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The cross-class cram down, and the third-party guarantor 22 August 2022

Part 26A of the Companies Act 2006:

1. Part 26 of the Companies Act 2006 provides for the court to sanction schemes of arrangement for companies seeking a compromise or arrangement with their creditors.  Such schemes need to be approved by 75% by value of each class of creditors.  This helped landlords, as a class or classes of creditors, to resist arrangements which they considered hostile to their interests. 
2. Part 26A was introduced into the Companies Act 2006 with effect from 26 June 2020, by Schedule 9 of the Corporate Insolvency and Governance Act 2020.  It introduced the possibility of what is referred to as a cross-class cram down.  The new s. 901G gives the Court the power to sanction an arrangement even if one or more classes of creditor is dissident, provided one class assents.  In those circumstances the Court can sanction the arrangement if none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative – the relevant alternative being what would be most likely to occur if the plan were not to be sanctioned.  This is known as the “no worse off” test. 
3. Unsurprisingly, and no doubt intentionally, this has weakened the ability of landlord creditors to resist arrangements which suit other creditors in a way landlords consider to be to their disadvantage. 

The Virgin Active Restructuring Plan

4. On 12 May 2021, in his decision in Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch), Snowden J approved a restructuring plan for Virgin Active Limited (“VAL”) under Part 26A (“the Plan”).  The Plan was one of several (“the Plans”) that had been proposed by companies which were part of the Virgin Active group (“the Group”), in response to its financial difficulties caused by the COVID-19 pandemic.  The Government-imposed shutdowns forced gyms to close in all of the Group’s territories, causing a plummet in membership payments.  However, the Group remained subject to many fixed costs and overheads, in particular its obligations to its secured creditors, and to its landlords. 

The Landlords

5. In the UK, there were 46 landlords (“the Landlords”), under 67 Leases (“the Leases”).  By the end of May 2021 the arrears of unpaid rent owed to the Landlords under of the Leases was about £30 million. Those arrears were all unsecured debts, and accrued in circumstances where Landlords were prohibited by law from taking enforcement action ordinarily available to them[1]. 
6. VAL sought to justify the Plans by showing that the outcome for all the creditors, including the Landlords, would be worse if they were not made, in which case the companies would be put into administration (“the Relevant Alternative”). The Landlords were not convinced, and a number of them resisted. 
7. As is usual, the Plans involved the division of the Leases into classes, with Class A being the most profitable sites, and Classes D and E being loss-making, which the Group didn’t want to retain.  For Classes D leases, the proposal was for all past, present or future rent, service charge, insurance or other liabilities to be “irrevocably and unconditionally compromised, released, discharged and brought to an end”, and for any sums payable under each lease to be “reduced to nil”, in exchange for a specified sum of money (a certain amount if the Landlord gave notice to vacate, otherwise a specified “Restructuring Plan Return”). 

The Guarantors

8. Some of the Leases were guaranteed by Group companies, and one was guaranteed by a company outside the Group (see para. 7 of the Judgment).  The guarantees given by other companies were to be compromised as part of the Plans.  As explained at para. 72 of the Judgment:

“As explained above, the Plans vary the rights of certain Landlords against certain guarantors within the VA Group. This falls within the scope of a compromise or arrangement between the Plan Companies and the Landlords, since the guarantors would otherwise have a “ricochet” claim against the relevant Plan Companies which would defeat the purpose of the Plans: see Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch) at [163], where the authorities are considered.”

9. However, it does not seem that express provision was made for guarantees given by third parties, of which there was evidently at least one.   

The sanctioning of the Plan

10. The Plans were approved by the Secured Creditors and the Class A Landlords, but they were rejected or failed to attain the necessary statutory majority in each of the other class meetings of Landlords in Classes B-E.  Nevertheless, Snowden J held that, on the evidence, the “no worse off” test was satisfied in respect of each class of Landlord, and he exercised his discretion to sanction the Plans. 

A third-party guarantor? Oceanfill v Nuffield. 

11. One of the Class D Leases was of premises in Leeds, which had originally been let to Nuffield Health Wellbeing Limited (“Nuffield”), for a term of 25 years from 29 September 1998.  Cannons Group Limited (“Cannons”) was Nuffield’s guarantor.  In 2000 this lease was assigned to VAL.  The landlord, Oceanfill Limited (“Oceanfill”), as well as taking a guarantee from a Virgin Group company, also took an authorised guarantee from Nuffield, as well as a guarantee of Nuffield’s obligations thereunder from Cannons. 
12. Oceanfill wanted to pursue Nuffield and Cannons for the unpaid rent under this lease.  The question arose whether it could do so, notwithstanding the sanctioning of the Plan by the Court.  There was no direct authority on whether restructuring plans under Part 26A impacted on third party guarantors in the position of Nuffield and Cannons.
13. Oceanfill issued a claim for the rent, and an application for summary judgment.  Nuffield and Cannons resisted, raising a number of lines of defence.  Judgment was given by Deputy Master Arkush on 15 August 2022: Oceanfill Limited v Nuffield Health Wellbeing Limited, Cannons Group Limited [2022] EWHC 2178 (Ch). 
14. The first was that the effect of the Plan was that the rents had not fallen due pursuant to the Lease, because the lease was in effect varied by it.  This argument failed.  The Judge considered that arrangements under Part 26A were like those under Part 26 in this regard, and take effect by operation of law, not as an agreement (actual or deemed) between the parties.  As the Judge explained at para. 26:

“To the extent that it provides for a tenant to be released from future obligations under a lease, as the Plan did in this case, it does so by means of a statutory scheme that releases or discharges the tenant from liability. In my view it is not correct to say that the Plan re-writes the Lease. It is more correct to say that it releases the Plan Company from future liability under the Lease terms by providing that the rent and other liabilities are not payable on its part.”

15. He held that the Plan left unaffected the rights of Oceanfill against third party guarantors. Between those parties, the lease remains valid and subsisting, and rent continues to ‘fall due’ even though it is not payable by the tenant, VAL.
16. The Defendants also invoked the rule in Holmes v Brunskill [1878] 3 Q.B.D. 495 CA.  The Plan was expressly stated to be “deemed to take effect, for all purposes whatsoever and without limitation, as having been made by deed”.  That, so the argument went, means that it is as if there has been a consensual act, varying the tenant’s obligations, and triggering the release of the guarantors.  The Judge rejected this variant of the variation argument too, not least because in order to reflect the true nature of the Plan, the hypothetical deed would have to state that the variation in the tenant’s liability was by virtue of operation of law, and not by agreement between them.
17. Nuffield and Cannons also argued that, just as claims against Group company guarantors might ricochet against VAL, so might claims against third party guarantors, such as themselves.  The Judge had no sympathy with that argument.  If VAL’s Plan had left it exposed in that way, then so be it.  He did not consider that it was appropriate to seek to fill any gaps that might have been left by the Plan. 
18. The Defendant’s next line of defence was to rely upon the terms of the guarantees they had given, and submit that the obligation “to pay the rents and observe and perform the covenants” applies in the form those covenants exist, as varied, at the relevant time.  However, this failed, as a matter of the construction of the lease, which contained

“[…] a clear provision that Nuffield and Cannons would not be released by variations of the Lease, or by any other matter by which the tenant would be exonerated from its obligations under the Licence to Assign, and that any such release could only be by way of release under seal given by Oceanfill.”

19. The Judge considered that provisions of this kind are commonly found and will be given effect to, citing the example of Samuels Finance Group plc v Beechmanor Ltd [1993] 67 P&CR 282. 
20. Nuffield and Cannons’ last line of defence was that there were “other compelling reasons for the claim to be disposed of at trial and not summarily”.  They argued that a fuller investigation of the case could add to or alter the evidence available to the trial judge.  The Judge rejected that argument, because the issues raised in the defence are matters of law, citing the judgment of Lewison J in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15], and concluding:

“[..] this is a case that gives rise to short, if novel, points of law or construction and I am satisfied that I have before me all the evidence necessary for their proper determination. The sooner the points are decided the better and I am satisfied that I should therefore grasp the nettle and decide them.”

21. This vindication of the landlord’s entitlement to pursue third party creditors, such as former tenants who have entered into AGAs, may be of some comfort to landlords who find themselves on the receiving end of a cross-class cram down, though, as the Judge made clear, they will have to give credit for whatever they do actually receive under the arrangement, and will not be allowed double-recovery.

Greville Healey, Falcon Chambers, 19 August 2022

The original version of this article was first published in the Woodfall Landlord and Tenant Bulletin. 

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• Greville Healey

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