Re Fitness First Clubs Limited

The court was asked to sanction a Restructuring Plan under Part 26A of the Companies Act 2006 which proposed substantial compromises of landlord lease liabilities and changes to guarantees given by the company's parent. Key legal principles applied were the cross-class cram-down in section 901G CA 2006 and the two statutory conditions (Condition A: no worse off; Condition B: existence of an assenting class with a genuine economic interest).

The judge identified the relevant alternative as an administration with an accelerated M&A process leading to a likely pre-pack sale. On the unchallenged valuation evidence and the Company’s comparator and cashflow forecasts, all landlord classes (other than the secured creditor and HMRC) would be "out of the money" in that alternative.

The court held that Condition A and Condition B were satisfied because estimated returns under the Plan exceeded the returns in the relevant alternative for every dissenting class. The court exercised its discretion to sanction the Plan, treating the objections of out-of-the-money landlords as carrying little weight, and approved compromise of parent guarantees as ancillary and necessary to safeguard the restructuring. The court made no order for costs.

This is a first-instance application by Fitness First Clubs Limited for sanction of a Restructuring Plan under Part 26A Companies Act 2006. The Plan restructures lease liabilities across multiple classes of landlords and adjusts the company’s obligations to its secured lender (the company’s shareholder) and to HMRC. Five of nine creditor classes of landlords voted against the Plan so the company sought to rely on the section 901G cross-class cram down.

Background and parties. The Company operates 36 gyms and is a wholly owned subsidiary of Maddox. The principal secured creditor and ultimate funder is the shareholder Ms Best. The opposing creditors before the court comprised one Class B1 landlord (Lazari) and four Class B2 landlords (the HL Landlords), together with other landlord classes who opposed at meetings.

Nature of application and relief sought. Sanction of the Plan incorporating (inter alia) reduced rents for defined periods, payments equal to 120% of estimated administration returns for many landlords, compounding of guarantees given by Maddox, and re-profiling of the secured creditor’s facilities.

Issues framed by the court. (i) What is the "relevant alternative" for Condition A (the company said administration with an accelerated M&A/pre-pack); (ii) whether dissenting landlord classes would be any worse off under the Plan than in that alternative; (iii) whether many landlord creditors are "out of the money" so that their objections should carry little weight in the exercise of discretion; and (iv) whether compromise of third-party guarantees and the exclusion of Maddox from the Plan produced unfairness.

Court's reasoning. The judge accepted the Company’s valuation evidence (FRP valuation range) and the Teneo comparator and cashflow forecasts as the best evidence of the most likely relevant alternative. The court found the company would be most likely to enter administration with an accelerated four-week M&A process and a pre-pack sale rather than continue trading outside an insolvency. On the comparator analysis the prescribed part was minimal and the unsecured landlord classes would be out of the money. The Plan provides creditors a Restructuring Plan Dividend Rate equal to 120% of the estimated administration dividend which produced materially higher returns for the dissenting landlord classes than would be realised in administration. On that basis Condition A was satisfied and Condition B was not in dispute. Having regard to the statutory tests and relevant authorities, the court exercised its discretion to sanction the Plan. The court accepted it was permissible to compromise guarantor rights where necessary to ensure the effectiveness of the arrangement and found no substantial unfairness caused by excluding Maddox from the Plan given that its continued role and service recharges were critical to ongoing trading. The court criticised limited engagement and some redactions of documents but nevertheless refused to make a costs order in favour of objecting landlords.

The court sanctioned the Restructuring Plan. The statutory conditions in section 901G (no worse off and existence of an assenting class with a genuine economic interest) were satisfied because the relevant alternative was found to be an administration with an accelerated M&A/pre-pack process and the estimated returns under the Plan exceeded those in that alternative for every dissenting class. The court therefore exercised its discretion to approve the Plan, including the compromise of third-party guarantees, and made no order for costs.