30 March 2021 • 6 minute read
Super Scheme or Super CVA?
The UK Restructuring Plan took its first foray down the well-trodden path of lease restructuring over the last week. The Restructuring Plan has been used through to court sanction in five cases so far: however, none has sought to compromise landlord claims, the preferred tool for which has until now been the CVA.
The convening hearing for the Virgin Active Restructuring Plans saw four of the group’s landlords oppose the convening of creditors meetings without disclosure of further information and the provision of additional time to consider the companies’ proposals. The Court was told that a further seven landlords shared similar concerns about the proposed Plans.
Whilst Mr Justice Snowden’s detailed judgment is yet to be released, the Court agreed to convene the creditors’ meetings for the Restructuring Plans, recognising the financial pressure currently imposed on the group, which is anticipated to run out of cash during w/c 10 May 2021. The Court also gave directions for the exchange of evidence ahead of a sanction hearing starting on 29 April 2021, which is likely to be fiercely contested.
In a first victory for the landlords, the Court ordered the disclosure of additional information, relating to the Plan Companies’ categorisation of their various sites and to the relevant alternative against which the outcome to creditors should be benchmarked. The landlords and their advisers will be required to provide a confidentiality undertaking to the Court in order to receive the relevant information and it is open to other creditors to apply to the Court to receive it.
The Virgin Active Restructuring Plan is shaping up to be a contested Restructuring Plan at the sanction hearing focused on, amongst other things, a valuation dispute. At the heart of that dispute is the “relevant alternative” – the hurdle that Virgin’s plan must beat if dissenting classes of creditors are to be forced to accept its terms using the powerful new cross class cramdown provisions. The Virgin Active Restructuring Plan will, if sanctioned, pave the way for companies in financial difficulty to compromise their lease liabilities through a process which is more powerful (and more debtor-friendly) than a CVA. This is one of a series of new and likely usages for the Restructuring Plan or “Super Scheme” procedure.
The Restructuring Plan is one of the new permanent measures introduced by CIGA and is a debtor-in-possession court supervised procedure with some very powerful features. The availability of cross-class cramdown in a Restructuring Plan/ Super Scheme process means that, unlike in a CVA, it is not necessary to secure the vote of 75% of creditors (and 50% of unconnected creditors). Rather, the company requires 75% of each class of creditor to vote in favour. Crucially however, if a class does not reach the required threshold the plan can nevertheless be sanctioned by the Court (and the dissenting class “crammed down”). This can be done if the dissenting class is no worse off than in the relevant alternative (typically an insolvency), the plan is approved by a class of creditors with a genuine economic interest in the relevant alternative and the Court consider the Plan to be fair.
If the Court agrees that landlords can be divided into classes in a Restructuring Plan, in much the same way as in a CVA, based on the proposed outcome for the landlord, companies utilising the Restructuring Plan in future will benefit from increased flexibility on the deal they are able to put to their landlords. No longer will the company need to place landlords of less profitable sites in more favourable categories, with a view to securing their vote in favour of a CVA.
Landlords holding sites of strategic importance are unlikely to be affected since they are typically not compromised to a significant extent. Likewise, landlords holding unprofitable sites which are intended to be closed should receive a similar outcome in a Restructuring Plan as in a CVA. However, sites “in the middle”, where rent reductions and the write down of arrears are necessary (and which typically make up the majority of a company’s leasehold estate) are susceptible to being squeezed further.
Landlord challenges have resulted in significant uncertainty around the use of the CVA. We are awaiting the outcome of the decisions in New Look and Regis in the coming weeks (the latter CVA having been approved by creditors in October 2018, with the company falling into administration in October 2019 with the challenge still unresolved). The Restructuring Plan gives companies the opportunity to persuade the Court that its proposals are fair “up front” and to argue that there is no party better placed than the company to articulate what the alternative would be, but for its proposal on the table. If successful and the Court sanctions the plan this provides the company with certainty, when compared with the potential for a CVA challenge on a timeline the company cannot control. Where cross class cramdown is required for a plan to be sanctioned, the “No Worse Off” test raises the possibility for valuation challenges to feature prominently in contested cases. Those challenges will, however, be within the confines of the court supervised process, and one lesson that the Virgin convening hearing has shown us is that judges will be slow to second guess a debtor seeking access to this rapid response restructuring process, where the debtor is able to demonstrate that there is a sufficient “burning platform” to justify accelerated timeframes.
It is not surprising therefore that Virgin Active has turned to the Restructuring Plan or that landlords are trying hard to shape the future use of this key tool. If Virgin Active is successful this is likely to pave the way for a series of restructuring plans which look a lot like a CVA; NCP could be the next in line.
The outcomes in Virgin Active (as well as New Look and Regis) are likely to determine the path for a number of businesses. We could yet see a rush of similarly situated companies with significant accrued and contingent liabilities to landlords seeking to follow suit, with the potential to inflict further economic consequences on a property community already suffering from a bruising twelve months. It important context that Landlords’ rights are still largely restricted until the end of June, with no ability to forfeit their lease or wind up their tenant for unpaid rent. In the meantime we may well see the emergence of the Restructuring Plan as the tool of choice to address lease liabilities.
Watch this space for future thought leadership from the DLA Piper restructuring team for further commentary.