On 2 September 2020 Virgin Atlantic's proposed £1.2 billion solvent restructuring plan, the first of its kind under the new Part 26A of the Companies Act 2006, was approved by the UK High Court.
As detailed in our recent article, the new Part 26A schemes are a sister procedure to schemes of arrangement under Part 26 of the act, which have been used as a means of compromising with members and creditors in rescue situations for some time. The principal difference with the new procedure is that Part 26A schemes do not necessarily require the approval of all affected classes of creditors and/or members - it is possible for a Part 26A scheme to come into effect even if some affected classes of creditors and/or members do not vote in favour of the scheme (i.e. the classes of creditors and/or members which vote in favour of the scheme may be able to 'cram down' the dissenting classes).
A solution born out of the COVID-19 pandemic, the intention of the Part 26A scheme is to provide an alternative to existing rescue procedures, facilitating a rescue of a business which has multiple classes of creditors and/or shareholders with conflicting interests.
Those keen to see how the new procedure would work in practice have been following the various stages of the Virgin Atlantic plan with great interest, in particular to see how the court would approach those aspects of the plan which differ from the existing schemes.
Unfortunately, while some questions have been answered, we will need to wait for further case law to assess how the courts will interpret their jurisdiction to cram down dissenting classes: as all four classes of creditors under the Virgin Atlantic restructuring plan voted in favour of the restructuring plan, the UK High Court did not have to consider whether the power to cram down a dissenting class had arisen. Nevertheless, the decisions in the Virgin Atlantic Part 26A scheme (at the creditor class meeting convening hearing and, post creditor meetings, at the approval hearing) provided some helpful commentary and guidance on how Part 26A schemes will be approached and sanctioned by the UK courts:
- case law relating to Part 26 schemes of arrangement will apply to Part 26A schemes including as to the constitution of classes, and the approach to determining the jurisdiction of the UK courts to sanction such Part 26A schemes;
- in relation to the two so-called 'threshold conditions' for approving the scheme, the requirement that: 'the company has encountered, or is likely to 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 the compromise or arrangement must be to eliminate, reduce or prevent, or mitigate the effect of the financial difficulties', both fell to be determined by the court at the class convening meeting (though could be revisited at the later approval hearing). In the Virgin Atlantic case, the judge held that both these conditions were clearly satisfied, in particular in the case of the first condition as evidenced by the weight of evidence submitted by Virgin as to its financial difficulties;
- what constitutes adequate notice of the hearing would be judged by reference to those creditors who either were not involved in shaping the restructuring plan and/or who had not bound themselves to vote in favour of such plan or who might likely vote against such plan. The High Court found that, given Virgin Atlantic had (i) identified and (ii) updated those trade creditors it hadn’t consulted with, 21 days was sufficient notice. Further support of this being adequate notice was the fact Virgin Atlantic invited those creditors it hadn’t consulted with to attend a webinar to discuss the plan (and the plan itself wasn’t particularly complex to understand); and
- virtual meetings were appropriate for creditors' meetings, confirming the approach taken in recent schemes.
In summary, there were few surprises. The courts did not have to consider and determine an approach to dissenting classes and whether or not to sanction a cross class "cram down". It remains to be seen what factors may persuade a court to refuse to sanction a scheme in circumstances where there are some dissenting classes.
It will also be worth watching future Part 26A Schemes to see the circumstances in which the constitution of the classes is likely to be contested, particularly given that the ability to cram down dissenting classes could bring additional advantage to presenting class constitution in particular ways.