The COVID-19 pandemic has prompted the restructuring of numerous businesses and that can mean commercial landlords having to take severe financial haircuts. That was certainly so in the case of a once successful chain of gyms whose business was devastated by the onset of the virus.
The chain, which relied heavily on office workers to generate membership fees, had contracted dramatically in the face of the pandemic and the changes in lifestyle that it engendered. It had been kept afloat by substantial loans from its main shareholder, who was its only secured creditor. She was not, however, prepared to continue funding the business in the absence of a court-sanctioned restructuring plan.
The plan put forward by the company was a complex one. However, if it were put into effect, the majority of commercial landlords from whom the company rented premises would be forced to accept a reduced rent for a three-year period or, in some cases, no rent at all.
Under judicial supervision, nine meetings of various classes of creditors were held with a view to obtaining approval for the plan. Four of the classes of creditors voted in favour of the proposal, but five – entirely made up of landlords – voted against it by substantial margins.
The company nevertheless asked the High Court to sanction the plan under Section 901F of the Companies Act 2006. Subject to certain conditions, Section 901G of the Act – the so-called ‘cram down’ provision – enables judges to sanction a restructuring plan even where one or more classes of creditors have not voted in favour of it by the 75 per cent majority usually required. The company’s application was, however, opposed by five dissenting landlords.
Ruling on the matter, the Court expressed the view that the company should have made more effort to engage with the landlords. It noted that, when businesses encounter financial difficulties, it is far more beneficial to seek to cooperate and negotiate with creditors rather than to assume that there will be hostility and opposition.
In nevertheless exercising its discretion to sanction the plan, the Court found that the most likely alternative would be to place the company in administration with a view to a swift pre-pack sale of part of its business and assets. If that course were taken, the dissenting landlords’ estimated recoveries would be substantially smaller than those they would receive if the plan were put into effect.
Given that four of the meetings had approved the plan by the requisite 75 per cent majority, and that the dissenting landlords would be no worse off if it were given effect, the conditions attached to Section 901G were satisfied.