Kate Stephenson authored this article regarding the restructuring of Virgin Atlantic Airways Limited, in which the company was the first to implement a restructuring plan under the new Part 26A of the UK Companies Act 2006.
Virgin Atlantic Airways Limited (the ‘Company’) recently became the first company to implement a restructuring plan under the new Part 26A of the UK Companies Act 2006 (the ‘Act’). This represented a major first test of the new procedure introduced pursuant to the Corporate Insolvency and Governance Act 2020, effective 26 June 2020.
The most ground-breaking aspect of the new restructuring plan procedure is the possibility that the court may approve a plan even if not every stakeholder class has approved it (‘cross-class cram-down’). However, cross-class cram-down was not engaged in this case, as each class approved the plan.
The Court approached the Company’s plan in a manner very similar to that applicable to a conventional scheme of arrangement; there were no major surprises. However, the convening and sanction hearings illustrated a number of points which will inform emerging market practice in respect of the new plan.
The Company’s restructuring plan
The Company’s plan formed part of its broader solvent recapitalisation deal – a suite of inter-conditional financial arrangements with other stakeholders which involved a significant shareholder support package and new, third party secured debt financing. The recapitalisation deal sought to ensure the survival of the airline against the backdrop of the existential crisis in the travel industry, owing to COVID-19 and related restrictions. Crucially, the restructuring allowed the Group’s planes to continue in operation.
The restructuring plan itself included four classes of plan creditor, constituted and compromised as shown below.
|Class||Nature of Claims||Treatment under the Plan||Approved Plan?|
|Operating Lessor Creditors||
|Connected Party Creditors||
The convening hearing
Trower J presided over the convening hearing. He cited the explanatory notes to the Act to the effect that the new restructuring plan procedure was intended to draw on the well-established process and principles for schemes of arrangement.
Jurisdiction – definition of a ‘company’
The Court has jurisdiction to make a convening order in respect of a ‘company’, which for this purpose means any company liable to be wound up under theInsolvency Act 1986: s.901A(4)(b) of the Act. The Company’s case was straightforward, as it is incorporated in England and Wales (and has its centre of main interests in England) – and therefore there was no need to establish any further sufficient connection.
Financial condition – ‘Condition A’
New s.901A(2) of the Act requires, as a threshold condition, that the company must have encountered, or be likely to encounter, financial difficulties that are affecting (or will or may affect) its ability to carry on business as a going concern. It is clear the company need not be insolvent to propose a plan.
The term ‘financial difficulties’ is not defined, but presumably takes its meaning from the modifier ‘affecting… the company’s ability to carry on business as a going concern’. Consistently with this, Trower J appeared to read ‘its ability to carry on business as a going concern’ as part of the definition of "financial difficulties".
The Court had little trouble in finding that the Company had encountered severe financial difficulties affecting its ability to carry on business as a going concern, given the near-shutdown of the global passenger aviation industry in the ongoing COVID-19 pandemic. The Court was satisfied, on the evidence, that the Company was on the brink of collapse and that ‘Condition A’ was met.
‘Compromise or arrangement’ and requisite purpose – ‘Condition B’
New s.901A(3) of the Act requires, again as a threshold condition, that a ‘compromise or arrangement’ must be proposed between the company and its creditors (or any class of them) or its members (or any class of them), and the purpose of the compromise or arrangement must be to ‘eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties’ described above.
The Court noted it was well-established that ‘compromise or arrangement’ requires some element of give and take, but beyond that it is neither necessary nor desirable to attempt a definition of ‘compromise or arrangement’. There was no reason to think that what was capable of amounting to a ‘compromise or arrangement’ for a restructuring plan was any different to that for a scheme.
The stated purpose of the Company’s plan exactly mirrored the legislative wording (set out above). The Court held that the requisite purpose of the compromise or arrangement was phrased broadly and intended to be expansively construed. The Court was readily satisfied that the purpose of the plan was to mitigate, and if possible eliminate, the Company’s financial difficulties.
The Court applied the same test for determining class constitution as for schemes of arrangement – namely, 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’. This involves consideration of stakeholders’ strict legal rights both absent, and under, the proposed plan.
The Court refrained from lengthy reasoning on class constitution, given the lack of adversarial argument, and conscious that this was the first restructuring plan. It simply held that none of the differences between restructuring plans and schemes of arrangement should be reflected in a different approach to class composition. The approach to class constitution should be broadly the same – even having regard to the fact that the possibility of cross-class cram-down under a plan raises the possibility that, in some circumstances, a company may have an incentive to increase the number of classes.
The Court approved the Company’s proposed class constitution which divided the plan creditors into four classes (described above), with fairly little comment. As noted, 100% of the creditors in the first three classes had locked up to vote in support of the plan in advance of the convening hearing.
Trade creditors – The Company excluded various categories of trade creditors from the plan (among others, those owed less than £50,000, for logistical reasons, those critical to the Company’s ability to operate safely and/or continue as a going concern, and those whose claims were being compromised separately). This was subject to particular scrutiny at the sanction hearing– see below.
Finance lessors – The Company had originally intended to include finance lessors / finance lease lenders within the plan (across three separate classes in addition to those listed above). However, once all finance lessors and finance lease lenders agreed to the proposed terms, the Company issued an addendum to its practice statement letter to the effect that these creditors would no longer be treated as plan creditors.
Shareholders – Notably, as the Company’s shareholders’ rights were not affected under the plan, there was no requirement for them to vote on it. (As noted, the broader recapitalisation deal, in parallel to the plan, involved a significant shareholder support package.)
Treatment of trade creditors / adequate notice
At the convening hearing, the Court was especially concerned to understand the treatment of the trade creditors (who, unlike the other creditor classes, had not been invited to sign plan support agreements), and in particular the adequacy of the 21 days’ notice of the convening hearing. The Court was ultimately satisfied that the steps the Company had taken – which included a webinar to explain the recapitalisation and plan to the trade creditors, and offer them the opportunity to ask questions – were sufficient, especially in light of the compelling urgency of this case, and as the treatment of trade creditors under the plan (described above) was not particularly complex.
Other jurisdictional aspects – Judgments Regulation
The Court was content to adopt the same practice in relation to the Recast Judgments Regulation as that adopted in schemes of arrangement.1 The Company had sought to rely on exceptions in Articles 82 and 253 of the Judgments Regulation to establish jurisdiction over the plan creditors. In the Company’s case, several plan creditors were domiciled in the UK; in particular, 90 out of 168 trade creditors were domiciled here. The Court held this was amply sufficient to engage the exception in Article 8 of the Judgments Regulation.
Notably, the Court held that the exception in Article 25 of the Judgments Regulation was not engaged in this case, given not all trade creditors had contracted with the Company on the basis of an English jurisdiction clause. Fortunately, this was ultimately immaterial in light of the Court’s finding that it had jurisdiction based on the exception in Article 8. Whilst perhaps unsurprising, this point is likely to increase in practical significance where future restructuring plans seek to compromise non-financial creditors (owing to the possibility of cross-class cram-down), increasing the practical likelihood that not every single creditor will be subject to an English jurisdiction clause.
The sanction hearing
Snowden J presided over the sanction hearing.
Approach to court’s exercise of discretion
As the explanatory notes to the Act make clear, the court will always have absolute discretion as to whether to sanction a restructuring plan, even though the necessary procedural requirements have been met (as is the case with conventional schemes of arrangement). The court has discretion to decline to sanction a plan if it is not ‘just and equitable’; this point appears in the explanatory notes to the Act rather than in the legislation itself.
In the Company’s case, the Court took the view that– as all classes had approved the plan – it would follow the tried and tested approach to the exercise of discretion established in respect of conventional schemes of arrangement. The Court was content that all four elements of the conventional test for sanction of a scheme (set out below) had been satisfied. Accordingly, it exercised its discretion to sanction the plan.
However, this was a straightforward matter given each class approved the plan, and the significantly worse outcome for plan creditors in the relevant alternative. The appropriate test(s) where cross-class cram-down arises remain to be established – as do the circumstances in which the court might decline to exercise its discretion; the limits of what is ‘just and equitable’ remain to be tested, especially in the event of cross-class cram-down.
Compliance with the statute
The Court dealt with jurisdictional considerations swiftly, after these had been considered carefully at the convening hearing and absent any suggestion that the convening judgment was in error. There were no issues as to the giving of notice, the content of the explanatory statement or the holding of the meetings.
Representation and voting at the plan meetings
Legislative requirements: For a class of stakeholders to approve a restructuring plan, at least 75% in value, of those voting, must vote in favour. Unlike a scheme, there is no numerosity requirement. Crucially, the plan may still be confirmed by the court even where certain classes do not vote in favour – so-called ‘cross-class cram-down’.
Voting and ‘quasi-numerosity requirement’: As noted, of the four classes of creditor under the Company’s plan, three classes had unanimously locked up to approve the plan. The remaining (trade creditor) class overwhelmingly approved the plan: 99% by value, of those voting, voted in favour. Turnout in the trade creditor class was also high: over 89% by value, 66% by number. There was no suggestion that any of those voting in favour did so for any collateral motive or had any special interest. As a practical matter, the Court requested that the Chairman’s report of meeting(s) continue to give voting numbers, on the basis that – even absent a numerosity requirement in the legislation – it is important as a matter of the court’s discretion to understand the full picture.
Excluded creditors: The Company had excluded certain trade creditors from the plan for logistical and commercial reasons, and certain financial creditors which (in most cases) were dealt with under the broader recapitalisation by separate bilateral agreements. It is well-established in the context of schemes of arrangement that it is for the company to decide which creditors it wishes to include in the scheme; it need not include all putative members of a class if there are commercial reasons for excluding certain members of that putative class.4 Those creditors or members who are not bound by the scheme retain their existing rights.
In his convening judgment, Trower J had noted briefly that the excluded categories ‘all appear to have been excluded for respectable commercial reasons’. At the sanction hearing, Snowden J examined the issue much more closely. He held that the ability of a company to propose a compromise or arrangement with some, but not all, of its groups of creditors was ‘one of the most flexible and valuable features of the scheme jurisdiction’ and saw no reason not to take the same approach in a restructuring plan. However, ‘if creditors who rank pari passu with scheme or plan creditors are being treated more favourably outside the scheme or plan, this should be fully explained..., so that [creditors under the scheme or plan] can assess whether they are being treated unfairly’. The Court ultimately held that the reasons for excluding certain trade creditors were reasonable (and not arbitrary or designed to manipulate the class), and was satisfied that the facts and reasons for the exclusion were properly disclosed in the explanatory statement.
Unanimous classes: The Court also observed that it would not ordinarily entertain a conventional scheme application where it was known in advance that all creditors are willing to consent. Snowden J, obiter, expressly declined to decide whether the power to cram down a dissenting class can be activated by including a class of creditors within a plan who would otherwise all have been prepared to enter into consensual arrangements to effect the restructuring of their rights. Accordingly, the market will need to approach this point cautiously. However, it is strongly submitted that the court’s cram-down jurisdiction ought not to be excluded where the consenting classes vote unanimously in favour. The mere fact of unanimity within a class does not suggest the restructuring plan is somehow a sham; instead, the plan is the implementation mechanism for the holistic restructuring deal. Unanimity may be far from certain at the outset of a transaction, and even apparently-unanimous consents may remain subject to key conditions precedent, which may be impossible to satisfy absent the restructuring plan. It should be perfectly legitimate, as a matter of legislative interpretation, jurisdiction and policy, for unanimously-consenting classes to ‘cram down’ a dissenting class; to hold otherwise would risk stakeholders needing to pursue artificial work-arounds.
Traditionally, for schemes of arrangement, the requirement that a scheme be ‘fair’ does not mean that the court imposes its own view of what is in the interests of creditors or even what is the ‘best’ scheme; fairness in this context means that the scheme must be one that an intelligent and honest person, a member of the class concerned and acting in respect of their interest, might reasonably approve.
The Court held it was clear that the Company’s plan was one which an intelligent and honest person could reasonably approve:
(a) the plan was part of the broader recapitalisation, approved by various stakeholders and all classes of plan creditors;
(b) the plan offered a return roughly four times more than trade plan creditors were likely to receive in the relevant alternative (administration);
(c) the trade plan creditors had voted overwhelmingly in favour, with a high turnout; and
(d) there was no formal opposition to the plan: although two trade plan creditors voted against it, neither appeared at the hearing or articulated any reason why the plan should not be sanctioned.
No ‘blots’ or defects
Again – traditionally, for schemes of arrangement, there must be no ‘blot’ or defect in the scheme. (The term ‘blot’ conveys some technical flaw, for example where the scheme simply does not work on its terms.) The Court extended this approach to the Company’s plan, raising no major issues. As a practical matter: the Court expressly approved the giving of an instruction (under the plan) from the RCF plan creditors to the RCF agent to execute relevant documents, noting that the conferral of a power of attorney has become common practice in schemes of arrangement.
The court is concerned not to act in vain; it will consider whether the scheme or plan is likely to be recognised in any key overseas jurisdictions which are material to its effectiveness. Given the overwhelming consent of plan creditors to the Company’s plan, it was clear on that basis alone that the plan would have substantial effect. Expert evidence stated that there was no reason the plan should not be recognised as a foreign main proceeding in the US (where the Company holds assets of material value). Final relief was indeed subsequently granted under Chapter 15.
Other notable issues
Jurisdiction – deed of contribution
As noted, finance lessors / finance lease lenders were originally to be included as plan creditors. As there was no direct payment covenant by the Company to the relevant creditors, the Company would have needed to execute a deed of contribution in favour of those creditors in order to create a direct claim by creditors at the top of the finance lease structure, to be compromised under the plan. In order to avoid any potential uncertainty as to the validity of that approach, the Company decided to omit such creditors from the plan once it had obtained their consent.
Cape Town Convention
Many of the Company’s leased aircraft are subject to a registered international interest for the purposes of the Cape Town Convention.5 The Convention provides that, following the occurrence of an ‘insolvency-related event',6 a debtor is effectively required to give up possession of the leased aircraft to a creditor in respect of which an international interest has been registered (or cure all defaults); the obligations owed by the debtor cannot be compromised in the insolvency proceedings.
There has been much debate as to whether this protection would apply in the context of a scheme of arrangement – and now, that debate extends to restructuring plans. The Company considered that its restructuring plan did not trigger an ‘insolvency-related event’ for the purposes of the Cape Town Convention.
However, as each of the plan creditors with a relevant interest had indicated its support for the plan, there was no need for the Court expressly to consider this point. This may be tested in future cases.
‘Ipso facto’ clauses
Other reforms introduced by the Corporate Insolvency and Governance Act 2020 include a prohibition on enforcement of so-called ipso facto clauses – i.e., clauses allowing one party to a contract to terminate, or impose altered terms, solely on the basis of the insolvency of the counterparty – in contracts for the supply of goods or services.7 This draws inspiration from US Chapter 11 proceedings and is designed to preserve a business’s operational capabilities (and, by extension, value for stakeholders) through a restructuring. Critically, the UK provisions cover only supplier arrangements, not general commercial contracts.
The rules restrict such action on the grounds of the new restructuring plan procedure (as well as existing UK insolvency proceedings and the new stand-alone moratorium). Accordingly, this meant that the Company’s suppliers could not rely on termination provisions which might otherwise have been triggered by the making of the convening order in respect of its restructuring plan. However, certain safeguards and exclusions apply.
In particular, Cape Town Convention interests are expressly excluded8 from the restriction, i.e., creditors with a registered international interest in relation to aircraft objects would not be restricted from termination, notwithstanding the new “ipso facto” regime – although, as noted, all such creditors had indicated their support for the plan.
Watch this space
Restructuring plans are expected to be used in a wide range of restructuring scenarios. In particular, the availability of cross-class cram-down offers the possibility of compromising a much wider selection of stakeholders than purely financial creditors (to which the vast majority of creditor schemes of arrangement are limited, except those in respect of insurance companies) – such as trade creditors, shareholders and other stakeholders.
Many issues remain to be explored in future restructuring plan cases, most notably around cross-class cram-down and related questions of class constitution and voting.
Kirkland & Ellis advised the UK Civil Aviation Authority on the Company’s solvent recapitalisation and the first restructuring plan, and is also advising PizzaExpress on what will be the second restructuring plan (in conjunction with a parallel company voluntary arrangement).
This article first appeared in Volume 17, Issue 6 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.
1. The Recast Judgments Regulation provides a general rule that any person domiciled in an EU Member State must be ‘sued’ in the courts of that Member State; this rule is subject to certain exceptions. It has never been conclusively determined whether the relevant provisions apply to schemes of arrangement. In order to avoid determining this issue, the court has adopted the practice of assuming the relevant provisions do apply (proceeding on the basis that scheme creditors are ‘sued’ by the company, and the scheme creditors are ‘defendants’ to the scheme), and considering whether the court has jurisdiction over the scheme creditors on that basis. ↩
2. In essence: if at least one creditor is domiciled in England, then Article 8 confers jurisdiction on the English court to sanction a scheme affecting the rights of creditors domiciled elsewhere in the EU, provided it is ‘expedient’ to hear the claims together ‘to avoid the risk of irreconcilable judgments resulting from separate proceedings’. ↩
3. In essence, Article 25 confers jurisdiction on a court where a jurisdiction clause (whether exclusive or non-exclusive) provides for the courts in the relevant Member State to have jurisdiction to settle disputes. ↩
4. Sea Assets v Garuda , affirmed in Re SABMiller . ↩
5. The Convention on International Interests in Mobile Equipment and related protocols, transposed into English law by The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015.↩
6. The definition of ‘insolvency-related event’ means the commencement of ‘insolvency proceedings’, which for this purpose is ‘liquidation, bankruptcy ... or other collective judicial or administrative insolvency proceedings ... in which the assets and affairs of the debtor are subject to control or supervision by a court ...’; the operative provisions are framed by reference to the conduct of an insolvency office-holder. A scheme of arrangement or restructuring plan under the Companies Act 2006 (notably, not under the Insolvency Act) is a ‘debtor in possession’ proceeding which does not involve the appointment of an insolvency office-holder. ↩
7. New section 233B of the Insolvency Act 1986. ↩
8. Paragraph 21 of new Schedule 4ZZA of the Insolvency Act 1986. ↩