Virgin Active Holdings Ltd & Ors, Re

Where the statutory conditions for cross-class cram down are met, the court must still exercise an informed discretion under Companies Act 2006, Part 26A. Condition A requires identification of the outcome most likely if the plan fails, rather than proof that it is more likely than not, followed by a comparison of the dissenting class’s position under each outcome.

Creditors who have no genuine economic interest in the relevant alternative carry little weight when objecting to the allocation of value or future upside. The court should nevertheless examine differential treatment, the commercial justification for exclusions, the adequacy of evidence, voting, legality and likely international effect. There is no absolute requirement for market testing before a plan is proposed.

Three companies in the Virgin Active group sought sanction of restructuring plans under Part 26A of the Companies Act 2006. Pandemic closures had caused an acute liquidity crisis. The plans preserved the secured lenders’ debt, restructured liabilities to landlords and general property creditors, and were supported by shareholder funding.

The secured-creditor and Class A landlord meetings approved the plans. Most other landlord classes and the general property creditor classes did not. The companies therefore relied on cross-class cram down under section 901G. The opposing landlords challenged the valuation evidence, the absence of a market-testing process, the treatment of shareholders, and the exercise of discretion.

The central issues were whether dissenting creditors would be no worse off than in the relevant alternative and whether the court should nevertheless sanction the plans.

1. The plans were sanctioned. The relevant alternative was an administration followed by an accelerated regional sale of the businesses. That outcome was not merely possible but almost certain if the plans failed. Condition B was undisputedly met.

2. For Condition A in section 901G(3), the court must select the outcome which is most likely to occur. It need not find that the selected outcome has a probability exceeding 50%. The court must then assess its consequences for each dissenting class and compare them with the plan.

3. The court accepted the desktop valuation and relevant-alternative evidence. A market-testing process was not an absolute legal requirement. In the circumstances, a distressed process during pandemic closures would not necessarily have produced more reliable evidence. The evidence showed that unsecured creditors would be out of the money save for limited prescribed-part recoveries.

4. The dissenting landlords and general property creditors would receive more, and generally sooner, under the plans than in administration. The statutory no-worse-off condition was therefore satisfied.

5. Conditions A and B did not create a presumption that sanction must follow, nor did section 901G impose a free-standing test of what the court thought just and equitable. The court was required to consider all relevant circumstances. The court could not apply the usual Part 26 rationality test to a dissenting vote in the same way as to an approving majority.

6. Creditors without a genuine economic interest in the relevant alternative had no entitlement to the restructuring surplus. The secured creditors, who would be in the money in an administration, could agree to shareholder retention of equity in return for essential new money. The plans also contained commercially justified differences in treatment and no legal blot. They were likely to have substantial effect in the relevant overseas jurisdictions.

• High Court (Chancery Division): Following a convening judgment, [2021] EWHC 814 (Ch), and a costs judgment, [2021] EWHC 911 (Ch), Snowden J sanctioned the restructuring plans.