In the matter of Fitness First Clubs Limited

Under Part 26A of the Companies Act 2006, cross-class cram down may be used where Conditions A and B are met. Condition A requires the plan company to establish the outcome most likely to occur if the plan is not sanctioned. “Most likely” does not mean certain or more likely than not. The court must assess the dissenting creditors’ position in that alternative and compare it with the plan. In exercising discretion, creditors without a genuine economic interest in the company generally carry little weight. Satisfaction of the statutory conditions gives the plan a fair wind, but creates no presumption of sanction. Differential treatment between creditor classes must be justified, although the in-the-money creditor may determine how restructuring benefits are allocated.

Fitness First Clubs Limited applied under Part 26A of the Companies Act 2006 for sanction of a restructuring plan reducing liabilities, principally rent payable under gym leases. Five classes of landlord creditors voted against the plan. The principal issues were whether the relevant alternative was an administration with an accelerated M&A process and pre-pack sale, whether the dissenting creditors would be no worse off under the plan, and whether the proposed allocation of restructuring benefits was fair. Further issues concerned the compromise of guarantees given by the parent company, the parent’s exclusion from the plan, creditor engagement and disclosure.

Disposition

The court sanctioned the restructuring plan under sections 901F and 901G of the Companies Act 2006. Conditions A and B were satisfied. The court made no order for costs.

1. Statutory and conventional principles. The court applied the statutory cross-class cram down conditions and confirmed that the conventional four principles for sanctioning schemes under Part 26 also apply to Part 26A plans. No issue arose concerning statutory compliance, fair representation, bona fide voting, reasonable approval or any blot.
2. Condition A. The court applied the three-stage no-worse-off analysis described in Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch): identify the relevant alternative, assess its consequences for dissenting creditors, and compare those consequences with the plan. The relevant alternative is the outcome most likely to occur, not an outcome that is certain or more likely than not. The company bears the burden of proof. Dissenting creditors bear only an evidential burden to provide a factual basis for challenge. Anticipated returns are primary, but timing and payment security may also be relevant.
3. Relevant alternative and outcomes. The most likely alternative was an administration with an accelerated M&A process leading to a pre-pack sale. The court rejected the proposed alternative of continued trading using the undrawn £1.5 million facility. The unchallenged valuation and evidence showed that each dissenting class would receive a higher return under the plan than in the relevant alternative. Condition A was therefore satisfied.
4. Discretion and fairness. The court treated creditors with no genuine economic interest in the company as out of the money. Recoveries from third-party sources did not alter that status. Their views consequently carried little weight. The plan’s differential treatment of creditor classes was justified by the relevant alternative, the source of the restructuring benefits and the economic interests of the secured creditor. Satisfaction of Conditions A and B gave the plan a fair wind, but there remained no presumption in favour of sanction.
5. Guarantees and excluded creditors. The court accepted that a plan may vary third-party guarantee rights where the variation is ancillary and necessary to the plan’s effectiveness, applying Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch). The parent’s guarantees were effectively worthless in the relevant alternative and their compromise did not create substantial unfairness. The parent provided critical centralised services, so its exclusion from the plan and continued payment for those services did not undermine fairness. The company’s inadequate engagement with landlords was criticised but did not affect the substantive decision.

not stated in the judgment.