Cramming down multiple classes of creditors

Author

Insolvency Insider
March 08, 2023

In what circumstances will the Court cram down multiple classes of creditors under Part 26A of the Companies Act 2006?

Overview

We last wrote about Listrac Midco Limited et al. (the “Plan Companies”), seven companies that are part of the Lifeways Group, a regulated provider of care services, in the context of the Court’s judgment convening meetings (the “Plan Meetings”) of certain of the Plan Companies’ creditors for the purpose of considering restructuring plans under Part 26A of the Companies Act 2006 (the “Plans”). Please refer to our previous summary for a more detailed explanation of the various Plan Companies and their proposed role under the Plans. In the decision summarised below, the Court approved the Plans notwithstanding that various classes of creditors did not approve the Plans with the requisite majorities.

Background

In short, the proposed restructuring involves certain secured creditors agreeing to reduce their existing secured indebtedness of £190,000,000 to approximately £88m (inclusive of accrued interest), and agreeing to provide additional new liquidity totalling £15m. In return, the secured creditors propose to acquire ownership of the majority of the Plan Companies (all except Midco).

Many liabilities of the Plan Companies will be left alone and are excluded from the Plans. Certain other liabilities need to be modified or compromised in order to make the transaction with the secured creditors viable. These liabilities fall into two groups:

  1. Liabilities under certain leases entered into by LCC, LAL, ACUKL and VML which were determined to be uneconomic or otherwise problematic. These liabilities have been divided into three categories:Class A Leases: Leases which are uneconomic on current terms and require amendment to bring the rent in line with market rent so they can be placed on a viable footing. For these leases, there will be a reduction in rent for 3 years during which leaseholders will pay a sum corresponding to the current market rent rather than the contractual rent. At the end of the 3-year period, the rent will be re-fixed to the higher of the contractual rent or the then-prevailing market rent. The landlords will also have the right to terminate their leases on 30 days’ notice following the Plans becoming effective. The landlords will be entitled to make a claim under the Plans for the shortfall between the rent they receive during the 3-year period and the contractual rent to which they would have been entitled.Class B1 Leases: Leases which are wholly unsuitable for future use and which will be exited under the Plans. These leases will terminate upon the Plans becoming effective, and the landlords will be entitled to make claims in respect of their losses.Class B2 Leases: These are the same as Class B1 leases but the relevant properties (LCC is the leaseholder in each case) have been sublet to a third party. They will also be exited under the Plans. These leases will terminate upon the Plans becoming effective, and the landlords will be entitled to make claims in respect of their losses.

  2. Various other unsecured creditor claims, including certain property-related claims liabilities owed to former advisers and claims from former senior management executives.

In comparing the Plans with what would happen if the Plans were not sanctioned, the most likely relevant alternative for LFL, LCC, LAL, ACUKL and VML would be insolvent administration, with the companies’ business and assets being sold in a pre-packaged administration sales process. With respect to Midco and Bidco, the most likely relevant alternative would be liquidation.

The Plans leave creditors affected by the Plans at least marginally better off than they would be if the Plans were not sanctioned, receiving 10% more than they would in the relevant alternative.

The Plan Meetings took place on 9 February 2023. All classes of creditors voted in favour of the Plans, except for the following:

  1. Class A landlord creditors of LCC: 1 creditor attended (out of a possible 2) and voted against the Plan.

  2. Class B2 landlord creditors of LCC: 1 creditor attended (out of a possible 2) and voted against the Plan.

  3. Other unsecured creditors of ACUKL: 1 creditor attended (out of a possible 3) and abstained from voting.

  4. Other unsecured creditors of VML: 1 creditor attended (out of a possible 5) and abstained from voting.

  5. Class B1 landlord creditors of VML: No creditor attended (out of a possible 1).

The Court’s Decision

The sanction hearing then took place on 22 February 2023. Because the requisite majority (75% by value) of certain classes of creditors of LCC, ACUKL and VML was not achieved, the Court had to be satisfied that the cross-class cram down provisions of s.901G were met in respect of those companies.

In addition, the Plan Meetings which failed to achieve the relevant majority had only limited (or no) attendance, and in the strict sense could not be described as having been “meetings” at all. The Court did not consider this to present a problem in terms of compliance with the statutory requirements, since the whole point of the machinery under s.901G is that the Court’s sanction power is not dependent on a positive outcome having been achieved across all meetings of every creditor class. In fact, the opposite is true: the purpose of s.901G is to confer a sanction power – provided certain conditions are fulfilled – even if there has been no agreement at one or more of the relevant meetings. The Court concluded that this was consistent with the policy and logic of the cross-class cram down. Were it otherwise, dissenting creditors could disable the operation of the cram down machinery simply by deciding not to attend and vote at the relevant class meeting.

The other conditions that needed to be met for the Plans to be sanctioned under s.901G are the following:

  1. Condition A: If the restructuring plan is sanctioned, would any members of the dissenting class be any worse off than they would be in the event of the relevant alternative? As outlined above, this condition was met because each of the classes to be crammed down will receive at least as good an outcome under the Plans as they would under the relevant alternative.

  2. Condition B: Has the restructuring plan been approved by 75% of those voting in any class that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative? This was also satisfied. Secured creditors form a class in each of the Plans and in each case voted unanimously in favour. In the relevant alternative, they would receive 51.7p in the £, and so have a genuine economic interest in the relevant Plan Companies.

Finally, the Court found that it was appropriate to exercise its discretion to sanction the Plans for each of the Plan Companies, finding that:

  1. There was compliance with the statutory requirements.

  2. Classes were fairly represented (notwithstanding the points about low turnout and abstention above, which were not sufficient to persuade the Court that the Plans should not be sanctioned) and there was no evidence to suggest that creditors voting in favour of the Plans acted otherwise than bona fide and for a proper purpose.

  3. The scheme was one that an intelligent and honest man, acting in respect of his interests, might reasonably approve.

  4. No remaining blot or defect had been suggested.

As a result, the Court sanctioned the Plans for all seven Plan Companies.

Judge: Mr Justice Adam Johnson

Counsel: Tom Smith KC, Paul Fradley and Annabelle Wang of South Square (instructed by Willkie Farr & Gallagher (UK) LLP) for the Applicant Companies