Cineworld: the show must go on

Louise Clark analyses the High Court’s approval of Cineworld’s restructuring plans, and the compromise required of landlords. Key points Part 26A of the 2006 Act enables companies to compromise creditor claims to survive This includes lease terms and agreements not to invoke Part 26A The court will always bear in mind the relevant alternative In UK Commercial Property Finance Holdings Ltd v Cine-UK Ltd and another; Crown Estate Commissioners v Cine-UK Ltd and another [2024] EWHC 2475 (Ch); [2024] PLSCS 173, the High Court has confirmed that, when considering restructuring plans under Part 26A of the Companies Act 2006, all obligations owed to landlords are capable of compromise. Background The case concerned applications by the defendants for orders sanctioning four restructuring plans relating to the Cineworld cinema chain in the UK. The defendants argued that if the plans were not sanctioned, they, and other group companies, had insufficient funds to meet their payment obligations to creditors and that administration was the most likely outcome with no – or de minimis – assets available for distribution to unsecured creditors. Under the plans, creditors were entitled to a payment of the higher of 150% of the amount they would receive under administration or £1,000. Sanctioning of the plans meant that the indirect parent company would provide immediate funding. The cost savings generated by the plans and the new funding would enable the group companies to continue operating as a going concern. Lease portfolio A significant number of the group’s leases were over-rented. The plans included the restructuring of the lease portfolio following models used in other cases, including Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch). Leases which were commercially viable on current lease terms or where agreements had been reached with landlords were not included in the plans. Other classes of lease were included, ranging from those which were uneconomic but could be rendered viable with rent reductions, to those which were commercially unviable where group companies were to be released altogether. In exchange for the compromise of future rent under the leases, landlord creditors were given break rights, entitling them to terminate the leases. Claims against guarantors were similarly modified. In 2023, negotiations between the parties resulted in the claimant landlords agreeing variations of rental payments and the compromise of claims for significant rent arrears on certain premises. In consideration for these concessions the defendants undertook, in side letters, not to seek to compromise further the rent payable and other terms of the leases if they entered into a restructuring plan. Nevertheless, the leases were included in the plans, which imposed substantial impairments on the claimants additional to those already agreed. The claimants argued that by promoting the plans the defendants were in breach of their undertakings. They sought injunctions to remove the relevant leases from the plans. The test The test for sanctioning a restructuring plan or cross-class cramdown where the arrangement has not been approved by the requisite majority in each meeting of creditors – under Part 26A sections 901F and 901G of the 2006 Act – was outlined in Re Virgin Active [2021] EWHC 1246 (Ch) as: a) satisfaction that creditors would be no worse off than under the relevant alternative if the plan was not approved; b) approval of the plan by at least one class of creditors; and c) that, in all the circumstances, the court should exercise its discretion. The court was satisfied that, if the plans did not succeed, the companies would be placed into insolvent administration, which was the relevant alternative. As for the Virgin Active test: i) Creditors, including guaranteed landlord creditors, would be no worse off under the plans than the relevant alternative by payment of the higher of 150% of their estimated insolvency return or £1,000. ii) The plans had been approved by each of the intercompany and term loan lenders. iii) The court should exercise its discretion to sanction the plans because: a) dissenting classes under the defendants’ plans were “out of the money” save in minor respects so that little weight was to be given to their views. b) differential treatment of landlords had become commonplace in plans involving lease liabilities. Classes of landlords would have their leases compromised in the same manner under the plans which accorded with the pari passu principle that creditors with the same rights as one another must be treated in the same manner (Re AGPS BondCo Plc [2024] EWCA Civ 24). c) There was nothing inherently unfair in a plan proposing long-term modifications to leases provided that the terms offered were at least as beneficial as in the relevant alternative and a break right was included for affected landlords (Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch); [2021] PLSCS 96). The landlords’ position The purpose of a restructuring plan under Part 26A of the 2006 Act is to improve the outcome for struggling companies where the relevant alternative is an insolvent administration or liquidation. The preferential treatment of some creditors may be justified if it facilitates or promotes a plan, but the courts should be slow to enforce agreements which operate to undermine the public policy behind the pari passu principle. This was not merely a dispute between the claimants and the defendants. The added collective dimension of the creditors generally had to be considered. Under the relevant alternative, the claimants would be in the same position as other landlords or general property creditors within the same lease class and the rights under the side letters would be immaterial. The court had jurisdiction to approve the plans – including to compromise the side letters – and it was fair to sanction them, notwithstanding the terms of the side letters, even though removing the leases would not render the plans unviable. Louise Clark is a property law consultant and mediator Photo by Gareth Everett/Huw Evans/Shutterstock