Cineworld restructuring plan sanctioned (despite prior promise to protect certain stakeholder liabilities)
Introduction
On 30 September, the English Courts approved four English restructuring plans (the Restructuring Plans) relating to companies in the UK arm of the Cineworld group. The sanction of the Restructuring Plans came after a challenge by two objecting landlords (the Objecting Landlords) on novel grounds, which had not been ventilated at the Convening Hearing. The judgment shows that restructuring plans continue to evolve as a useful tool for court supervised compromises of both secured and unsecured creditors.
The case demonstrates that even where, in the words of Snowden LJ, creditors “must stop shouting from the spectator’s seats and step up to the plate”, a well-designed restructuring plan that seeks to promote a fair outcome based on pari passu principles compared against a clear relevant alternative may be difficult to challenge, and creditor coordination for any potential challenge needs to be efficiently organised in accordance with the two-step court process.
In summary, the Court in sanctioning the Restructuring Plans held:
- that side letters entered into between Cineworld and the Objecting Landlords by which Cineworld agreed not to compromise certain leases in a company voluntary arrangement (CVA) or restructuring plan (eg contractual undertakings granted by the plan companies that would be contractually enforceable) did not preclude such leases and their side letters from being included in the Restructuring Plans;
- the Objecting Landlords’ request for an injunction excluding the relevant leases from the Restructuring Plans was dismissed;
- that an application to enforce a contractual agreement to exclude certain debts from a restructuring plan will, as a matter of public policy, generally give way to a statutory scheme for the benefit of all creditors which incorporates the pari passu principle (equal treatment of creditors which would have the same ranking in an insolvency scenario); and
- the fact that the Restructuring Plans could proceed without the liabilities owed to the Objecting Landlords did not mean that the “relevant alternative” to the Restructuring Plans would be the same plans with the relevant creditors excluded. Such reasoning would lead to “absurdity” where a company with multiple creditors could never persuade the Court that insolvency was the relevant alternative.
Background
Restructuring plans – key principles
A restructuring plan is a powerful court supervised procedure that allows a wide range of compromises to be effected, where such a proposal may not be capable of agreement on a fully consensually basis.
Affected stakeholders vote on the company’s proposed plan in separate classes. Stakeholders should vote in the same class where their rights are “not so dissimilar as to make it impossible for them to consult together with a view to their common interest”. 75% by value of the creditors or voting members within each class (which have a genuine economic interest present) must approve the plan.
It is possible to pass a plan even if one class does not vote in favour through a cross-class cramdown mechanism. This is subject to two threshold tests:
- the court must be satisfied that if the plan is sanctioned, no members of the dissenting classes would be any worse off than they would be in the “relevant alternative” (eg liquidation); and
- at least one class voting in favour would receive a payment or have a genuine economic interest in the company in the event of the “relevant alternative”.
Class Composition
In total, Cineworld’s compromise consisted of 32 classes of creditors across the four Restructuring Plans. A summary of the liabilities and their treatment under the Restructuring Plans is set out below.
|
Liability |
Treatment |
|
First ranking secured intercompany loan of USD19 million (lent by the USA arm of the Cineworld group) |
Released in exchange for warrants for shares in the various plan companies and releasing the plan companies’ unsecured and intercompany liabilities. |
|
Second ranking secured term loan of USD1.6 billion |
|
|
Class B leases |
Rent reduced in line with estimated market value. |
|
Class C leases |
Subdivided into two classes:
|
|
Class D leases |
Subdivided into three classes (D1, D2 and D3), all leases exited under the Restructuring Plans. |
|
General property creditors |
Liabilities released in exchange for payment of the higher of:
|
|
Business rate creditors |
Liabilities released in exchange for payment of the higher of:
(plus, in the case of Class C1, C2 and D1 leases, the equivalent of 30 days’ accrual of business rates from the date of the restructuring). |
A number of the plan companies’ liabilities were excluded from the restructuring plans, namely:
- revolving credit facility – the creditors under this facility benefitted from security over the wider Cineworld group so would be anticipated to recover in full in the event of the relevant alternative;
- Class A leases – these were deemed to be commercially viable on the existing lease terms;
- Aviva compromise leases – a consensual rent compromise had been separately negotiated with Aviva in respect of three sites;
- head office lease – this did not relate to a cinema site and was of central importance to the business of the wider Cineworld group;
- trade creditors – the supply of goods and services was deemed critical to the continued day-to-day operation of the business of the group;
- customers – compromising such liabilities would cause considerable damage to the brand and business of the Cineworld group; and
- HMRC – at the time of the restructuring plans there were no material outstanding liabilities to HMRC.
The “Relevant Alternative”
The Court was satisfied that the “relevant alternative” for the purpose of the Restructuring Plans was the insolvent administration of the UK arm of the Cineworld group.
The court accepted evidence from Cineworld that under the relevant alternative, unsecured plan creditors (landlords under the leases, general property creditors and business creditors) would either receive nil or a de minimis amount.
The Court rejected the argument of the Objecting Landlords that the relevant alternative would in fact be the plan companies proceeding with the Restructuring Plans with the exclusion of the Objecting Landlords’ leases. Miles J stated that this reasoning would lead to “absurdity” and “would indeed on one view mean that a company with multiple creditors could never persuade the court that insolvency was the relevant alternative”.
Voting
Each of the Restructuring Plans were approved by the requisite majority of intercompany loan creditors and term loan creditors (the two “in the money” classes of creditor). Certain of the general property creditor, business rate creditor and Class B landlord classes also approved the Restructuring Plans, but the requisite majority was not obtained at the other class meetings.
Objecting Landlords
A challenge was raised by the Objecting Landlords (UK Commercial Property Finance Holdings Limited and Crown Estate Commissioners). In summary, Cineworld had contractually renegotiated certain leases with the Objecting Landlords in 2023. As part of the renegotiation, the relevant Cineworld entities gave undertakings not to further compromise the rent if the tenants were to subsequently enter into a restructuring plan or CVA. The Objecting Landlords sought an injunction to prevent the leases from being included in the Restructuring Plans. This argument was based on the equitable principle that a negative covenant given for valuable consideration will be enforced by the Courts absent special circumstances (which may include public policy).
Such an argument may have wider analogy with creditor protections in loan agreements, for example around the commencement of restructuring processes or undertakings to preserve and maintain a borrower/obligor groups “center of main interests” (one of the potential means to access the Part 26A jurisdiction).
The Court, considering the arguments advanced by the Objecting Landlords, and the facts relating to the timing of their legal intervention, held that:
- the negative covenants in the side letters were capable of being compromised by the Restructuring Plans. Once they were compromised, there would be nothing to enforce; and
- where the threshold for a restructuring plan designed to avoid a formal insolvency is met and the pari passu principle is engaged, any application to enforce a contract to exclude relevant creditors will generally have to give way to that principle unless there is evidence of bad faith (eg conduct that would be regarded as unacceptable by reasonable and honest people) or evidence that other creditors were unfairly benefiting at the expense of the Objecting Landlords. The existence of the side letters was not considered to be a good and proper justification for excluding the relevant leases from the Restructuring Plans and such exclusion would not facilitate or enhance the prospect of a successful restructuring in the interests of the collective.
It was specifically noted by the Court that the Objecting Landlords had left it “very late in the day to make their applications” and the injunction application being raised on the eve of the sanction hearing was “contrary to the principles of efficient and effective case management”. It was also noted that no reason was given by the Objecting Landlords for not raising any objections at the convening hearing (of which they were given adequate notice) and this was not merely a formal point given that the Restructuring Plans had proceeded on the footing that the relevant leases were to be included, and the plan companies had modelled the outcomes on that basis.
Takeways
Timing of Creditor objections
It is clear from comments made by the Court that creditors should seek to ensure that, if they have a legitimate basis for complaint, this is raised at the appropriate time in proceedings. Delay risks reducing the weight of such objection.
With respect to the novel arguments advanced by the Objecting Landlords, it seems possible that this case could be distinguishable in other cases and therefore its wider application is fact specific. The words of Machiavelli seem as interesting now as when written “the promise given was a necessity of the past: the word broken is a necessity of the present” and the Court appeared sanguine about this in the context of its consideration of the relevant alternative.
Further landlord protections?
The Objecting Landlords were not able to argue as a successful alternative that the difference in their contractual rights under the various side letters placed them into a different class. This argument would have had more weight if made at the Convening Hearing. This is because the Court held that undertakings given by Cineworld in the side letter did not give the Objecting Landlords materially different rights to other landlords in the event of the “relevant alternative” (ie insolvent administration) as such rights, while beneficial to the Objecting Landlords, were unsecured contractual promises.
To have been in separate classes, the undertakings would need to give the Objecting Landlords sufficiently different rights to the unsecured pari passu claims of other landlords. It leaves open the possibility that landlords engaging with tenants that might consider a collective process (such as a restructuring plan) could seek to agree certain forbearances that might insulate their position by creating a separate class in any restructuring.
Additional structures that landlords should consider when engaging with tenants where there is a risk of a Part 26A restructuring plan include, without limitation:
- entry into rent deposit deed – rent deposits are a type of security taken by landlords to protect against the risk of a tenant failing to pay rent or breaching other covenants in a lease. Had the Objecting Landlords had the benefit of a rent deposit deed (on a secured basis) and potentially including their side letter protections within the terms of a rent deposit deed may have created additional arguments in favour of the enforcement of those pre-plan rights; and
- recourse to third-party guarantees – it was held in Oceanfill Ltd v Nuffield Health [2022] EWHC 2178 (Ch) that a release of a tenant from its obligations to pay future rent under a lease did not prelude the landlord from claiming the originally agreed amounts from a third-party guarantor. Such case is a reminder that if a landlord has obtained a third-party guarantee, they may have had a further route to recovering amounts owed under the leases not precluded by any compromise as part of a restructuring plan process.
Coming to a Cinema Near You?
It is clear from cases like Cineworld that Restructuring Plans, are flexible procedures and can be adapted to address collective compromises where previously a CVA may have been used.
It is perhaps worth noting that the jurisdiction of restructuring plans, schemes of arrangement and CVAs is limited to amending the contractual rights between a company and its creditors and not proprietary rights. Leases create both: (a) contractual rights and obligations; and (b) a proprietary interest in land. In Re Instant Cash Loans [2019] EWHC 2795 (Ch), Zacaroli J gave guidance that whilst a scheme of arrangement could relieve a tenant of its liability for future rent (an amendment of the contractual undertaking to pay rent), it could not unilaterally terminate a lease (which would be a removal of a landlord’s proprietary right of forfeiture). Zacaroli J held that it was not necessary for the proprietary right to be altered for effect to be given to the contractual compromise. This was distinguished from, for example, a scheme of arrangement effecting the release of security which is incidental to or parasitic upon the release of the relevant debt.
The Cineworld judgment and reasoning confirms that landlords may in the future be unable to rely on specifically negotiated pre-plan negative contractual undertakings if their tenants subsequently enter into restructuring plans, unless additional protections are agreed or they can show that such undertakings were provided in bad faith.
The extent to which such negative undertakings and side-claims can be included in restructuring plans seems to very much already be in a cinema near you and landlord creditors should be aware of the latest blockbuster.
The DLA team has significant experience acting on the most complex and heavily contested Part 26A restructuring plans in the market, including Aggregate, Deep Ocean, NCP, Fitness First, and Revolution Bars. If you would like to discuss Part 26A restructuring plans or any of the issues discussed in this article, please reach out to your usual DLA contact.
