U.K. Court Sanctions First New Restructuring Plan for Virgin

In June 2020, the Corporate Insolvency and Governance Act came into force, introducing a new restructuring tool into Part 26A of the Companies Act 2006.

On 2 September 2020, the U.K. Court sanctioned the first Restructuring Plan under the new legislation for Virgin Atlantic Airways Limited ("the Company"). Virgin's airline business was adversely impacted by COVID-19 and it was estimated that the Company's cash flow levels would become critical by the week beginning 21 September and that it would run out of available cash altogether during the week beginning 5 October. Without a restructuring, the Company's directors would have had to place it into administration in mid-September.

To avoid this, the Company proposed the Restructuring Plan which involved four classes of creditors: (1) RCF Lenders under the Company's $280m fully drawn secured revolving credit facility; (2) Operating Lessors under the Company's 24 aircraft operating leases; (3) Connected Party Creditors, including creditors in the Virgin Group and Delta Air Lines Group with whom the Company had intellectual property and joint venture agreements; and (4) Trade Creditors.

The new Restructuring Plan provided for in Part 26A is similar to a Scheme of Arrangement under Part 26 of the Companies Act 2006, with one of the key differences being the cross-class cram down mechanism for dissenting classes of creditors. The cram down was not needed in Virgin's case because, by the time of the Convening Hearing, the RCF Lenders, the Operating Lessors and the Connected Party Creditors had already agreed to support the plan and it was subsequently also approved by the Trade Creditors.

Despite the cram down not being used, the court made some other useful points regarding Restructuring Plans.

Mr Justice Snowden confirmed that the court has a general discretion as to whether to sanction a Restructuring Plan under Part 26A and that the authorities under Part 26 can assist the court in deciding how to exercise its discretion.

The judge also found that as all classes of creditors approved the Virgin Restructuring Plan, he was in a similar position as he would have been had the Plan been proposed as a Scheme of Arrangement. He could therefore follow the "tried and tested" approach to exercising his discretion established under Part 26 as he did not have to consider whether the need for a cram down had arisen.

Despite this, Mr Justice Snowden said that the court would not normally entertain an application for a Scheme of Arrangement where it was known in advance that the creditors had consented and it is not "normal practice" to include classes in a Part 26 Scheme where 100% of the relevant creditors are known to be willing to consent. He noted, at paragraph 49 of the judgment, that the fully consenting classes may have been included with a view to arguing that the cram down power would have been available if the Trade Creditors had not voted in favour of the Plan but he clarified, at paragraph 50, that he should not be taken to have decided that the power could be activated by including within a Plan a class of creditors who would otherwise all have been prepared to enter into consensual arrangements to give effect to the restructuring of their rights.

The court also looked at whether the classes of creditors were fairly represented. A Restructuring Plan requires approval from 75% in value of members and does not have a number threshold. The RCF Lenders, Operating Lessors and Connected Party Creditors had a 100% turnout and vote in favour at their creditor meetings. At the Trade Creditors' meeting there was an 89% turnout by value and a 99% vote in favour so the 75% threshold was met. However, some of the Company's Trade Creditors were excluded from the class.

Mr Justice Snowden considered the ability for a company to exclude some creditors with whom it does not want to propose an arrangement a valuable feature of a Scheme of Arrangement and said he saw no reason why it should not also be available under a Part 26A Restructuring Plan. He noted, however, that the exclusion of creditors does have implications for the exercise of the court’s discretion as to whether to endorse the decision of the majority at the relevant creditors' meeting. He therefore found it necessary to consider whether the classes of creditors are fairly represented.

Overall, Virgin's Restructuring Plan looked much like a Scheme of Arrangement and, despite the court making some useful points, it leaves many questions unanswered, including how the cross-class cram down power will be used in practice.