At a Glance
The English Court yesterday published its judgment approving Fitness First’s restructuring plan, notwithstanding a challenge from certain opposing landlords.
This judgment underlines the position — first established in the similar case of Virgin Active (see our Alert) — that creditors who are “out of the money” in the relevant alternative have no standing to object to the manner in which a restructuring plan allocates the benefits of the restructuring between stakeholders.
Fitness First’s plan involved a five-month “instalment plan” for a historic VAT liability owed to HMRC, which voted in favour of the plan. This contrasts to HMRC’s active opposition to three other recent restructuring plans which sought to impose haircuts on HMRC (see our Alert on Nasmyth and GAS’ restructuring plans, which the court declined to approve, and our Alert on Prezzo’s restructuring plan, which the court approved last week).
This plan was the first to compromise business rates payable to local authorities in respect of premises — a technique Kirkland pioneered in respect of company voluntary arrangements in Homebase (see our Alert) and which Prezzo also used in its restructuring plan (see our Alert).
The principal terms of the restructuring plan were as follows.
|Approval (by value, of those voting)|
|Secured creditor (also 75% indirect shareholder)||
|HMRC (secondary preferential creditor)||
|Landlords, divided into six different classes1||
||Class A unanimously approved
Other five classes rejected (0-32% in favour)
|General property creditors and business rates creditors2||
A valuation of the business estimated value in the range of £4.5–7 million –— well below secured indebtedness of c.£18.7 million.
Shareholders were not included within, or compromised by, the restructuring plan. Shareholders had provided funding/credit support since 2020 (most recently in January 2023) but did not specifically contribute new value under the restructuring.
Trade creditors (including the plan company’s parent in respect of head office employee claims and related liabilities) were also excluded from the plan, given the “critical” nature of their supplies/services and the cost and complexity of including them.
The plan was opposed by a “Class B1” landlord and separately by four “Class B2” landlords. The court granted a two-week adjournment in respect of the sanction hearing, upon application by the opposing landlords.
Opposing landlords criticised the questionable nature of the company’s “burning platform” / long stop date of 30 June, given the company’s secured creditor was also a 75% indirect shareholder (i.e., the only reason the company was obliged to enter into a plan by that date was because the company had promised its shareholder that it would do so).
However, the court held that there was no real evidential basis that the company would be able to use a shareholder loan facility to tide it over its peak cash shortfalls and continue to trade (as certain landlords had contended). The court agreed with the company that the relevant alternative to the plan was an administration with an accelerated M&A process leading to a prepack sale.
Given the court’s finding as to the correct relevant alternative, there was no issue as to the satisfaction of the two statutory requirements for binding a dissenting class (i.e., the “no worse off” test and the requirement for an “in the money” consenting class). Accordingly, the focus was on matters relevant to the exercise of the court’s discretion.
|Ground of Opposition||
|The plan did not represent a “fair distribution of benefits”, in part because the company’s shareholders were not being compromised under the plan and a shareholder debt was treated as a critical creditor claim||
|Lack of engagement with landlords / lack of information||
|Compromise of landlord’s guarantee claim against plan company’s parent||
The court made no order as to costs, i.e., the opposing creditors must bear their own costs, as the court did not consider their objections substantial enough to justify making an order for costs against the company.
1. The categorisation of the leases – according to their profitability and contribution to the business – followed the usual approach in the context of company voluntary arrangements and in previous restructuring plans involving lease liabilities (namely Virgin Active (2021) and Lifeways (2023)). ↩
2. The plan compromised business rates liabilities relating to “Class C” and “Class D” premises, which would likely remain unoccupied in the relevant alternative (since such sites would not form part of the assets sold in any pre-pack sale). It did not compromise business rates liabilities in respect of “Class A” premises or the three classes of “B” premises (since such sites would likely form part of the assets sold in a pre-pack administration sale and therefore the premises would continue to be occupied). ↩
3. The payment of business rates for the first 28-day period was intended to ensure that the local authorities were treated in the same way as would likely occur in the relevant alternative of a four-week (i.e., 28 day) M&A process followed by an administration, since the company might continue to occupy the sites during the M&A process. ↩