Tenant insolvency: fail to plan, plan to fail?

Restructuring plans are becoming the insolvency process of choice for tenants wishing to modify their lease obligations. The Court of Appeal has now provided some guidance, explains Mathew Ditchburn. The first appeal decision concerning restructuring plans was handed down on 23 January 2024 in the case of Strategic Value Capital Solutions Master Fund LP and others v AGPS BondCo plc [2024] EWCA Civ 24, regarding the Adler Group plan. It deals with important questions about the approach taken to restructuring plans, and should be of interest to property owners seeing an increased incidence of retailer and other tenant insolvencies. What is a restructuring plan? Restructuring plans were introduced by the Corporate Insolvency and Governance Act 2020, by way of a new Part 26A of the Companies Act 1986. They enable a company to propose a compromise or arrangement with its creditors which must then be approved by 75% by value of each class of creditors whose rights are affected. By virtue of section 901G of the 1986 Act, the court may still sanction a plan even though it has not been approved by one or more classes of creditors. This so-called “cross-class cram down” power has two conditions: None of the dissenting creditors are worse off under the plan than they would be in the “relevant alternative”, ie what is most likely to occur if the plan is not sanctioned (usually administration or liquidation). The plan has been approved by 75% by value of at least one class of creditors who would receive a payment out of the insolvent estate, or have a genuine economic interest in the relevant alternative. By cramming down dissenting property owners, restructuring plans have been successfully deployed by a number of tenant companies, such as Virgin Active and Fitness First, to modify lease obligations. The facts of the case The Adler Group, a German property company, had debts in excess of €6bn (£5.1bn), principally in the form of bonds, and substituted a UK company as the issuer of the notes in order to propose a restructuring plan. One class of creditors did not approve the plan by the requisite 75% majority; only 62% voted in favour. Nevertheless, the judge sanctioned the plan using the cross-class cram down powers. The dissenting class appealed. The decision The Court of Appeal looked at different rules regarding the fairness of restructuring plans, including the “rationality” test that the plan must be one that a creditor could reasonably approve. Courts have previously taken the view that creditors are much better at judging their own interests than the courts, and so judges have always been very slow to depart from the majority view of creditors. It was decided by the Court of Appeal that this was not the right approach when exercising a cross-class cram down. If the rationality test could be satisfied simply by saying that 50% or more of a dissenting class had voted in favour then that would undermine the importance attached to the requisite 75% majority. For similar reasons, strong overall support for a plan across creditors as a whole could not by itself be a good reason to cram down a dissenting class. The Court of Appeal held that a more pertinent question was whether there was a fair distribution of the benefits generated by the restructuring. This requires the court to inquire how the value preserved or generated by the plan, over and above the relevant alternative, is to be allocated. It does not follow that all creditors must be treated the same. Differential treatment can be justified with good reason. The usual reason is that it is necessary to prioritise critical suppliers that are essential for the continuation of the company’s business to ensure the continued supply of goods or services. In addition, creditors who are found to have provided some additional benefit or accommodation to achieve the purposes of the restructuring should be entitled to receive some priority or enhanced share of the benefits. Better and fairer plans In previous cases, the courts have taken the view that they are not required to ask whether the plan is the best or the fairest one available, or whether it could be improved. The Court of Appeal confirmed that this is only right where there are no dissenting classes and so no need to exercise the cross-class cram down. Timing Restructuring plans are often run to a compressed timetable owing to the company’s alleged urgent need to restructure. This can have undesirable consequences, such as creditors having insufficient notice or time to obtain and get to grips with the detailed financial information underlying the plan. The Court of Appeal warned against this practice: courts should not be presented with a “gun to the head” and told that the plan must be sanctioned to avoid an immediate collapse of the business. Instead, “a plan company must… make available in a timely manner the relevant material that underlies the valuations upon which it relies”. If not, the court should exercise its power to order disclosure of key information and adjourn hearings to facilitate this. In the event, the Court of Appeal set aside the plan, which goes to show that it should not always be assumed that a restructuring plan will be sanctioned or that it will be fair for the court to cram down any dissenting creditors. Mathew Ditchburn is UK head of real estate and head of real estate disputes at Hogan Lovells Photo by Moviestore/Shutterstock (10983388a)