At the end of February 2023, the High Court sanctioned seven restructuring plans for companies in the Lifeways group. Lifeways is a group providing supported living and specialist residential, support and care services at properties throughout the UK.
The case raised several interesting aspects, particularly in relation to the conduct of creditor meetings for a restructuring plan where cross class cram down is sought, and whether there is a read across from scheme case law on this issue.
We set out below our initial impressions based on the reporting of the case and the papers made publicly available, noting that at the time of writing the judgment is not yet available.
The plans were designed to effect a debt-for-equity swap whereby the secured lenders would take ownership of the group in exchange for the reduction of their secured indebtedness, and would also provide additional liquidity under a new super-senior secured loan facility. In addition, 27 out of the group’s 120 leases were to be compromised. Using techniques commonly used in retail CVAs, Class A leases were to be compromised by reducing the rent to market rates for a concession period, after which the higher of contractual and market rent would be payable. Class B leases were to have the rents set at £0 with landlords each having an option to terminate the relevant leases.
The five classes (across the various plan companies) were:
the secured creditors;
- the unsecured creditors (a large mix of different unsecured creditors, with the majority of liabilities relating to lease liabilities but also including certain intercompany debts and two sets of professional adviser fees – notably trade creditors were not part of the plans);
- Class A landlords;
- Class B1 landlords; and
- Class B2 landlords (the distinction between B1 and B2 being that, in the B2 class, the relevant premises had been sublet by the group).
Voting and statutory majorities
For four of the companies, every class voted in favour of the relevant plan by the required majority (75% by value of those present and voting). For three companies the relevant majorities were not achieved. In some cases, only one creditor attended a class meeting (and voted against), in one case a class meeting was not attended by any creditors. As a result the group relied on cross class cram down in respect of three companies.
Unanimous approval by one class
The secured creditor class voted unanimously in favour of the plans. Concern has been raised in previous cases (Virgin Atlantic and Re Houst) that it may be artificial to include a unanimously supportive “in-the-money class” in the plan, solely in order to constitute the assenting class for the purpose of cross class cram down, where it would otherwise have been possible for the company to come to a consensual contractual arrangement with them. This was directly addressed by counsel explaining that the secured creditors would not have supported the deal had the group’s other liabilities not been compromised at the same time. That would not have been possible without the plans.
Attendance at class meeting by one creditor only or no creditors
In some of the meetings only one creditor attended. In one instance, the Class B1 Landlords class meeting was not attended by any creditors.
Counsel for the group submitted that the rule set out in Re Altitude Scaffolding (that, in a scheme of arrangement context, a ‘meeting’ of creditors must have at least two participants, unless there is only a single creditor in the class) should not apply to restructuring plans where cross class cram down is engaged. Counsel advanced several reasons:
- Policy: If Altitude Scaffolding applied to plans, it would enable creditors who object to the plan to essentially avoid a cross class cram down by not attending the meeting – which would frustrate the statutory purpose of cross class cram down.
- Wording of the legislation: Even if Altitude Scaffolding applied, where cross class cram down is engaged, no meeting needs to actually be held. All that is required is that a meeting is summoned.
Looking at the latter argument in more detail: the cram down section of the legislation is engaged where a compromise has not been agreed by a number representing at least 75% in value of a class of creditors (the dissenting class) present and voting at a meeting summoned. Therefore the legislation simply requires – with respect to the dissenting class – that a meeting has been summoned. There is no reference to the meeting being held (or indeed, therefore, validly held).
This section is mirrored by the cram down condition requiring that – with respect to the assenting class - there must have been a meeting where at least one class of creditors, “who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative”, have agreed by 75% in value of those present and voting.
Read together, these provisions could suggest that the rule set out in Re Altitude Scaffolding should only apply to the assenting class meeting, and not to dissenting class meetings.
The group argued that should the restructuring plans fail, the alternative would be insolvent administrations with a prepack sales process. They had engaged EY to provide an analysis of likely recoveries under the plans and in the relevant alternative. While all classes did better in the plans than in the alterative (a condition to enable cross class cram down), it is interesting that for some classes, the plans beat the relevant alternative by a very small amount indeed (for example, some creditors would have had a zero recovery in the relevant alternative compared to £0.00000009 in the plan).
The vast majority of creditor claims were governed by English law, however four leases were subject to Scots law. The plan companies had received advice that the plans would be effective to compromise those leases under Scottish law.
Turnout at meetings summoned for a scheme or a plan can be a headache for advisers and the company alike. This issue is compounded where the plan intends to utilise cross class cram down and some creditor constituents can be fairly sure from the outset that their vote will be ultimately overridden. Why bother to turn up? This case addresses the apathy – or wish to be obstructive - of non- voting creditors head on, by making clear that a failure by dissenting classes to turnout for the meetings will not be fatal to a plan.
In this respect, it is also a good example of an emerging divergence between scheme and plan case law. Whilst scheme authority remains the starting point for the court in considering a plan, it is now well established that the use of cross class cram down leads to meaningfully different consideration on certain issues.