Travers Smith, acting for Virgin Active, successfully obtains court order restraining landlord enforcement action

Virgin Active Health Clubs Limited ("VAHCL") is part of the Virgin Active group of companies (the “Group”). The Group operates a chain of health clubs in the UK (and overseas) which have been forced to close for most of the last 12 months due to government restrictions during the Covid-19 pandemic. VAHCL holds some of the Group’s leases in the UK, which are used to operate health clubs.

During the lockdown periods, substantial rent arrears had accrued under VAHCL’s leases, and many of VAHCL’s leases had become unaffordable. The Claimant is one of VAHCL’s landlords.

In the months leading up to the court hearing, VAHCL and two other companies in the Group (the "Plan Companies") had been working on a restructuring plan under the recently introduced Part 26A of the Companies Act 2006 (a "Restructuring Plan").

A Restructuring Plan is a proposal made by a company with certain or all of its creditors or members. The proposal involves an arrangement or compromise aimed at eliminating, reducing or preventing, or mitigating the effect of, the company's financial difficulties.  The process is broadly similar to the well-used English scheme of arrangement procedure, whereby affected creditors or members form classes depending on their interests.  Those classes then vote on the Restructuring Plan. 

The Restructuring Plan will be approved by those creditors or members of a class if 75 per cent. in value of them vote in favour of it. However, there is a key difference to the scheme of arrangement procedure - namely the inclusion of a cross class-cram down mechanism.  This allows a Restructuring Plan to be sanctioned (i.e. approved by the Court) if at least one class of creditors or members votes in favour of the Restructuring Plan, even if  other classes vote against the plan.  To exercise cross-class cram down, at the sanction hearing, the Court  must be satisfied that no member of the dissenting class(es) would be any worse off under the Restructuring Plan than they would be in the event of the likely alternative if the plan was not approved. That alternative, in the case of a financially distressed company, will usually be administration or liquidation.

For further detail on the Virgin Active Restructuring Plan and  its successful sanction by Snowden J, click here.

It was common ground that there were unpaid arrears of rent and there was no dispute about VAHCL’s liability for those arrears. The landlord made an application seeking judgment for those arrears, plus costs and interest, under CPR 24.2. VAHCL made its own application applying for a stay of the claim or, alternatively, a stay of judgment (together the "Applications").

Prior to the hearing of the Applications on 12 March, the Plan Companies had issued a Practice Statement Letter notifying their creditors of their intention to seek leave to convene meetings of their creditors under Part 26A, effectively commencing the Restructuring Plan timetable.

The first convening hearing was listed to take place some two weeks after the hearing of the Applications, followed by creditors' meetings, with an anticipated final sanction hearing on 23 April 2021 (the sanction hearing was ultimately listed to start on 29 April).

If the Restructuring Plan were to be sanctioned by the Court at the sanction hearing, it would be binding on all the affected creditors regardless of those who dissent or fail to vote. As far as the landlord's claim was concerned, the Restructuring Plan would discharge the rent arrears owed by VAHCL to the landlord in full.

The Restructuring Plan procedure does not entitle the applicant debtor to a statutory moratorium whilst a Restructuring Plan is being prepared. Therefore, the Plan Companies were potentially exposed to ad hoc enforcement action by creditors against the Plan Companies and their assets up until the sanction of the plan. It was submitted that this could undermine the Restructuring Plan and lead to unequal treatment of creditors. To prevent these scenarios from arising, an application for short stay was deemed necessary and was made by the Court

The Court has the power to grant a stay under CPR 3.1(2)(f) to allow a company to enact a scheme of arrangement under Part 26 of the CA 2006. It was submitted by VAHCL that the same principle ought to apply to a Restructuring Plan under Part 26A, having regard to the close similarities between Part 26 and Part 26A (see above).

A stay of execution of judgment was granted in Sea Assets Ltd v PT Garuda Indonesia [2001] 6 WLUK 583 where a scheme of arrangement was proposed by the airline for its creditors (which included the claimant). In granting the stay, the Court considered whether there was a well advanced scheme of arrangement which had a reasonable prospect of success.

Similarly, in Bluecrest Mercantile BV v Vietnam Shipbuilding Group [2013] EWHC 1146 (Comm), a stay was granted by the Court in support of a proposed scheme of arrangement on the basis that a scheme of arrangement may amount to such special circumstances to justify granting a stay of proceedings or judgment where there is a reasonable prospect of success of the scheme being sanctioned. In arriving at its decision to stay proceedings, the Court in Bluecrest also considered the amount of work that had gone into the restructuring, the likelihood of the scheme going ahead and the possibility that not granting a stay would allow a free-for-all of enforcement action by creditors.

The Bluecrest order also ensured that the terms of the stay protected legitimate interests of the creditors including the claimant. The stay was granted for a short period of time (for 8 weeks) and the claimant was free to bring the matter back to court at short notice if needed.

The stays granted in Sea Assets and Bluecrest can be viewed as instances of the Court implementing some of the basic policy objectives of insolvency and restructuring law, which are designed to prevent free-for-all enforcement actions by creditors against a company in financial distress. In the above cases the Court has allowed for stays to be granted, provided that they are appropriate on the particular facts of the case.

The Court, finding in VAHCL's favour, noted that:

• the Restructuring Plan was not aspirational:
  
  (a) the dates that would see it through to sanction had been booked;
  
  (b) the Court considered that a great deal of work had been put into the Restructuring Plan, involving a team of restructuring advisers, valuers, two eminent City law firms and leading and junior Counsel; and
  
  (c) the Restructuring Plan had the support of the Group's secured lenders who had locked up to vote in favour;

• if the stay was refused, the claimant's action would be disruptive to the restructuring process, and the restructuring would be undermined by virtue of the claimant receiving full payment instead of the amount that it would receive as a class B landlord creditor under the Restructuring Plan;
  
  
• it was also noted that, under the Restructuring Plan, the claimant landlord would receive 120 per cent of the sum it was estimated to receive in an administration scenario;
  
  
• the sanction hearing was only six weeks away, and the period of the requested stay would be for seven weeks (a relatively short period of time);
  
  
• regard should be had to the wider principle that creditors should be treated equally where a company meets the conditions to apply for a Restructuring Plan and that the process under Part 26A should be permitted to proceed without being impeded by a judgment being entered in order to be enforced; and
  
  
• the claimant should not be permitted to disrupt the effect of the proposed restructuring due to the timing of the issue of its claim. In balancing the interests of the company's creditors with that of the claimant landlord, the interests of the wider class of creditors "trumps" the private interests of the claimant.

The Court adopted the approach in Bluecrest and made the order requested by VAHCL, namely for a stay of enforcement under CPR Rule 3, to include a recital of the claimant's entitlement to judgment with permission to apply.

Interestingly, only six days after giving judgment in this case, Chief Master Marsh also heard the case of Commerz Real Investmentgesellschaft mbh v TFS Stores Limited (aka The Fragrance Shop). In that case, the applicant landlord applied for summary judgment and succeeded.

The two cases are markedly distinguishable on their facts. Whilst both defendants had experienced disruption to their businesses as a result of the pandemic, and which had impacted their ability to continue to pay rent to their landlords, VAHCL was actively promulgating a restructuring plan. There was clear evidence that this was a highly developed proposal with a defined timetable. The Court concluded that there was, at a minimum, a reasonable prospect that the restructuring would be sanctioned by the Court (noting that whether it will do so was of course a matter for the Court to consider at the sanction hearing).

This case shows that a Bluecrest stay can be used to help to fill a gap in the protective legislative measures available to a company seeking to implement a restructuring. As The Fragrance Shop case shows, the measures brought in by the Government to protect tenants during the pandemic do not provide complete protection. Likewise, the statutory moratoria afforded by administration and the new provisions introduced by the Corporate Insolvency and Governance Act 2020 may not be appropriate or available to every company. The Virgin Active case confirms that, where a company that is actively and credibly seeking to effect a restructuring with the intention of avoiding administration or liquidation and, in doing so, is proposing a better outcome for creditors as a whole, it may seek the Court's protection from ad hoc claims from creditors that would otherwise disrupt that process and/or give individual claimants an advantage over the general body of creditors.