The English High Court has exercised its cram down power and sanctioned the Part 26A restructuring plans proposed by four of Cineworld’s UK operating companies, in face of significant opposition from its landlord creditors, including a novel injunction application by two landlords to exclude their leases from the plans.  In sanctioning the plan, Cineworld’s UK Group avoided administration at the end of September.

Restructuring leasehold obligations via an English restructuring plan is now a tried and tested solution for over-rented companies, finding precedent in the Virgin Active, Lifeways Group and Fitness First restructurings.  However, the Cineworld plans are the first time the court has considered (and denied) the effectiveness of a side agreement that provides for a creditor to be excluded from a restructuring plan.  Leave to appeal has been granted to one objecting landlord on this issue.

The objecting landlords had negotiated rent reductions in 2023 in exchange for an agreement not to be included in a future restructuring plan or CVA.  Mr Justice Miles rejected the landlords’ injunction applications, holding there was jurisdiction for the court to approve the plans, including a compromise of the side letters. 

Key findings from the judgment are as follows:

• Although the side letters were negotiated at a time it was foreseeable that the UK group might need to seek a restructuring, the restructuring plans were developed in light of the deteriorating financial situation and not in bad faith.
• Restructuring plans are a form of collective proceeding for the benefit of the creditors as a whole and are an aspect of insolvency law, of which the pari passu principle is a fundamental principle and embodies a public policy.  They are not a conventional dispute between debtor and creditor, and the court will be slow to enforce agreements which operate to undermine the pari passu principle.
• Fidelity to the pari passu principle will often justify plan companies in acting contrary to previous undertakings not to include debts within a restructuring.   Any application to enforce a contract to exclude relevant creditors will generally have to give way to that principle unless there is a good reason or proper justification for excluding the relevant creditors from the plan.  Here there was no good reason: excluding the landlords would not facilitate or improve the prospects of success of the plan. 
• The plans were fair to include the objecting landlords: to exclude them would place them in a significantly better position compared to the other landlords of sites falling within the same categories. 
• Mr Justice Miles was also critical of the timing of the injunction applications, noting they were very late in the day, contrary to the principles of efficient and effective case management.  The objecting landlords’ points could have been raised at the convening hearing, at which they did not appear. Resultantly the leases were included in the plans and the objecting landlords were entitled to vote at the meetings: this enabled the court to consider the plan with those parties included.
• The court rejected an argument that the relevant alternative to the plans was not the administration of the companies but a plan with them excluded. The relevant alternative is what would happen to the companies absent the proposed plans, which was administration. It would lead to absurdity if any particular creditor could say to the court that the alternative to the plan proposed by a company is the same plan with that particular creditor excluded.

The plans were supported by the senior secured intercompany lender who had provided secured bridge financing via Cineworld’s US Group, and the term loan lenders, who agreed to extend their facilities by six months.  Both are “in the money” creditors in the relevant alternative.  The existing shareholders will provide new equity funding and retain their equity under the plans.

The plans follow Cineworld’s exit from Chapter 11 in 2023 which saw transfer of the equity ownership of the group to its senior lenders, a USD4.53bn reduction in the group’s funded indebtedness and new debt financing, but did not address the UK Group’s lease portfolio. Weil acted for the Unsecured Creditors Committee in the Chapter 11 proceedings.