Landlords beware, cram down is here

The Part 26A scheme entailed breaking the landlords down into five separate classes depending on the profitability of the leases in a similar way to the categorisation of leases in a retail CVA. Unlike a CVA, however, each class voted separately and the intention of the scheme companies was to use the new class cram down power in Part 26A to cram down dissenting classes.

At the convening hearing an ad hoc group of landlord creditors challenged the adequacy of the explanatory statement provided by the scheme companies. The court held that it was not appropriate to refuse to convene the scheme meetings or require the scheme companies to amend the explanatory statement because, inter alia, (1) the appropriate time to examine the adequacy of the explanatory statement was at the sanction hearing; and (2) commercially confidential disclosure might damage the business. The court held however that, due to the short notice period for the convening hearing, creditors who wished to raise issues as to class composition would not be restricted from doing so at the sanction hearing.

The court instead convened the meetings but ordered that the court should disclose additional documents on the basis of confidentiality undertakings given to the court by the landlords’ lawyers.

At the scheme meetings the requisite 75% threshold was not reached in four of the five landlord classes.

At the sanction hearing the court sanctioned the scheme holding that:

  • The “relevant alternative” had to be judged at the date of the sanction hearing and considerations as to the possibility of a solvent rescue at an earlier stage were not relevant to this judgment (but may go to the issue of discretion). The relevant alternative for this purpose was a distressed sale of the business through administration
  • The landlords argued that the provision of information was deficient and should not be relied on by the court in assessing likely outcomes in the relevant alternative. The court however relied on the valuation evidence provided by the schemes companies (which showed a better outcome for the landlords under the schemes than in administration) drawing support for this reliance from the fact, inter alia, that the landlords had not provided alternative valuation evidence and had not applied for disclosure of additional evidence from the scheme companies
  • On the issue of discretion the landlords argued that the shareholders were benefiting from a potential “restructuring surplus” should the restructuring be successful and this violated the absolute priority rule in that they were securing a benefit when landlord creditors had not been made whole. The court held that the dissenting landlord classes had no genuine economic interest in the scheme companies save as to the prescribed part and their objections as to the secured creditors’ decision to permit the shareholders to benefit in any restructuring surplus carried no weight. The court did however hold that there may be circumstances in which a court may decline to sanction a scheme on the ground of arbitrary discrimination between different classes of unsecured creditor all of whom were “out of the money” but that it was not necessary in the present case to consider that issue as in effect there were commercial grounds for justifying the discrimination between the different classes of creditors in the present case
  • Had the value “broken” with the landlord creditors, the court would still have held that it was appropriate in the circumstances for benefits to be conferred on the shareholders, the court here holding that there was not anything inappropriate in the scheme companies using Part 26A rather than a CVA if Part 26A was more likely to achieve the desired result of rescuing the companies in the interest of their stakeholders generally.

In re Virgin Active Holdings Ltd, convening hearing, 1 April 2021; sanction hearing, 12 May 2021

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