Following oral sanction
in February, Justice Johnson has handed down his judgment giving his reasons for sanctioning Lifeways Group restructuring plans. The group’s comprehensive restructuring involved; debt write off, super senior new money, a transfer of ownership as well as compromising landlord claims.
The judgment provides welcome guidance for practitioners dealing with inquorate creditor meetings and the plan was novel in that it was the first to be used by a healthcare operator, regulated by the Care Quality Commission, or CQC.
Representing the plan company, Graham Lane, Partner at Willkie Farr told Reorg:
“The Lifeways restructuring plans not only cement the use of Part 26A plans to successfully rationalize a company’s leasehold portfolio, they are also ground-breaking in being used for the first time on a U.K. healthcare regulated business. We worked closely with the Care Quality Commission throughout the process. This should pave the way for other healthcare operators to consider using a Part 26A plan to stabilize their businesses while ensuring continuity of care.”
The success of the process means that the group was able to implement a debt haircut of around £100 million senior secured debt and transfer ownership from the Ontario Municipal Employees Retirement System, or OMERS, to the group’s lenders. Additionally, £15 million new super senior money was provided to the group.
The restructuring plans also compromised landlords, splitting them into two categories based on whether the lease was:
- operating but over-rented (in which case, a rent reduction to market rent was applied); or
- non-operational/of no future use for the group (in which case, all liabilities were released and reduced to nil).
Further to this, the plans addressed the claims of a variety of general unsecured creditors – including the group’s former professional advisors and former members of its senior management.
For four of the Lifeways plan companies concerned, the statutory requisite voting thresholds of 75% in value of those present and voting per class
of creditors were met. For three companies, the voting thresholds were not met and the English Court was accordingly asked to sanction exercising its cross-class cramdown powers.
Alex Roy, Associate at Willkie Farr explains:
“The sanction judgment provides welcome confirmation on two points: that non-attendance/non-voting at plan meetings does not prevent use of the cross-class cramdown, and that the class of general unsecured creditors compromised by a plan can be very wide. In this case, it included potential claims of former employees and former advisers. The convening judgment helpfully clarified the circumstances in which shareholders will not be affected by a plan involving a change in ownership. In future, a contesting shareholder will need to carefully consider whether its economic rights to participate in capital and profits of the company are being diluted by the plan.”
The judgment provides the following further guidance on restructuring plans:
Shareholders Not Affected by a Plan Unless Their Economic Rights Are Diluted
Certain minority B shareholders who were beneficiaries of a management incentive plan sought to be included as an additional voting class in Lifeways plans. However Justice Trower, at the convening stage of the plan, rejected this. Trower J concluded: “In short, I think it is clear that neither the contractual terms of the rights themselves nor their economic value will be affected by the Plans so as to engage section 901C(3) of CA 2006” (emphasis added).
Trower J explained in his convening judgment
that the plans do not vary any of the B shareholders’ existing rights under the articles. “All that they do is to give effect to the existing rights,” he said.
It follows not just that the B shareholders’ rights themselves are unaffected by the plans, but their economic value is also unaffected. The effect of the proposals, Trower J said:
“[...] does not mean that the economic value of the B shareholders’ rights are being affected by the plans. They are worthless in the counterfactual both because it is clear that even the enterprise value of the group is very substantially less than the amount of the secured debt, and because the contractual right of the B shareholders to receive a distribution under the intercreditor agreement on exercise of the option was never going to be engaged, just as it will not be engaged under the terms of the plans.”
As well as this, the court confirmed that the decision by the plan companies to share the relevant practice statement letter with the B shareholders, out of an abundance of caution and 21 days in
advance of the convening hearing, had been prudent (even if not strictly necessary) to afford
them sufficient time to consider whether they were “affected” by the plans or not.
Inquorate Creditor or Members Meetings Not a Block
The sanction judgment provided by Adam Johnson J demonstrates the English Court’s power to exercise a cross-class cramdown on creditor classes who dissent, abstain or fail to attend the relevant creditor meetings.
The judge commented in his judgment at para 63: “it is true that the turnout was low, but I do not find that at all surprising given that the relevant creditors are all out of the money. The low turnout, and passivity even among those who did attend (who abstained), is again consistent with such creditors simply having decided not to engage, rather than with them having any inability to do so
This means that a plan cannot be defeated by classes of creditors who refuse to vote.However, inquorate meetings still remain a risk for schemes of arrangement under Part 26 of the Companies Act 2006 (following the decision in Re Altitude Scaffolding  BCC 904
Use of the Cramdown Power
The English Court sanctioned three of the seven Lifeways plans using its discretionary power under section 901(G) of the CA 2006 to cramdown dissenting classes. This meant that the plan binds classes of landlords and unsecured creditors who either opposed the RPs or who did not attend the creditor meetings.
In support of its use of the cramdown power, the group used detailed valuation evidence provided by FRP Valuation Services Ltd.. Ernst & Young used the evidence to calculate estimated creditor recoveries in the relevant alternative to the plans.
The relevant alternative considered were a pre-pack administration sale for five companies and a liquidation for the other two. The companies’ evidence clearly demonstrated that value broke
in the group’s secured debt, enabling the votes in favor of secured lender classes to cram down the dissenting / non-quorate classes.
Confirmation of Using a Plan to Wind Down and Not Rescracue a Company
Not all of the plans used by Lifeway entities were rescue plans. The purpose of one of the plans, that of Listrac Midco Ltd., was to facilitate its solvent wind-down and eventual dissolution whereas the purpose of the other six was to enable the companies to continue trading as going concerns.
The sanction judgment confirms that plans can be used to effect solvent wind-downs.
The Lifeways companies were represented by Tom Smith KC of South Square, instructed by a team led by Graham Lane from Willkie Farr & Gallagher (UK) LLP. The plan administrator is Ernst &
Young LLP. Latham & Watkins advised the senior secured lenders.
The skeleton arguments for the plan hearings can be found HERE