Virgin Active - Restructuring Plans sanctioned

An important judgment by Snowden J yesterday, sanctioning Virgin Active's restructuring plans after a contested sanction hearing, which included a cram down of several landlord classes that did not approve the plans by the requisite majorities in those classes. 

The decision is important as among the many points covered, it considers certain key issues including:

• the choice between a CVA or a plan - the court found that there was nothing inappropriate in a plan being used rather than a CVA if it appeared more likely to achieve the desired result of rescuing the companies in the interests of their stakeholders generally
• the issues and evidence that will be considered in a cram down application and the meaning of the "no worse off in the relevant alternative" test (which is one of the conditions to cram down) - it being clear that this will be heavily dependent on the evidence
• the assessment of valuation evidence and whether market testing is required - the answer being no in this case
• issues relating to the exercise of the court's discretion to sanction, even if the conditions to cram down have been satisfied - the court made it clear that it still had a role to play in exercising that discretion even if the conditions are satisfied
• the allocation of any restructuring surplus created by the plan - the court found that as the objecting landlords were out of the money, their objections to what the secured creditors agreed with the plan companies carried no weight
• whether shareholders who retain an interest (especially where they have made a further injection) should lead to a refusal to sanction - the court held it did not on the facts and there was no principle of absolute priority as such in the plan legislation
• the application of the plan disenfranchisement provisions allowing creditors to be excluded from the vote where they have "no genuine economic interest" and the impact that has where those creditors have been allowed to vote and are instead sought to be crammed down - this gave the court comfort that their votes need be given little or no weight in the exercise of any discretion to sanction. 

The judgment clearly demonstrates the utility of restructuring plans as a powerful restructuring tool, subject to proper judicial safeguards. 

It is worth noting the recent New Look CVA judgment which also allowed for a compromise to be imposed on dissenting landlords, again subject to judicial safeguards and some potential differences in terms of approach to a scheme or restructuring plan given the difference in the legal tools. 

Some further points to consider (and how CVAs might differ from plans) include:

1. the importance of the nature of the right to be compromised, eg for landlords, ensuring that they continue to be able to take back their property if they consider a better deal can be achieved in the open market
2. what the relevant alternative actually is and the nature of the evidence that might be required and tested in court; this may differ in terms of the assessment of a landlord's position in the relevant alternative - namely a return of an unprofitable lease - and that of a junior financial creditor where there is uncertainty in terms of where value breaks
3. the impact of the overall creditor voting result (for example, to determine whether dissenting creditors were part of a group or class with similar characteristics in which others voted in favour or were swamped by other creditors in a different group or class and the relevant values of those creditors) and 
4. other issues which may go to the court's assessment or exercise of discretion (for schemes and plans) or assessment of unfair prejudice (for CVAs), for example, fairness of allocation of benefits (which of course may depend on how far out of the money the dissenting creditors are in the relevant alternative).