Re Virgin Active Holdings Limited

The court considered an application by three Virgin Active companies under Part 26A of the Companies Act 2006 for an order under section 901C convening creditor meetings to consider proposed restructuring plans. The judge found that the threshold conditions in section 901A(2)-(3) were satisfied because the companies had encountered financial difficulties as a result of the COVID-19 pandemic and the proposed compromises were directed to mitigating those difficulties.

The court determined class composition for the convening stage. It accepted that the secured lenders should form a single class and that the landlords should be divided into five classes (A–E) based on the Plan Companies' commercial categorisation of leases; the General Property Creditors were to form a separate class. The court rejected the argument that the manager of Canary Riverside should be placed in a separate class.

On the adequacy of the explanatory statement, the court held that, although creditors were entitled to information reasonably necessary to decide how to vote and to challenge any cram-down later, the draft explanatory statement was not manifestly deficient so as to refuse convening. The court declined to require unrestricted disclosure of certain commercially sensitive materials in the explanatory statement (notably the Deloitte working model, detailed five-year business plan and extensive historical site-by-site data), but ordered limited confidential disclosure to named advisers of creditor groups of the business plan, cashflow forecasts, 2019 site-by-site financial data and the Plan Companies' analysis underpinning lease classification, on confidentiality undertakings. The court made ancillary directions for notice, virtual meetings and a tight timetable for meetings and the sanction hearing in view of urgent cashflow needs, and made a CPR 5.4D(2) order requiring notice of applications to inspect the Plan Companies' evidence.

Background and parties. The applicants were Virgin Active Holdings Limited, Virgin Active Limited and Virgin Active Health Clubs Limited (the Plan Companies), part of an international gym operator group. They sought an order under section 901C of the Companies Act 2006 to convene meetings of creditors to consider restructuring plans under Part 26A. Key stakeholders included secured lenders under a 2017 Senior Facilities Agreement, 67 landlord leases across 45 properties, and a number of general property creditors. The restructuring package involved lender forbearance, shareholder and affiliate funding and compromise terms for landlords and other unsecured creditors.

Nature of the application. An application at first instance to convene creditor meetings and to approve an explanatory statement and timetable. Relief sought included orders that meetings be convened, directions as to class composition, adequacy of the explanatory statement and disclosure, and a tight timetable to permit implementation in light of pressing cashflow needs.

Issues before the court.

• whether the statutory threshold conditions under section 901A (Conditions A and B) were satisfied;
• the appropriate class composition for the convening stage (in particular the division of landlords into classes A–E, treatment of secured creditors and of General Property Creditors, and whether the Canary Riverside manager required a separate class);
• whether the explanatory statement was adequate for convening purposes and whether additional disclosure (including Deloitte working models, detailed business plans, cashflow forecasts and site-by-site historical accounts) should be required as part of the explanatory statement or otherwise disclosed; and
• the timetable for meetings and the sanction hearing given the Plan Companies' urgent cashflow position.

Court's reasoning and conclusions.

• Threshold conditions: on the evidence (declining trading, severe EBITDA decline and imminent cash shortfall caused by the pandemic) Condition A (financial difficulties affecting going concern) and Condition B (a compromise with creditors to mitigate those difficulties) were satisfied.
• Relevant alternative and valuation basis: Deloitte advised that a trading administration was the most likely alternative and produced an Estimated Administration Return; the Plans offered a Restructuring Plan Return set at 120% of that estimate to provide uplift relative to the relevant alternative. The court accepted that identifying the counterfactual/relevant alternative was material to later cram-down arguments.
• Class composition: applying established principles (similarity of legal rights and the counterfactual comparator), the secured lenders should form one class; landlords should be split into five classes (A–E) based on the Plan Companies' commercial assessment of site profitability and strategic value; General Property Creditors should form a separate class. The manager of Canary Riverside did not require a separate class because its contingent or accrued claims were of the same kind as other unsecured property creditors for counterfactual administration purposes.
• Explanatory statement and disclosure: the Practice Statement requires sufficient information to enable an informed vote, but the convening hearing is not the forum for full forensic review. The court would not refuse to convene meetings on the basis of the Explanatory Statement provided, but ordered limited, confidential disclosure (business plan, cashflow forecasts, 2019 site-by-site data and the allocation analysis) to named advisers under confidentiality undertakings to enable meaningful challenge at sanction. The court declined to order unrestricted inclusion of Deloitte's working model (EPM) or other voluminous commercially sensitive material in the public explanatory statement, but accepted an offer that Deloitte would meet advisers to explain the model and that Deloitte's terms did not include a success fee.
• Timetable and urgency: given the credible evidence of imminent cash exhaustion, the court directed a compressed timetable (Plan Meetings on 16 April 2021; evidence filed week commencing 19 and 26 April; sanction hearing to commence 29 April 2021) and permitted virtual meetings, while preserving creditors' rights to raise issues at sanction. Ancillary orders included CPR 5.4D(2) notice of applications to inspect evidence.

The court granted the application to convene creditor meetings under section 901C and found that the statutory threshold conditions in section 901A were satisfied. The court determined class composition for convening purposes (secured creditors in one class; landlords divided into five classes A–E; General Property Creditors in a separate class) and refused to order unrestricted inclusion of voluminous commercially sensitive material in the explanatory statement. However, the court ordered limited confidential disclosure of the business plan, cashflow forecasts, 2019 site-by-site financial data and the Plan Companies' lease-classification analysis to named advisers under confidentiality undertakings, made ancillary procedural directions (including a CPR 5.4D(2) notice requirement) and set a compressed timetable for meetings and the sanction hearing because of urgent cashflow needs. The convening decisions remain open to challenge at the sanction hearing.