Virgin Active: Will landlords be feeling the burn? (Part 2)

The first article on the Virgin restructuring posted last week explained the process of Part 26A.

The Sunday Times, on 28 March 2021, wrote an article on the Virgin Active proposals with a headline referring to the restructuring process as ‘Like CVAs on speed’. While there are a number of similarities between this restructuring procedure and CVAs, there are also a some key differences which are identified below:

Key differences between this restructuring procedure and a CVA

Voting

CVA: A CVA binds only unsecured creditors. Consequently only unsecured creditors have the right to vote.

Part 26A: Restructuring can affect both secured and unsecured creditors. Consequently both secured and unsecured creditors who are affected are entitled to vote.

Categorisation of creditors

CVA: Approval of CVA requires the support of 75% or more (by value) of all the creditors entitled to vote.

Part 26A: Sanctioning of the scheme is possible if it is supported by at least 75% (by value) of one category of creditor, even if all other categories dissent.

Timescales

CVA: The timetable from publishing a proposal of a CVA to its approval can be measured in weeks. However, if challenged the Court process will likely take a number of months.

Part 26A: The timetable for restructuring is to a large extent in the discretion of the court. As we have seen in Virgin Active the process could be concluded within a couple of months following its formal commencement.

Challenging/appealing

CVA: A CVA, if passed, can be challenged by creditors on the grounds of unfair prejudice or a material irregularity in the procedure adopted.

Part 26A: As the process is overseen by the court, a challenge to the sanctioning of a restructuring scheme is likely to be considered in the same way as the appeal of any court judgment. The aggrieved party would need court permission and would have to demonstrate that the decision to sanction the scheme represented an error of law or fact. Given the power to sanction restructuring is discretionary the scope for a successful challenge appears significantly narrower than with CVAs

Costs

CVA: While each case turns on its own facts the costs of formulating, proposing and then securing a CVA are primarily those of an insolvency practitioner. The extent of legal involvement will depend upon the complexity of the CVA and the extent of any challenge.

Part 26A: As the procedure is court led, the costs will likely be significantly higher than those associated with a CVA. In Virgin Active the costs claimed by the main group of aggrieved landlords up to and including the convening hearing were said to be £735,000 plus VAT.

Costs liability

CVA: If a CVA is passed, the company and the parties meet their own costs. If challenged in court the costs of those proceedings will be in the discretion of the court though may be governed by whether or not the challenge was successful .

Part 26A: While costs remain in the discretion of the court, it is likely to award creditors their reasonable costs associated with the restructuring process (even if objections that are ultimately unsuccessful are raised) provided the position adopted by the creditor is not seen as frivolous or of no general assistance to the court.

Summary

While the costs and procedural requirements may make Part 26A restructuring unsuitable in many cases, a combination of a swifter timescale, the ability to stifle dissenting creditors and a more limited ability to challenge the outcome may be seen as powerful tools which encourage companies to lean toward it rather than using CVAs.

Prior to Virgin Active the scheme has been used successfully in a handful of cases. Virgin Active is the first reported instance of a hotly contested scheme but it may not be the last.  National Car Parks (NCP) have recently proposed its own restructuring with the first court hearing scheduled to take place at the end of this month.

The final article in this series will focus on what the future holds for landlords, given the outcome of the sanctions hearing in Virgin Active announced on 12 May and the outcome of the challenges to the New Look and Regis CVAs.

If you would like to speak to us, please contact our real estate construction team.