The test for sanctioning a cross-class cramdown under sections 901F and 901G of the Companies Act 2006 is: satisfaction of the “no worse-off test”; approval of the plan by at least one class of creditors; and that the court should exercise its discretion in all the circumstances: Re Virgin Active [2021] EWHC 1246 (Ch).
The High Court has considered the test in approving restructuring plans in UK Commercial Property Finance Holdings Ltd v Cine-UK Ltd and another; Crown Estate Commissioners v Cine-UK Ltd and another [2024] EWHC 2475 (Ch); [2024] PLSCS 173.
The case concerned applications by the defendants for orders under the 2006 Act sanctioning four restructuring plans between them and other group companies and certain creditors relating to Cineworld cinemas in the UK.
The plans included the restructuring of the group’s lease portfolio following models used in other cases, including Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch). Lease liabilities which were commercially viable on current lease terms or where agreements had been reached with landlords were not compromised. As is customary in plans seeking to compromise lease liabilities, in exchange for the compromise of future rent under the leases, landlord creditors were given a break right, entitling them to terminate the leases. Claims against guarantors were similarly modified.
The claimants argued that following renegotiations of certain lease terms in 2023, the defendants had undertaken, in side letters, not to seek further amendments in the event of a restructuring plan. They were in breach of those undertakings and the claimants sought injunctions to remove the relevant leases from the plans.
The court was satisfied that if the plans did not succeed the companies would be placed into insolvent administration. As for the Virgin Active test:
i) the landlords would be no worse-off under the plans than the relevant alternative by payment of the higher of 150% of their estimated insolvency return or £1,000;
ii) the plans had been approved by each of the intercompany and term loan lenders; and
iii) The dissenting classes were “out of the money” so that little weight was to be given to their views.
Consequently, the court had to consider whether enforcement of preferential arrangements by the claimants would infringe the public policy embodied in the pari passu principle that creditors in the same class rank equally. Fairness in this context related to the relative treatment of creditors between themselves rather than the company-creditor relationship.
The court had jurisdiction to approve the plans, including to compromise the side letters, and it was fair to sanction them, notwithstanding the terms of the side letters.
Louise Clark is a property law consultant and mediator
