Not worth the paper it’s written on? High Court rules previous undertakings to exclude creditors from a future Part 26A restructuring plan non-binding
The High Court has sanctioned four restructuring plans1 in respect of the Cineworld group, ruling that prior undertakings given by the companies to exclude certain leasehold claims from a future restructuring plan did not prevent the Court from sanctioning plans that included those same claims.
Background: The Cineworld group restructuring
Cine-UK Limited, Cineworld Cinemas Limited, Cineworld Cinema Properties Limited, and Cineworld Estates Limited (the Plan Companies) applied for sanction of four restructuring plans and an order for cross class cram down under sections 901F and 901G of the Companies Act 2006 (CA 2006).
The Covid-19 pandemic, subsequent government restrictions, and difficult market conditions had all threatened the group’s ability to carry on trading as a going concern. In 2023 the group underwent a reorganisation under Chapter 11 of the US Bankruptcy Code. However, the UK group continued to struggle, in large part due to certain over-rented leasehold premises.
As part of the group’s efforts to negotiate its way out of financial difficulties, agreements were reached with two landlords - UK Commercial Property Finance Holdings Limited (UKCP) and the Crown Estate Commissioners (the Crown Estate) - which included undertakings not to include their claims in a future restructuring plan.
Subsequently the Plan Companies suffered further trading setbacks and ultimately proposed UK restructuring plans under part 26A of the CA 2006. The plans involved:
- a debt for equity swap involving compromising and releasing secured loan obligations in exchange for warrants for shares
- recapitalising the UK group with £16 million of new equity funding and up to a further £35 million of funding for capital expenditure
- amending and extending payment obligations to secondary secured lenders
- restructuring the lease portfolio, by categorising various leases into sub-classes based on their commercial viability and then offering full rent, reduced rent, or no rent, with break rights so that the landlords would not be bound by the reduced rent (a technique utilised in previous restructuring plans and often used in CVAs to ensure fairness)
- compromising and releasing unsecured property and business rates liabilities
In all cases, creditors would receive at least the greater of £1,000 or 150% of their estimated return in the ‘relevant alternative’ to the plan; in this case, insolvent administration.
The High Court ordered meetings of 31 classes of creditors be convened, at which each plan was approved by the intercompany lender class and the term loan lender class, who were ‘in the money’ creditor classes in the relevant alternative.
Two dissenting landlords - UKCP and the Crown Estate - were out of the money creditors. Given their views on the fairness of the plan therefore held little weight, they relied on the previous undertakings given by the Plan Companies not to seek further amendments to certain leases if a restructuring plan were proposed and applied for injunctive relief against their inclusion in the plans. The injunctions were sought at a relatively late stage in the proceedings - after the class meetings had been held and only days before the sanction hearing took place. Issues of jurisdiction and class composition generally should be raised at the convening hearing, at which neither UKCP nor the Crown Estate had appeared.
Decision: When is a departure from the pari passu principle justified?
The court always has a discretion as to whether to sanction a plan, even where the statutory requirements are met. Following the Court of Appeal decision in Adler2, where the court is asked to impose cross class cram down on a dissenting class, the court must look beyond the usual rationality test of whether an honest and reasonable person, acting in respect of their class interests, would have voted for the plan. The court must also apply a horizontal comparator test to analyse the treatment of members of the dissenting class(es) compared with other creditors. While there is no absolute priority rule in the UK (unlike in US Chapter 11 proceedings), the pari passu principle requires that creditors within the same class should be treated equally. This remains a fundamental principle of insolvency law and may only be departed from in the context of a Part 26A restructuring plan where there is justification.
The court held that the Plan Companies were not bound by their previous undertakings to exclude certain leases from future restructuring plans. Importantly, UKCP and the Crown Estate did not allege bad faith on the part of the Plan Companies and the judgment makes specific reference to this point. The court also accepted that their trading position genuinely had deteriorated since the undertakings were given. To give effect to the undertakings would be to depart from the pari passu principle without justification, as excluding UKCP and the Crown Estate, while compromising claims of other landlords of similarly performing premises, would not increase the prospects of the restructuring succeeding.
A further noteworthy aspect of the Cineworld plan is the court’s sanction of existing shareholders’ equity retention, notwithstanding that some creditors (who would rank above the shareholders in an insolvency scenario) saw their claims compromised. The reason for this was that those creditors would still receive more under the plans than they would receive in the relevant alternative and the shareholders were providing new equity as part of the restructuring. The proposed distribution of the restructuring surplus therefore was considered fair .
Can injunctive relief ever be available to enforce undertakings not to compromise creditors?
In this case, the nature of the liabilities subject to the negative undertakings were of a type capable of being compromised by a Part 26A plan. While the limits of restructuring plans continue to be tested, there appear to be few categories of liabilities whose nature would exclude them from the purview of a restructuring plan. Restructuring plans have been used to compromise claims of HMRC and arbitral awards. On the other hand, criminal liabilities are a stark example of liabilities that should not be compromised by a plan sanctioned under the civil law. Proprietary rights vested in third parties also should be excluded on the basis that a person with a purely proprietary claim is not a ‘creditor’. However, such excluded categories of liabilities are likely to be few and far between.
Enforcing undertakings given by companies to exclude creditors from a future restructuring plan will be particularly challenging where they would breach the pari passu principle, not further the plan’s prospects of success, and where the creditors with the benefit of the undertakings will not be contributing to the success of the restructuring. It does not, however, follow from Cineworld that all such undertakings will necessarily be capable of compromise. In Cineworld, the judge specifically referenced the absence of any alleged bad faith on the part of the plan companies in sanctioning the plan. As the relevance of bad faith was not subject to judicial scrutiny, this may open an avenue for future challenges to plans, for example where there has been a clear attempt by the company to hoodwink a creditor into agreeing a bilateral compromise it has no intention of honouring. Similarly, the judge noted that other creditors were not responsible for the pre-plan undertakings and did not unfairly benefit from their non-binding effect at the expense of the objecting creditors.
There may be alternative ways of protecting a creditor’s position. In appropriate circumstances, a minority or subordinated creditor may seek undertakings from other creditors not to vote in favour of a plan that would see its rights altered in a manner not contemplated, for example under the relevant intercreditor agreement. As with other aspects of Part 26A plans, we expect the boundaries will continue to be tested.
[1] Cine-UK Limited & anr v The Crown Estate Commissioners & anr [2024] EWHC 2475
[2] Re AGPS BondCo Plc [2024] EWCA Civ 24
