On 4 September 2020, the High Court sanctioned a restructuring plan of Virgin Atlantic Airways Limited (Virgin) under the new Part 26A of the Companies Act 2006, brought in by the Corporate Insolvency and Governance Act 2020 (CIGA); this is the first time the court has sanctioned a restructuring plan under the new Part 26A. This decision is significant as it not only confirms that the court will approach its consideration of plans under the new Part 26A in a similar way to creditor schemes of arrangement, but suggests that the new cross-class “cram-down” procedure (only available under the new Part 26A) could be used by the court in the appropriate circumstances.
Differences to schemes of arrangement
There are a few key differences between the new Part 26A procedure introduced by CIGA 2020 and creditor schemes of arrangement:
(a) Under creditor schemes of arrangement, any company, whether solvent or not, can propose a scheme (to enable the company to implement a take-over or changes to capital structure, for example). However, under the new Part 26A, a company wishing to propose such a plan needs to satisfy certain conditions relating to its financial difficulty i.e. that the company has encountered, or is likely encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern, and that the purpose of arrangement must be to eliminate, reduce or prevent or mitigate the effect of those difficulties. On the facts of Virgin’s case, the court was satisfied that the company met the necessary financial difficulty conditions in order to sanction the plan.
(b) One of the most significant differences is that under the new Part 26A the court may exercise its discretion in using a cross-class "cram-down” procedure i.e. if at least one class of creditor with a legitimate interest votes to approve the plan, then the court can order the other classes of creditor to be bound by the decision even if they voted against the proposal. This effectively gives the court discretion to sanction a plan without needing to obtain the 75% vote in favour at one or more of the class meetings, provided that another class which would receive a benefit under the relevant alternative to the plan has voted in favour of it and the members of the dissenting class(es) would be no worse off had the plan not been sanctioned. This procedure is not available under creditor schemes of arrangement.
The Virgin decision
On this occasion, the court was not asked to exercise its discretion to use the cross-class “cram down”, since all four classes of creditors approved the plan at the convening hearing. Three out of the four classes of Virgin’s creditors had unanimously agreed prior to the creditor’s meetings to support the proposed restructuring. This meant that the new procedure was effectively not needed, and that the Judge could follow the “tried and tested” approach as used under the established schemes of arrangement regime in exercising its discretion to sanction the plan.
However, the potential use of the new procedure did impact the structuring of the plan; a wider group of creditors that was strictly necessary was deliberately included in the plan to ensure a greater chance that the ‘legitimate interest’ threshold needed to trigger the “cram down” would be available if required. This was tactical to ensure that, if the trade creditors (fourth group of creditors) voted against the plan, their vote would be “crammed down” by the court to ensure the plan was sanctioned.
What does this decision mean for the operation of restructuring plans under the new Part 26A?
As the test case of the new Part 26A, the Virgin case does show us that in making its decision regarding the sanctioning of a plan under the new Part 26A, the court will consider any relevant scheme case law in evaluating the proposed plan, including using scheme precedent to guide the court’s decision-making regarding a plan’s fairness.
Since it was not necessary for the court to use the “cross class cram down” mechanic available within the Part 26A procedure, it means that this novel aspect of the new procedure has not been tested in practice yet. What this case can tell us about the court’s willingness to exercise its discretion to invoke this mechanic is thereby limited. Interestingly, in both the convening and sanctioning decisions of this case, the Judges did not comment on whether they considered it would be appropriate to exercise the “cross class cram down” mechanic in circumstances (such as in the Virgin Atlantic case) where the assenting classes of creditor had unanimously approved the scheme (meaning that arguably it was artificial to convene meetings of those classes anyway, since they could simply have signed up to a consensual agreement with Virgin outside of any scheme procedure). This remains a point to be decided in a future case under the new Part 26A.
It also remains to be seen whether the new Part 26A becomes widely used as we head into further uncertain times; the confirmation that scheme precedent is relevant to the court’s consideration of plans under the new Part 26A will be useful for companies and stakeholders considering implementing similar plans going forward.
David Steinberg, Co-head of the restructuring and insolvency practice at Stevens & Bolton, comments:
"The Virgin Atlantic decision is a significant milestone in the continuing evolution of UK corporate restructuring practice. That said, the most interesting feature of the new Part 26A procedure – the cross-class cram-down – remains untested, given the majorities obtained across all classes of creditors in the Virgin Atlantic restructuring plan. In a conventional Part 26 scheme, the promoters and their legal advisers naturally strive to avoid dividing creditors into separate classes if they can justify it, given that a dissenting class has an effective veto over the whole restructuring. In contrast, under a Part 26A restructuring plan, the debtor may be tempted to tack in the opposite direction – i.e. convening class meetings of creditors who are likely to support the restructuring plan anyway, as a ‘device’ to cram-down one or more dissenting classes. It will be fascinating to see how the judiciary deal with such cases in the future."
Rebecca Hunt