Third-party guarantors released by virtue of Part 26A plan?

Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Anor [2022] EWHC 2178 (Ch)How does a sanctioned restructuring plan impact third-party guarantors?

Overview

Part 26A of the Companies Act 2006 was enacted in June 2020 with the goal of ensuring businesses impacted by the Covid-19 pandemic could maximise their chances of survival. Since its enactment, no court has considered how a sanctioned restructuring plan under Part 26A impacts third-party guarantors. This decision answers the question of whether the plan re-writes the terms of an agreement and releases the debtor from liability, such that amounts owing have not fallen due and third-party guarantors have nothing to be liable for, or whether the plan merely alters the liability of the debtor, leaving unaffected the liabilities of third-party guarantors.

Background

The claimant Oceanfill Ltd. (the “Landlord”) was a landlord of premises leased to Virgin Active Limited (the “VAL”), which operated as a gym. Nuffield Health Wellbeing Ltd and Cannons Group Limited (collectively, the “Guarantors”) guaranteed VAL’s obligations under the lease. In this case, the Landlord brought an application for summary judgment, claiming rental arrears of approximately £140,000. This amount would ordinarily have been payable by VAL. However, in May 2021, the High Court approved a restructuring plan for VAL pursuant to Part 26A of the Companies Act 2006 (the “Plan”). The reason for the Plan was that the pandemic forced VAL to close its locations and deprived it of the income needed to pay rent.

Part 26A introduced an additional power, known as a “cross-class cram down”, for the court to sanction a composition or arrangement even if it is not agreed by a number representing at least 75% in value of a class of creditors, referred to as “the dissenting class”. This is only permissible if the court is satisfied that, if the compromise or arrangement were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the “relevant alternative”. The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned.

Under the Plan, the Landlord was classified as a “Class D Landlord” entitled to a “Restructuring Plan Return”, in exchange for a compromise of all claims it had against VAL. All of the Class D Landlords voted against the Plan, but Snowden J. nevertheless sanctioned the Plan on the basis that the Class D Landlords would not be any worse off than they would be in the “relevant alternative” – administration followed by an accelerated sale of the business.

The issue was whether the Plan re-wrote the terms of the lease and released VAL from liability, so that the sums claimed by the Landlord had not fallen due (as the Guarantors contended), or whether the plan merely altered the liability of VAL, leaving unaffected the liabilities of the Guarantors (as the Landlord contended).

The Nature of the Plan

The Guarantors argued that the rents claimed had not come due as a result of the effect of the Plan, which varied the terms of the lease from the date of the Court’s approval; released VAL from any outstanding liability as at that date; and reduced the rent falling due pursuant to the lease to zero during the duration of the Plan.

The Landlord took a different view of the effect of the Plan, arguing that a scheme of arrangement binds affected creditors by operation of law, and not by virtue of an actual or deemed agreement by the creditors. The Landlord therefore submitted that a scheme of arrangement sanctioned by the court under Part 26 does not affect the rights of a creditor bound by the scheme against third parties also liable for the same debt.

Deputy Master Arkush agreed with the Landlord, finding that the Guarantors’ arguments could not withstand the clear and longstanding authority that a scheme of arrangement under Part 26 takes effect by operation of law, and not by virtue of an agreement between the parties, whether actual or deemed. Accordingly, it was not correct to say that the Plan re-wrote the lease – rather, it released VAL from future liability under the lease by providing that the rent and other liabilities were not payable on its part. Alternatively, to the extent that this could be described as re-writing the lease, it was a re-writing only as between the Landlord and VAL – it left unaffected the rights of the Landlord against third-party guarantors. As between them, the lease remained valid and subsisting, and rent continued to “fall due” even if not payable by VAL.

The Issue of “Ricochet” Claims

One of the arguments advanced by the Guarantors was that, in sanctioning the Plan, Snowden J. pointed out that the Plan varied the rights of certain Landlords against certain guarantors within the corporate group of VAL. Snowden J. found that this fell within the scope of a compromise or arrangement between the Plan companies and the Landlords, since the guarantors within the corporate group would otherwise have a “ricochet” claim against the relevant Plan companies, which would defeat the purpose of the Plan. The Guarantors relied on this statement to argue that, if judgment were given against the Guarantors (which were not members of the corporate group, but rather third parties), that might lead to such claims being made against VAL by them.

Deputy Master Arkush rejected this argument, pointing out that Snowden J.’s comments were made in the context of guarantors within the corporate group, not third parties. Deputy Master Akrush acknowledged that these might also produce “ricochet” claims at the instance of the third parties, but found that this was not considered, and it was not clear whether such claims were even contemplated. Whether this was deliberate or inadvertent, such claims were unaffected under the Plan. Deputy Master Arkush saw no compelling reason to take them into account in sympathy for the interests of VAL when VAL itself, assisted by a team with highly experienced legal and accountancy advice, did not do so in proposing the Plan.

Deputy Master Arkush also found that any “ricochet” claims that might be made against VAL would not exceed approximately 2 years’ liability under the lease, which was a relatively minor sum in financial terms given the release of VAL’s liabilities effected by the Plan (approximately £30 million).

Accordingly, the Landlord was entitled to judgment on the claim.

Judge: Deputy Master Arkush

Counsel: Stephen Jourdan Q.C. and Imogen Dodds of Falcon Chambers (instructed by Teacher Stern LLP) for the Landlord; James Tipler of Falcon Chambers (instructed by Eversheds Sutherland (International) LLP) for the Defendants