The High Court approved the first restructuring plan to come before the courts under Part 26A of the Companies Act 2006, introduced by the Corporate Insolvency and Governance Act 2020.
At a remote hearing on 2 September 2020, Mr Justice Snowden sanctioned a Restructuring Plan between Virgin Atlantic Airways Limited (the “Company”) and four classes of its creditors (the “Plan Creditors”) being:
i) the lenders under a $280 million secured revolving credit facility;
ii) the lessors under 24 operating leases for aircraft leased to the Company;
iii) certain creditors (including other Virgin companies and companies in the Delta group) who had entered into various intellectual property licensing agreements and joint venture agreements with the Company; and
iv) 162 of the Company’s trade creditors (the “Trade Plan Creditors) who were owed a total of about £51.67 million.
The Company is part of the Virgin Atlantic Group, and is indirectly owned 49% by Delta Air Lines and 51% by Virgin Investments Limited (“VIL”), whose ultimate beneficial owner is Sir Richard Branson.
The Company has several thousand employees and thirty five aircraft and would normally carry approximately 6 million passengers a year. Its business has been significantly impacted by the downturn in air travel as a result of the COVID-19 pandemic, and the Company has said it does not expect demand for air travel to return to pre-pandemic levels until 2023.
It was projected that the Company’s liquidity would reach a critical level by 21 September 2020 which would trigger the certain bondholders to commence an enforcement process over the Company’s landing and departure slots at Heathrow airport. In any event, the Company was projected to run out of available cash by 5 October 2020.
The proposed Restructuring Plan was intended to reduce the Company’s debt to a sustainable level, to provide for a deferred repayment schedule for that debt, and for there to be an injection of new money from VIL (£200 million) and Davidson Kempner Capital Management (£170 million) so that the Company could continue trading.
If the Restructuring Plan were not approved, the Company would have to be placed into administration in mid-September 2020, with a poor return to creditors predicted of between 10.5p to 21.4p in the £, and the first dividend not expected for two years. In contrast, the Restructuring Plan provided for a much better return to creditors, including 80p in the £ to Trade Plan Creditors.
This case was the first restructuring plan under Part 26A Companies Act 2006 - a new procedure introduced by the Corporate Insolvency and Governance Act 2020 on 26 June 2020 - to come before the court. It was noted that the court has a general discretion whether to sanction a restructuring plan under Part 26A.
Notably, all classes of Plan Creditors voted in favour of the Restructuring Plan. No creditors made any representations to challenge the sanctioning of the plan. The first three classes had all attended their respective class meetings and 100% of each class voted in favour. The Restructuring Plan was also approved by 99.24% in value of the Trade Plan Creditors who voted at their class meeting. Of the Trade Plan Creditors, only two creditors voted against and three creditors abstained from voting.
Part 26A restructuring plans allow for a “cross-class cram-down” to bind dissenting creditors to the plan, if the court considers it is fair and equitable, and if satisfied that (i) none of the members of the dissenting class would be any worse off than they would be if the plan were not sanctioned (comparing it with what is likely to happen to the company otherwise) and (ii) the plan has been approved by at least one class that would have a genuine economic interest if the plan were not sanctioned Given that each class approved the Company’s Plan, the cross-class cram-down was not engaged and Mr Justice Snowden did not have to decide on this point. Therefore this element of the new procedure remains untested.
Mr Justice Snowden held that much of the existing caselaw regarding the court’s discretion to sanction Part 26 schemes of arrangement was applicable to Part 26A plans. He referred to the four stage test that the court must consider:
i) whether the provisions of the statute had been complied with;
ii) whether the class was fairly represented by the meeting, and whether the majority was coercing the minority in order to promote interests which are adverse to the class that they purported to represent;
iii) whether the scheme was a fair scheme which a creditor could reasonably approve; and
iv) whether there is any “blot” or defect in the scheme.
Mr Justice Snowden found that each of these tests were satisfied, and that the Restructuring Plan would have a substantial effect, having heard detailed expert evidence that the US Bankruptcy Court was likely to recognise the Restructuring Plan as a foreign main proceeding under Chapter 15. . Therefore Mr Justice Snowden exercised his discretion to sanction the Restructuring Plan.
On 3 September 2020, a United States bankruptcy judge granted recognition of the Restructuring Plan under Chapter 15 Bankruptcy Code in order to protect the Company’s assets from creditors in the US.