Travers Smith LLP has advised Virgin Active on its successfully sanctioned, ground-breaking Restructuring Plan.
The Part 26A Restructuring Plan (the Restructuring Plan) of three companies in the Virgin Active Group (the Plan Companies) was approved by an order of the Hon. Mr Justice Snowden on 12 May 2021. This is a notable development in restructuring techniques. It is only the second time the Court has sanctioned a Restructuring Plan using the cross-class cram down mechanism.
Furthermore, it is the first time the Court has approved a Restructuring Plan containing landlord compromises of the kind more typically found in a company voluntary arrangement (CVA). This case will see Restructuring Plans being added as another option in the restructuring toolbox for companies struggling with unviable real estate portfolios.
The Travers Smith team acted alongside Allen & Overy LLP, with financial advice being provided by Deloitte.
Restructuring & Insolvency Partner Edward Smith led the Travers Smith team, providing the Plan Companies with advice in the lead up to the preparation of the Restructuring Plan, and developing the property-based compromises contained in the Restructuring Plan. He was assisted by Restructuring and Insolvency Senior Associates Kirsty Emery and Natalie Scoones, with support from the firm's Real Estate team led by Senior Counsel Sarah Walker, assisted by Senior Associate Emma Sykes.
The Virgin Active group of companies operates a chain of health clubs in the UK (and overseas) which were forced to close for most of the last 12 months due to government restrictions during the Covid-19 pandemic. Over the lockdown periods, substantial rent arrears had accrued under the group's leases and the group’s financial position became increasingly strained. The Plan Companies therefore appointed legal and financial advisors to consider their restructuring options.
What is a Restructuring Plan?
A Restructuring Plan is a new restructuring mechanism recently introduced under the Corporate Insolvency and Governance Act 2020, which added Part 26A into the Companies Act 2006. It involves a proposal being made by a company to certain or all of its creditors or members. The proposal will be an arrangement or compromise aimed at eliminating, reducing or preventing, or mitigating the effect of, the company's financial difficulties. The process is broadly similar to the well-used English scheme of arrangement procedure, whereby affected creditors or members form classes depending on their interests. Those classes then vote on the Restructuring Plan.
The Restructuring Plan will be approved by those creditors or members of a class if 75 per cent in value of them vote in favour of it. However, there is a key difference to the scheme of arrangement procedure - namely the inclusion of a cross-class cram down mechanism. This allows a Restructuring Plan to be sanctioned (i.e. approved by the Court) if at least one class of creditors or members voted in favour of the Restructuring Plan - despite the fact that other classes may have voted against the plan. To exercise cross-class cram down, at the sanction hearing, the Court must be satisfied that no member of the dissenting class(es) would be any worse off under the Restructuring Plan than they would be in the event of the likely alternative if the plan was not approved. That alternative, in the case of a financially distressed company, will usually be administration or liquidation.
The Virgin Active Restructuring Plan
The Plan Companies' Restructuring Plan categorised compromised different creditors within a number of classes. Broadly these involved the secured creditors, the landlords, and certain other creditors with different types of property-related liabilities. The Restructuring Plan was part of a broader restructuring, pursuant to which, amongst other things, new money was being provided by the group's shareholders and the plan committed the group's secured lenders to provide an amended credit facility.
What was novel about this Restructuring Plan was the inclusion of landlord compromises in the structure, of a kind historically used in company voluntary arrangements. CVAs have been growing in prevalence over the last few years; being used as a method of compromising real estate liabilities where companies are burdened with unsustainable leasehold portfolios. Whilst they have been effective for many companies, the CVA mechanism lacks the cross-class cram down mechanism available under Part 26A. This means that, if particular landlords with substantial liabilities vote against the CVA, the required majority may not be reached. By comparison, in the case of Part 26A, where it can be shown that no creditor in the dissenting class(es) would be worse off than it would be in the likely alternative, a company proposing a Restructuring Plan can ask the Court to sanction the Restructuring Plan irrespective of the fact that the required voting majority was not met in a class or classes.
Similar to a typical landlord CVA structure, the Plan Companies' Restructuring Plan categorised the leasehold estate into classes based primarily on the profitability of the relevant leases. Different treatment then applied to the different classes to restore the leasehold portfolio to a sustainable position. For example, those compromises included (across various landlord classes) certain rent arrears being written-off, future rental payments being reduced and/or deferred and the companies having the option to pay no rent in relation to sites they wish to exit.
Importantly, the Restructuring Plan also included the Plan Companies' secured lenders within a class. This was necessary because the unanimous support of the various lenders could not be obtained outside the plan. At the class meetings, the secured lender class did vote overwhelmingly in favour of the Restructuring Plan, and by well above the statutory 75% required. The inclusion of the lenders within the plan and their support for the restructuring were, in Snowden J's judgment, key factors in establishing the fairness of the Restructuring Plan, notwithstanding the dissenting votes of "out of the money" creditors.
The use of cross-class cram down
For various reasons, including the fact that a number of landlords with larger claims had a "swing vote" in certain classes, a number of creditor classes did not vote in favour of the Restructuring Plan in the required majorities. The Plan Companies therefore asked the Court to exercise its discretion to use the cross-class cram down mechanism to sanction the Restructuring Plan, producing detailed evidence that no member of the dissenting classes would be worse off than they would be in the likely alternative of administration and that the Restructuring Plan was fair as between the various classes of creditors.
The Court was persuaded to exercise cross-class cram down and sanctioned the Restructuring Plan on 12 May 2021 following detailed submissions from the Plan Companies and a group of landlords who opposed the Restructuring Plan.
The end of landlord CVAs?
Whilst the judgment is fact specific, it provides invaluable guidance on the principles to be applied in Part 26A cases, in particular, stressing the need to consider the interests and outcomes of "in the money creditors", such as the secured lenders, as against those who are "out of the money". The sanction of this Restructuring Plan is likely to set a precedent for operational restructurings going forwards, especially those requiring a rebalancing of leasehold liabilities.
Whilst a Restructuring Plan provides an alternative for a company considering a restructuring of this kind, they should be seen as complimentary to the landlord focused CVAs, rather than displacing them. In many cases a CVA will continue to remain a viable alternative. Disregarding the inability to obtain cross-class cram down, CVAs can usually be implemented relatively quickly and, consequently, there are cost efficiencies. We expect that CVAs will continue to be used for implementing a restructuring where the primary cause of financial difficulties is an overburdened real estate portfolio. A well-structured Restructuring Plan may be a useful alternative where a more complex or wide-ranging restructuring is required involving secured creditors (as was that case here) and/or where a disparate or divided creditor base may discount a CVA.
Travers Smith's involvement in Virgin Active's Restructuring Plan adds to our wealth of cross-disciplinary experience and expertise in high-profile retail and leisure restructurings. This has included acting on the CVAs of Carpetright, Carluccio's, House of Fraser, Debenhams, Gaucho, Powerleague Fives, itsu, YO! Sushi, Harding Brothers and Dune of London, as well as the administration sales of the Azzurri Group and Laura Ashley.