Virgin Active: Will landlords be feeling the burn? (Part 3)
The much awaited decision in the Virgin Active restructuring case has been handed down with the court sanctioning Virgin’s proposals notwithstanding vehement objections by many groups of landlords.
As explained in the previous posts in this series this hearing, known as a sanctions hearing, is the last stage in the process for approval of restructuring plans. It is at this hearing that the court can impose (or not) restructuring proposals on dissenting classes of creditors, known as a cross claim cram down.
In Virgin Active, of the creditor classes affected, only the secured creditors and the ‘Class A’ landlords (who were pretty much unaffected by the proposal) voted in sufficient numbers to support. All other classes of creditor expressed widespread opposition to the proposals. When faced with these competing positions the court had two questions to consider: First, does the proposal represent the best, or least worst, scenario for the creditors? Second, if it does, is it fair to impose the scheme of the dissenting classes of creditor?
The best/least worst scenario
There was no dispute that if the plan was not sanctioned Virgin would be moved to administration. The challenge raised by the landlords here was that the consequences of being moved to administration were not as severe as Virgin had portrayed. If the consequences were not so severe, it would follow that the restructuring scheme could be more generous than that proposed. In other words it did not represent the best or least worst outcome.
This argument was in no small part based on the method by which Virgin assessed the relative outcomes. A desktop analysis was utilised. The landlords felt this to be insufficient and that Virgin should have instead tested the market in the real world in order to form a view on what could be achievable in the absence of restructuring. This approach was rejected by the court. There was no indication of how such a real world marketing process would be funded or conducted in practice, and concerns were also raised by the court over the impact of Covid on any such marketing process. In other words such an approach would not be practical.
Imposing the scheme
The power to impose a restructuring scheme on dissenting classes of creditors is a matter for court discretion. The court has to consider the impact on all classes of creditors in both the situation where the scheme is imposed and where it is not. In carrying out this assessment the court has to have regard to the overall level of support for the scheme.
With Virgin it was decided that, while the majority of creditor classes rejected the proposal, there was still significant support for the scheme overall. Having been satisfied that there was support from a cross section of creditors and having been satisfied on balance that the scheme represented the least worst alternative for creditors as a whole, the court sanctioned the proposal with the effect that it will now, subject to any appeal, be imposed on all classes of creditors.
The Virgin Active decision, coupled with the outcome of the recent CVA challenges in the cases of New Look and Regis, will be greeted with considerable disappointment by landlords and we can expect to see further disputes in this arena being litigated in the future.
On the one hand these recent cases may have emboldened companies in distress and certainly the Virgin Active case illustrates how the process can be utilised even in the face of significant opposition. That may signal an increased likelihood in such scheme being utilised in the future, though as mentioned in previous posts the costs of such a scheme may be prohibitive in the majority of cases.
On the other side of the fence are landlords and other creditors who will no doubt look to limit the effects of cases such as Virgin Active in the future. We may get a flavour for the approach landlords, in particular, will be taking in response to restructuring proposals when the outcome of the convening hearing in the NCP restructuring scheme, scheduled to take place on 28 May 2021, is known.
For now it will be very much a case of watch this space to see how this area of law develops. To discuss further, please contact Nitej Davda.