to court for disclosure promptly if this is not forthcoming from the company.
In relation to NCP, for example, a group of landlords sought to challenge the company’s relevant alternative and valuation. In the event, NCP withdrew its plan (see Parking nightmare – what is happening with NCP’s restructuring plan?).
It may also be possible to argue that there is no supporting class of creditor if either:
- The classes that have voted in favour of the plan do not suffer any impairment as a result of the plan; or
- No supporting class would be “in the money” in the relevant alternative.
The importance of creditor engagement
The need for creditors to be proactive when challenging a restructuring plan was borne out in Re Houst Ltd [2022] EWHC 1941 (Ch).
In Houst, the effect of the plan was to compromise £1.77m in unpaid taxes owed to HM Revenue and Customs so that HMRC would receive only 20p in the pound. This was despite the fact that HMRC would be a preferential creditor in any administration or liquidation of the company.
HMRC voted against the plan; however, it did not attend the sanction hearing to make submissions, or provide any valuation or relevant alternative reports. The judge observed that: “HMRC are a sophisticated creditor able to look after their own interests. They have had full notice of the plan and, although they voted against it, they have not attended the hearing to oppose the plan, or presented any arguments against sanctioning the plan.”
The plan was duly sanctioned, notwithstanding that the judge acknowledged that there was “only a weak basis for depriving HMRC of the priority they would have in the relevant alternative”.
In another recent decision, Re Smile Telecoms Holdings Ltd [2022] EWHC 387, the company applied successfully to exclude certain classes of creditor from voting on the basis that they were “out of the money” creditors.
Based on the relevant alternative that the company had put forward, the company’s secured senior lenders would be the only class of creditor to see any return if it entered administration. In the absence of any challenge to the accuracy of this, the other creditors were prevented from voting altogether, despite the judge calling this “even more draconian” than a cross-class cram-down.
Recent decisions have shown that a failure to engage actively with the restructuring plan process could result in property owners’ views being ignored, or they may even find that they are shut out from voting on the plan. Therefore if, as is expected, there is an increase in occupiers proposing plans in the coming months, owners cannot afford to be complacent or delay in taking action to mount any challenge.
An earlier version of this article appeared in EGi on 1 November 2022
Authored by Mathew Ditchburn and Ben Willis.
