On 30 September the High Court sanctioned the restructuring plans of four entities in the Cineworld group, in so doing declining to grant injunctions sought by two disaffected landlords.  This post discusses the key takeaways from the convening and sanction judgments.

Background

Cineworld is a global cinema group which operates in ten countries including the United States and the United Kingdom.  Its recent financial difficulties have been well-documented, with screen actors’ and writers’ strikes compounding the damage wrought by COVID lockdowns and restrictions.  The UK part of the group had been reliant on the US operations for liquidity since at least July 2023, but ongoing support was conditional upon the implementation of a comprehensive restructuring.

The restructuring plans were proposed by the four primary tenant entities within the UK part of the group and principally sought to address their over-rented lease portfolio.  If the plans were not sanctioned, the evidence was that the directors would have to place the companies into insolvent administration as they would be unable to discharge their payment obligations on the September quarter day.

Overview of the restructuring plans

The plans had five main elements:

1. Intercompany loans.  The plan companies’ secured loan obligations to the US group would be released in full in exchange for share warrants.  Unsecured intercompany liabilities would also be released in full.
2. Term loan.  Amendments would be made to an existing term loan credit agreement in order to extend the maturity date and extend the PIK election.  In exchange for these concessions, which would assist in easing liquidity pressures, the existing call protection provisions would also be lengthened.
3. Leases.  Following the model used in previous restructuring plans (such as Virgin Active and Fitness First), the lease portfolio was divided into a number of classes based on commercial viability; this allocation then determined the treatment of the leases under the plans as regards reductions of rent, the payment of arrears and break clauses.
4. Other unsecured creditors.  The plans addressed creditors with claims in respect of general property liabilities and claims in respect of business rates.  Pursuant to their terms:
   1. The plan companies would be released from their obligations in relation to general property creditors in exchange for a payment of the higher of 150 per cent of their estimated insolvency return and £1,000 (a fixed floor amount).
   2. Business rate arrears in relation to all leases to be compromised by the plans would be released in full.  Business rates for the current ratings year in relation to Class C and Class D leases would also be compromised (in a similar fashion to the general property liabilities).
5. Recapitalisation.  If the plans were sanctioned, the UK part of the group would be recapitalised through £16 million of new equity from the plan companies’ indirect parent to fund immediate liquidity needs.  Further funding of up to £35 million would be available to fund capital expenditure on the satisfaction of certain conditions.

Voting

Each of the plans was approved by the requisite majority in the intercompany lender and term loan lender creditor classes (the intercompany lender and a significant majority of the term loan lenders had previously signed an agreement to support the plans but it was accepted that this was not an artificial attempt to manipulate the class composition).  Support for the plans from the other creditor classes was limited, with only 4 out of 24 classes voting in favour.  The plan companies therefore sought to bind the dissenting classes via cross-class cram down.

Cross-class cram down and sanction

In its sanction judgment the Court had no difficulty in finding that the gateway conditions for cross-class cram down had been met:

• In relation to Condition A (that none of the members of the dissenting class would be any worse off if the plan was to be sanctioned than they would be in the relevant alternative), it accepted that the relevant alternative was an insolvent administration and noted that the plans had been specifically designed to ensure that plan creditors would be no worse off by providing for a payment of the higher of 150% of their estimated insolvency return and the £1,000 floor.
• In relation to Condition B (that the plan has been approved by a class of creditor who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative), it noted that both the intercompany lender and the term loan lenders  would be “in the money” in the relevant alternative and that there had been no challenge to the inclusion of these classes by the Court at the convening hearing.

The Court then considered its general discretion in relation to sanction.  In determining that, subject to the specific issues concerning the objecting landlords (discussed below), the Court should exercise its discretion in favour of sanction, it made the following remarks:

1. As the dissenting creditors would be substantially “out of the money” in the relevant alternative, their views ought to be given little or no weight.  In any event, apart from the objecting landlords, no creditor appeared at the sanction hearing in order to contest their treatment under the plans.
2. The allocation of benefits under the plans was appropriate and fair in circumstances where the unsecured creditors were substantially out of the money.
3. The differential treatment of landlords under the plans accorded 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 plan unless there is a good reason or proper basis for a departure.
4. There is nothing inherently unfair in a plan proposing long-term modifications to leases in circumstances where, as here, affected landlords are given an appropriate break right.
5. There were good commercial reasons for the exclusion of certain creditors (such as trade creditors and employees) from the scope of the plans.
6. The retention of equity in the group by its existing shareholders was justified on the basis that new value would be provided (via the equity funding from the indirect parent) as a quid pro quo. 

Objecting landlords

Lastly, the Court considered the position of two landlords who had sought injunctions to remove specific leases from the ambit of the plans.  The objecting landlords had both previously agreed significant consensual concessions with certain of the plan companies, in return for which the latter had agreed not to seek to further compromise the relevant leases as part of any restructuring plan.  Faced with the prospect of substantial additional impairments under the plans, the landlords applied for injunctions to restrain the apparent breach of the contractual undertakings.

The Court declined to grant the injunctions sought, finding that:

• There is tension between the Court’s equitable jurisdiction to enforce a negative covenant (here, the undertaking given in favour of the objecting landlords) and the application of the pari passu principle of equality of treatment, which is engaged when the statutory preconditions for a restructuring plan are met and the relevant alternative is a formal insolvency.
• Normal equitable principles cannot be applied as if this was a conventional dispute between the parties because the collective nature of the restructuring plan proceedings adds an important extra dimension.  The default requirement is that creditors be treated in accordance with the pari passu principle; indeed, adherence to the pari passu principle will often justify plan companies acting contrary to previous undertakings not to include debts within a restructuring.
• The question for the Court to answer is whether the existence of the side letters which contained the negative covenants constituted a good reason or proper justification for excluding the objecting landlords’ leases from the plans. The Court found that it did not.  The common feature of previous examples where the exclusion of certain creditors was found to be justified was that this would facilitate or enhance the prospects of a successful restructuring, in the interests of the collective.  There was no such feature here; if the objecting landlords’ leases were to be excluded, they would simply be placed in a significantly better position compared to the other landlords of sites falling within the same categories.  This would be an infraction of the pari passu principle.

Comment

The Court’s analysis of the interplay between the equitable principles underpinning the enforcement of negative covenants and the collective nature of restructuring plan proceedings will be read with interest by practitioners and its ultimate conclusions may embolden debtors that are considering plans to widen the pool of creditors that they are seeking to compromise to include those with whom they have previously negotiated consensual concessions.  We understand however that one of the objecting landlords is now pursuing an appeal, so we await further developments with interest.

This post was authored by Charlotte Cocker and Gareth Grand.