Cineworld Restructuring Plan sanctioned with cross-class cram down, over objections

On 30 September 2024, Mr Justice Miles sanctioned four English Part 26A restructuring plans for Cineworld group companies, rejecting challenges from certain opposing (landlord) creditors.

At the convening hearing, the court gave permission to convene an unusually large 32 creditor meetings across the four plan companies. No creditor challenged the plans at that stage. Two classes of creditors approved each plan: an intercompany lender class and a term loan lender class. While certain of the plans were also approved by other creditor classes, 20 creditor classes across the different plans voted against them.

Two landlord creditors opposed sanction. They argued that their inclusion in the plans breached side letters entered into by certain of the plan companies in 2023. Those side letters had formed part of contractual rent negotiations and included promises by the relevant companies that, in the event of a later restructuring plan, they would not seek to make any further amendments to the relevant leases. The challenging creditors therefore sought an injunction removing their leases from the ambit of the plans.

The court dismissed the injunction application and sanctioned the plans, applying cross-class cram down. Permission to appeal was granted, so this may not be the end of the story. Below we set out the court’s reasoning, but first here are our key takeaways.

Key takeaways

• Challenge early. The opposing creditors did not challenge the plans at the convening hearing, which clearly hindered their ability to present their case effectively.
• Injunctions are not the way to challenge restructuring plans. It is unclear why the opposing creditors sought an injunction, rather than challenging the relevant alternative or other aspects of the plans, especially as they did ultimately challenge the relevant alternative, but without flagging they would do so (see below). The court was not impressed.
• Public policy - rescue culture and pari passu principle. The court emphasised that restructuring plans are a statutory procedure designed to further the public interest in a positive rescue culture. In addition, where the relevant alternative to a restructuring plan is a formal insolvency, the process is a form of collective proceeding related to insolvency law and the public policy embodied in the pari passu principle is engaged. This should be taken into account by the court when considering the fairness of, and whether to exercise its discretion to sanction, a restructuring plan.
• The relevant alternative is what would happen to the companies without the plans actually proposed. It is not a different plan (eg, one that does not include the opposing creditors). The court noted that “It would lead to absurdity if any particular creditor could say to the court that the alternative to the plan proposed by a company is the same plan with that particular creditor excluded. It would indeed on one view mean that a company with multiple creditors could never persuade the court that insolvency was the relevant alternative.”
• Exclusion of creditors. The court was persuaded that it was not only right to decline the injunction, but that the plan companies were correct in including the opposing creditors in the plans. Any exclusion would have contravened the pari passu principle and would require objective justification – which was not established on the facts. 
• Exclusion of shareholders. Not much of the 30-page judgment is dedicated to this, with the court briefly noting it was satisfied the retention of equity was justified given the provision of new equity funding by an indirect parent, and that in any event Adler shows it is for the “in the money” creditors to determine what happens to the group’s equity. 

The plans

The plans have five main features: 

• compromising and releasing secured intercompany loans from the US group in exchange for warrants for shares in the plan companies, and releasing the plan companies’ unsecured intercompany liabilities;
• recapitalising the UK group through £16 million of new equity funding from an indirect parent company, with further funding of up to £35 million available to fund capital expenditure on the satisfaction of certain conditions;
• amending and extending time for payment of secondary secured lenders;
• restructuring the plan companies’ portfolios of leases; and
• compromising and releasing the plan companies’ unsecured property and business rates liabilities.

As regards the restructuring of the lease portfolio, the plan followed various landlord plans (see our blog on the Fitness First restructuring plan here), with leases divided into classes according to profitability and contribution to the business (Classes A to D). As is common, Class A included those leases that were commercially viable on current lease terms. In this plan, Class A creditors were specifically excluded from the plan and no modifications were made. Classes B to D were all economically unviable (on pre-plan terms) on a sliding scale, so different amendments (from bringing rent to market to exit) were proposed. As is required, each landlord was offered a break right, enabling them to terminate the relevant leases and seek a market rent instead of accepting the amended terms. 

The plan did not include or affect the plan companies’ shareholders, who retain their rights (save for consensual agreement to issue warrants for shares in the plan companies to the intercompany lender). 

Voting

Each plan received 100% approval by the intercompany lender class and a term loan lender class. While some other creditor classes approved, as mentioned above, 20 creditor classes across the different plans voted against them. 

Cross-class cram down

The court may sanction a restructuring plan notwithstanding that it has not been approved by at least 75% by value of those present and voting either in person or by proxy of each class of creditors provided that two conditions are met:

1. Condition A: the court is satisfied that if the restructuring plan were to be sanctioned, none of the members of the dissenting class(es) would be any worse off than they would be in the event of the relevant alternative (the “no worse off” test); and
2. Condition B: the plan has been approved by a number representing 75% in value of at least one class of creditors present and voting either in person or by proxy, who would have a genuine economic interest in the company in the event of the relevant alternative.

In relation to Condition A, there was no proper challenge and the court accepted that the relevant alternative was an insolvent administration. The court was satisfied that the “no worse off test” was met. In two of the plans, unsecured creditors would be able to recover from the prescribed part, while in the other two plans there would be no prescribed part and therefore no recovery for unsecured creditors. In order to ensure the plans complied with the legislative requirement for a compromise (emphasised in Adler: see our blog here), the plans were structured so that there was a £1,000 floor for unsecured creditors, who were entitled to the higher of 150% of their estimated returns in an insolvency or the £1,000 floor.

It was uncontroversial that Condition B was met by the approving vote of the intercompany lender and term loan lender class.

Discretion: “out of the money” creditors have little or no say

The real battleground here was whether the court should, as a matter of discretion, sanction the plans.

Applying Virgin Active and Adler, the court held that when deciding whether to sanction a restructuring plan as against a dissenting class, it is relevant to consider whether the dissenting class is “out of the money” in the relevant alternative. When a dissenting class is “out of the money”, the view of any creditor in that class about the fairness of the plan or complaints about the distribution of the benefits of the restructuring “should not weigh heavily or at all in the decision of the court as to whether to exercise the power to sanction the plan and cram them down”.

The court held that the dissenting classes here were “out of the money” – save in two regards: 

• Participating in the prescribed part – but following Virgin Active (see our blog here), this did not prevent those unsecured creditors from being considered “out of the money”.
• Certain modest rent payments for a short time during administration pending assignment of relevant leases to a third party or pending strip-out works – but following ED&F Man (see our blog here), even if these payments meant any relevant creditors were not entirely “out of the money”, little weight should be given to the views of those creditors (rather than no weight at all). 

Discretion: fair plan?

The court held that the plans were fair and examined a number of issues. 

• Fair allocation of benefits: payment of the higher of 150% of the estimated insolvency return or the £1,000 floor is an appropriate and fair allocation of benefits in circumstances where the unsecured creditors are either entirely or substantially “out of the money”. 
• Differential treatment of landlords according to their classification is acceptable and, indeed, now “commonplace”. The court noted that landlords whose leases have been categorised into the same class(es) according to their likely treatment in the relevant alternative will have their leases compromised in the same manner under the plans. The court noted that this accords with the general principle that creditors who have the same rights as one another, assessed by reference to their rights in the relevant alternative, must be treated in the same manner in a restructuring plan, unless there is a good reason or proper basis for a departure.
• Long term lease modifications are not inherently unfair: the answer to any landlord who does not like the modifications lies in the inclusion of a break right, provided that the terms offered upon exercise of that break right are at least as beneficial as in the relevant alternative to the plan.
• Exclusion of creditors: Class A landlords as well as certain other creditors (such as the landlord of the head office as well as trade creditors and employees) were excluded from the plans altogether. The court followed Adler, which held that it was acceptable to afford advantageous treatment to certain creditors where “the continued supply of goods or services by those creditors is regarded as essential for the beneficial continuation of the company's business under the plan”.
• Equity retention: the court was satisfied that the retention of equity by existing shareholders was justified for two reasons: (i) the indirect parent was providing new equity funding and therefore providing new value to the plan companies as a quid pro quo; and (ii) following comments in Adler, it is for the creditors who are “in the money” to decide on the allocation of the restructuring surplus, including the destination of the equity in the group.

Tension: upholding contractual terms – or pari passu treatment of creditors?

The opposing creditors sought to argue that their leases should not have been included in the plans because this was what had been contractually agreed, but did not argue that the plan companies had acted in bad faith (in the sense that a decision had already been made to promote the plans at the time of the negotiations leading to the side letters).

The court disagreed that it should enforce the contractual agreement “as a matter of right or course” and found instead that negative covenants of this nature are (in principle) capable of being compromised as part of restructuring plans.

In considering how the court should apply its discretion, the court placed great weight on the fact that Part 26A cannot be used by healthy companies to re-write their contractual obligations and that their purpose is to improve the outcome for creditors, often enabling the company to carry on as a going concern. In circumstances where the relevant alternative is a formal insolvency, the court noted that there is potentially a serious tension between the equitable jurisdiction to grant an injunction to preserve the contractual rights of certain creditors and the application of the pari passu principle, requiring creditors to be treated equally. 

Preserving contractual rights as argued by the opposing creditors could not only allow a creditor to do better than other creditors with like claims in the relevant alternative, but could “even leapfrog creditors with better outcomes in such an alternative”.

The court would therefore be slow to enforce agreements which operate to undermine the pari passu principle. Indeed, fidelity to the principle will often justify plan companies repudiating previous undertakings not to include debts within a restructuring.

Here, the court found that excluding the opposing creditors from the plans would not facilitate or improve the prospects of success of the plans and would have the effect of putting those creditors in a significantly better position than they would have been in the relevant alternative, thus offending the pari passu principle.

International recognition

The vast majority of leases subject to the plans were governed by English law and related to properties located in England. However, one of the claims to be compromised was an Irish law guarantee in respect of the lease of a property located in the Republic of Ireland. The corresponding lease itself was not held by a plan company and was not included in the plans.

Expert evidence adduced as to the effect of the plans on the Irish guarantee said that, while it was more likely than not that the Irish courts would not grant an order recognising the effectiveness of the compromise, the plans would “nevertheless have a real prospect of having substantial effect in Ireland” because the relevant plan company had no assets in Ireland or any other EU member state against which a judgment from the Irish court could be enforced, any judgment obtained against the company in Ireland would not be enforceable in England once the plans had been sanctioned and the Irish court would more likely than not refuse to make an order for the winding up of the relevant company on any petition presented by the landlord of the underlying Irish lease.

Comment

Cineworld is the 30^th sanctioned restructuring plan (looking simply at groups of companies, so counting the four Cineworld plans as one “Cineworld” deal) since the introduction of the restructuring plan in 2020. With each one, more issues get resolved, but it is clear that there remain some very chunky topics that will need to be addressed further, such as:

• What exactly is a fair allocation of the restructuring surplus? Here, the court was satisfied that the distribution was fair, but arguably the court’s analysis was helped by the fact that the dissenting creditors were entirely, or to a very large degree, “out of the money”. 
• Should equity be able to retain its share? Here, this topic is dealt with in two short sentences. It is likely that in a stronger “all guns blazing” challenge this topic will be revisited.
• How will the court marry its analysis of whether alternative (or “fairer”) plans are available, with the apparent “absurdity” highlighted here of enabling a particular creditor to object that the alternative to the plan proposed by a company is the same plan with that particular creditor excluded? Could an the alternative plan be the relevant alternative if it can be demonstrated that it would in fact be likely to be proposed by the company acting properly, if sanction were refused, and supported by the necessary majorities of other creditors and any new money providers (which has not been the case when other plans have been challenged on the basis there is a better plan eg, Aggregate)?
• How will the court’s analysis differ in cases where challengers allege (or indeed, can prove) bad faith? Here, the judgment notes that the opposing creditors did not allege bad faith by the company when entering into the side agreements, but not does address the consequence were it otherwise. There is no general duty in English law for a company to act otherwise than in its commercial interests, but bad faith could go to discretion at sanction.
• Is it right to characterise restructuring plans as a “collective” process, given they aren't required to include all creditors and invariably do exclude certain, often significant, groups of creditors? In a similar vein, should restructuring plans be considered “an aspect of insolvency law”? The court's finding on the latter point are consistent with Gategroup (which considered whether restructuring plans are “insolvency proceedings” for the purpose of the Lugano Convention), but the point / issue remains undetermined in other contexts and more broadly remains a subject of debate among practitioners and academics alike.