The High Court has upheld a company restructuring plan, in a judgment which indicates that the rights of all creditors to be treated equally will usually trump any individual rent concessions agreed by the company with their landlords, even where that includes a contractual commitment not to enter into a restructuring plan.
In Re Cine-UK Ltd and others [2024] EWHC 2475 (Ch), four Cineworld group companies successfully obtained court sanction for their controversial restructuring plans pursuant to Part 26A the Companies Act 2006, despite opposition from two of the group's landlords.
Cineworld had been in financial difficulties for a number of years following the Covid pandemic. In 2023, Cineworld agreed rent reductions with various landlords, including the objectors, and entered into side letters agreeing those variations, including contractual commitments not to include the objectors' leases in a future restructuring plan.
Following the further deterioration of their financial position, Cineworld proceeded to do exactly what they had agreed not to do, proposing a Part 26A restructuring plan to reduce their rents and turnaround their businesses, arguing that if the proposed plans were not sanctioned then the companies would fall into administration.
By the time of the final sanction hearing, various other creditors' objections had been withdrawn and only two objecting landlords actively opposed the plans, relying on Cineworld's agreement not to enter into a restructuring plan.
The court found that ratifying the restructuring plans would put the individual objectors in a worse position than if their leases were excluded from the plan. Despite this, the court found that the restructuring plans could compromise the objectors' contractual rights, including the commitment not to have their leases included in the restructuring plans.
The Court found that the restructuring plans were viable and the test for sanction was met because:
1. none of the members of the objectors' class would be worse off than they would be in the "relevant alternative", which in this case was administration; and
2. the plan had been approved by at least one class of creditors, Cineworld's lenders, who had a genuine economic interest in the relevant alternative.
As this test was met, the court had a discretion whether to cram down the objectors and other dissenting landlords and sanction the plans. As a matter of public policy, the court decided it had to act for the benefit of the creditors as a whole, taking into account the pari passu principle of treating creditors equally and without preference.
As to the contractual commitment not to enter into a restructuring plan, the court found that despite the short passage of time between the rent concession negotiations and the restructuring plan proposals, Cineworld had genuinely believed such a scenario could be avoided. As such, the court sanctioned the restructuring plans and ordered that the dissenting creditors be crammed down, resulting in further rent reductions to the objectors' leases.
This case demonstrates that where landlords have renegotiated with a distressed counterparty, they do so at risk. The insolvency court's powers are wide ranging and it will, as a matter of public policy, be willing to override even express contractual protections for landlords against their tenants compromising their leases in restructuring plans.
The decision indicates that the appropriate way for landlords to protect themselves from restructuring plans is not with contractual exclusions or injunctions, but by challenging the plan itself, by reference to insolvency principles and caselaw.
