The defining feature of the restructuring plan, which was introduced by the Corporate Insolvency and Governance Act 2020, is the "cross class cram down" ("CCCD") mechanism it introduces as a means of imposing a settlement on recalcitrant creditors.
In contrast to the well-established scheme of arrangement under Part 26 of the Companies Act 2006, the CCCD allows the court to use its discretion to bind dissenting creditors in circumstances where (i) one class with a genuine economic interest has approved the proposed restructuring plan and (ii) the court is satisfied that none of the dissenting class would be worse off under the restructuring plan than they would be in the "relevant alterative", i.e. the scenario if the restructuring plan were not sanctioned.
While the restructuring plan no doubt provides a welcome relief for companies that have successfully garnered the support of "in the money" creditors but face opposition from "out of the money" creditors, the restructuring plan process has been of concern to landlords of underperforming businesses who have found their rights and claims and claims against tenants compromised through the plan process.
The effect of such compromises was most recently demonstrated in UK Commercial Property Finance -v- Cine-UK and Cineworld [2024] EWHC 2475 (Ch) (the "Cineworld Case"), in which a restructuring plan proposed by certain companies (the "Plan Companies") in the Cineworld UK cinema group (the "Cineworld Group") was sanctioned by the High Court, despite opposition from landlords.
The facts
In 2023, following the material financial impact of the COVID-19 restrictions, the Cineworld Group underwent a reorganisation under Chapter 11 of the US Bankruptcy Code. While this provided the Cineworld Group, particularly in the US, with some headroom and liquidity, it did not deal with the lease liabilities of the UK members of the Cineworld Group.
The combination of the COVID restrictions, the screenwriter strike of 2023 and "over rented" leases (i.e. leases concluded at above market rate rents) led to the Cineworld Group in the UK continuing to face financial distress. Consequently, the Plan Companies proposed a restructuring plan that, in summary, sought to:
- implement a debt for equity swap in respect of certain loan obligations owed to the American part of the Cineworld Group and the release of corresponding security;
- amend and extend time for payment in respect of secondary secured lenders;
- restructure the UK group's portfolio of leases; and
- compromise and release certain unsecured property and business rates liabilities within the UK group.
In line with recent cases such as Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch) ("Virgin Active") and Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch), landlords were placed into a different classes depending on the commercial viability of their respective leases.
While the plan was approved by certain creditors, including the Plan Companies' intercompany lenders, the term loan lender and certain business rates creditors, the plan did not receive support from a number of landlord classes. For one of the Plan Companies, Cine-UK Limited, only two out of eight classes approved the plan (although all the dissenting creditors were landlords). The court was therefore asked to use the CCCD mechanism to enable these plans to proceed.
Two landlords, UK Commercial Property Finance Holdings Limited and the Crown Estate Commissioners (the "Opposing Creditors") raised a last minute objection to the proposed restructuring plan on the evening before the sanction hearing. The Opposing Creditors sought injunctions to exclude their leases from the plans. This was on the basis that the Opposing Creditors had previously entered into side letters (the "Side Letters") under which the Plan Companies had agreed that, if a restructuring plan was proposed, they would not include the Opposing Creditors' leases.
The decision
Mr Justice Miles applied the three stage test outlined by Snowden J in Virgin Active, that is:
- Had the plans been approved by at least one class of creditors?
- Was the "no worse off test" satisfied?
- In all the circumstances, should the court exercise its discretion to sanction the restructuring plans?
The first two criteria were easily satisfied. The proposed restructuring plans had each been approved by at least one class of creditor. Mr Justice Miles was also satisfied that insolvent administration was the appropriate relevant alternative and that the Opposing Creditors would be no worse off in the event of an insolvent administration. The proposed restructuring plan was structured so that creditors were entitled to receive a payment of the higher of 150% of the amount they would receive in an administration or £1,000.
This left the final question – should the court exercise its discretion to sanction the restructuring plans? Mr Justice Miles, citing Virgin Active, followed the earlier case law, in holding that the view of "out of the money" creditors "should not weigh heavily or at all on the decision of the court as to whether to sanction the plan and exercised the CCCD power". Mr Justice Miles accepted that the Opposing Creditors were "out of the money" save for two minor points – they would be entitled to a de minimis share of the prescribed part and that they would receive payments of contractual rent for a short period of 30 or 90 days. Given the modest amount of these payments, Mr Justice Miles did not consider it appropriate to give much weight to the views of those creditors.
Opposing Creditors' challenge
The Opposing Creditors sought an injunction removing their leases from the proposed restructuring plans. While their submissions were based on seven different grounds, the thrust of the first six of grounds was that it would be inappropriate for the proposed restructuring plans to alter the prior, freely negotiated, Side Letters. In the view of the Opposing Creditors, the court should enforce the negative covenant given by the Plan Companies not to include the relevant leases in the proposed restructuring plans. The Opposing Creditors argued that equity should enforce a negative covenant given for valuable consideration absent special circumstances. In the alternative, they argued that the appropriate relevant alternative was the proposed restructuring plan with the Opposing Creditors excluded.
Mr Justice Miles was unpersuaded by these arguments. He noted that there was "potentially a serious tension between the equitable jurisdiction to enforce a negative covenant to exclude particular creditors and the application of the pari passu principle." He observed that "Restructuring plans [are] a form of collective proceeding for the benefit of [a company's] creditors as a whole [and] the pari passu principle [is] a fundamental principle of insolvency law and [embodies] a public policy[…] the court [will therefore] be slow to enforce agreements which [operate] to undermine this policy."
We agree with this analysis. If a restructuring plan cannot amend negative covenants then its efficiency will be significantly weakened given the underlying premise of the tool is to alter contractual arrangements with a view to rescuing the business or improving the result for creditors.
Mr Justice Miles was equally unconvinced by the second argument. He noted that it would lead to an "absurdity" if dissenting creditors could simply argue that the relevant alternative was the same restructuring plan but with that creditor excluded. This would make it near impossible for a company with multiple creditors to make a convincing argument that insolvency was the relevant alternative.
As Mr Justice Miles stated, there is nothing inherently unfair in a restructuring plan proposing long term alterations to leases. As Mr Justice Zacaroli noted in Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch), the inclusion of a break right for landlords in a restructuring plan provides them with an alternative if they are dissatisfied with the proposed terms of that restructuring plan.
The difficulty for landlords in such cases is precisely the same matter that will have led to the proposal of a restructuring plan in the first place. It is the economic reality that the market rent for the leases included in the restructuring plan will be lower than the contractual rent being asked of the tenant before the development of the restructuring plan. If, in fact, the market was such as would enable a landlord to re let the properties concerned at the same or indeed a higher rent than it had been receiving, the landlord would be very unlikely to object to the terms of the restructuring plan. Indeed, the tenant would be most unlikely to be proposing a restructuring plan in the first case!
Practical takeaways
The Cineworld judgment will no doubt be of concern to landlords who have, before the proposal of a restructuring plan, entered into a compromise under which a tenant has agreed to exclude their leases from any future insolvency procedures. As Rachel Reynolds, a partner in our real estate practice, has said in her article dated 2 October 2024, such agreements are, following this judgment, going to be of questionable value. That assumes the judgment stands. However, we understand that leave to appeal has been granted and that either or both of the Opposing Creditors may indeed take this case to the Court of Appeal. We question whether any such appeal would succeed and in any event, unless and until there is a successful challenge, the law and indeed the position of landlords with regard to pre restructuring plan agreements will be determined by the Cineworld judgment.
So what practical steps can landlords take to protect themselves?
First, landlords should engage openly and constructively with stressed tenants at an early stage. Doing so should increase the likelihood that a bilateral agreement can be struck outside of a restructuring plan as and when such a plan is proposed. In the Cineworld Case, a number of such agreements were reached prior to the proposed restructuring plan being voted on. Our experience is that stressed companies will, on account of the cost and uncertainty of the restructuring plan process very often make the proposal of a plan a last resort. We have also seen numerous instances of a pending restructuring plan being used as "lever" to obtaining such agreements.
Another lesson coming from the Cineworld judgment is that landlords (and indeed any other creditor wishing to object to a restructuring plan) should ensure that any concerns and objections are raised as early as possible. Mr Justice Miles was critical of the fact that the Opposing Creditors had only raised their objections and sought injunctive relief at almost the last moment before the sanction hearing. The failure of the Opposing Creditors to make their submissions at the convening hearing led to the proposed restructuring plan proceeding on the basis that their leases were to be included and the plan had been modelled on that basis.
Finally, landlords who wish to challenge a restructuring plan must carefully consider the basis on which such a challenge is made and the prospects of success. In these types of cases, a challenge will generally need to be based on either the correctness or otherwise of the "relevant alternative" to the restructuring plan. That will almost invariably be the administration or liquidation of the company proposing the plan. Alternatively or in addition, a creditor wishing to challenge a restructuring plan may wish to argue that it is in some way unfair.
The making of any such challenge will inevitably be costly due to the need for expert evidence, along with the fact-based nature of the restructuring plan process. Hence any creditor wishing to make a challenge should always give, with the assistance of its legal and financial advisors, serious consideration to whether a challenge to a plan will in fact be no more than "throwing good money after bad".
The law and practice in relation to restructuring plans has been evolving rapidly over the past few years and it continues to do so. Hence landlords and other creditors will need to remain vigilant and proactive in any case where they are engaging with a counterparty that encounters financial stress, or indeed distress. The Cineworld Case is yet another salutary reminder of the need for strategic planning and early intervention in the face of actual or potential restructuring scenarios.
