On 29 June 2023, Mr Justice Green approved a restructuring plan for Fitness First Clubs Ltd (“the Company”), a company that operates gyms.
He relied on the cross-class cram down power to impose this plan on dissenting landlords. This judgment reinforces that the views of dissenting creditors who are “out of the money” in the “relevant alternative” will be given little weight by the court when deciding whether to “cram down” against those creditors.
For more details about what a restructuring plan is, please see our page Legal Advice on Company Restructuring Plans.
In a proposed restructuring plan, creditors are divided into different classes. Each of these classes vote on the plan and the threshold for approval within each class is 75% in value (gross value in debt). Where there are classes of creditors that have not voted in favour, the court has the power to approve a restructuring plan when certain conditions are met and the court decides to use its discretion to do so. This is commonly referred to as a cross-class cram down power.
The Company had experienced financial difficulties as a result of the Covid pandemic and sought a resolution. It applied for the court’s approval under Part 26A of the Companies Act 2006 (“CA 2006”) of its proposed restructuring plan. The Company sought to make use of the cross-class cram down provisions of the CA 2006 as five out of nine of the Company’s classes of creditors had not voted in favour of the restructuring plan. These five dissenting classes were different classes of landlords for premises from which the Company operated its gyms. Under Section 901G of the CA 2006, the court may approve a plan where one or more of the classes of creditors dissent. In making this decision, the court first has to decide whether Condition A and B detailed in this section are met.
Condition A is that the court needs to be satisfied that the members of the dissenting classes would be no worse off in the plan than they would be in the “relevant alternative” (i.e. what would be most likely to occur if the Company did not enter into the plan).
In this case, the court found that the “relevant alternative” for the Company would be a pre-pack administration and that the landlords would be no worse off in the plan than in a pre-pack administration.
Condition B is that the plan has been agreed by a number representing 75% in value of at least one class of creditors who would receive a payment, or have a genuine economic interest in the Company’s insolvency, in the event of the relevant alternative. It was uncontroversial in this case that this condition was met by the approving vote of the secured creditor class.
It then fell to the court’s discretion on whether to approve the restructuring plan. The landlords argued that the plan did not represent a “fair distribution of benefits” on the basis that the Company’s shareholders were not being compromised under the plan and that a shareholder’s debt was treated as an important creditor claim. The court found that the out of money creditors “have no real entitlement to share in the restructuring surplus and cannot really sustain a complaint that it is all unfair”.
The court therefore approved the plan and made no order as to costs, which means that the landlords had to bear their own costs.
If you would like to discuss a restructuring plan for your company with one of our experts, please get in touch today on 0845 287 0939 or contact us by email.