It has not been a good week for landlords, with the High Court rejecting two landlord challenges to restructurings in respect of the New Look CVA and the Virgin Active restructuring plans. We'll cover the New Look judgment in a separate update, once we have the judgment on the Regis CVA challenge which is expected shortly. In the meantime, the Virgin Active decision has confirmed that the cross-class cram down power in the new Part 26A restructuring plan can have real effect to achieve a holistic restructuring and we summarise some of salient points from the judgment below.
At the Virgin Active creditor meetings, two classes comprising secured lenders and critical landlords voted in favour of the plan, and five classes of landlord and property creditors voted against it. In sanctioning the restructuring plans, the High Court exercised its discretion to apply cross-class cram down in respect of the five dissenting classes, notwithstanding the opposition of a set of landlords. This is the first opposed cross-class cram down decision, and the judgment of Snowden J provides important guidance on the treatment of dissenting classes which are out of the money and the allocation of the so-called 'restructuring surplus'.
The judge first considered the statutory conditions for exercise of the cross-class cram down power and found that these had been met on the facts. In particular, the judge found that the dissenting classes would be no worse off under the plans than they would be in the relevant alternative to them (which was administration). The opposing landlords argued that the court should nonetheless refuse to sanction the restructuring plans on the basis that they were not just and equitable. One of their key complaints was that under the plans, the existing shareholders (who were providing £45m of new money) would retain their shares in full to the exclusion of the landlords, and therefore stood to benefit from the restructuring surplus (ie. any increase in value in the group as a result of continued trading facilitated by the plans). The landlords contended that this was unfair given that the landlords would rank ahead of the shareholders in an administration and were contributing to the survival of the plan companies by the release of their claims.
The judge rejected these arguments, finding that since the landlords were 'out of the money' in the relevant alternative to the restructuring plans, their objections to the treatment of the shareholders carried no weight. This was supported by the fact that such 'out of the money' creditors could have been bound by the plan and their rights affected by it, without being permitted to vote on the plan pursuant to section 901C(4) of the Companies Act 2006. Rather, the key principle is that "it is for the company and the creditors who are in the money to decide, as against a dissenting class that is out of the money, how the value of the business and assets of the company should be divided".
The judge acknowledged that there may be limits to this principle, but he found that they did not apply in this case. On the facts, there were credible commercial reasons for allowing certain other critical 'out of the money' creditors to be treated more favourably than the landlords. And, while he considered that the landlords (as 'out of the money' creditors) had no right to complain about the shareholders' treatment, he was satisfied that the treatment was appropriate in any event. The shareholders were providing an appropriate amount of new money in return for their equity on better terms than would be available in the market, and the provision of new money could not be equated to the write-off of past and future rent suffered by the landlords.
The judgment is also interesting as it supports the use of desktop valuations as a reliable basis for valuing a plan company (and thereby creditors' claims against that company) in the relevant alternative. Valuation is key in a cross-class cram down scenario due to the 'no worse off' statutory condition for its exercise referred to above. The valuations underpinning Virgin Active's restructuring plans were desktop valuations, done primarily using discounted cashflow methodology. The opposing landlords argued that a market testing process should have been conducted to value the plan companies. However, the judge disagreed. He found that there is no evidence that market testing is habitually used in the market and it was unclear how funding for such a process would have been obtained. Further, the judge noted that the outcome of any market testing in this case would have had to be treated with 'extreme caution', given that it would have been launched in a depressed market as a result of the COVID-19 pandemic and lockdowns. The judge's endorsement of desktop valuations will give companies considering a restructuring plan comfort that they shouldn't be required to go to the additional cost and expense of market testing, particularly in the current uncertain market conditions.
