Restructuring plans: The Cineworld restructure

Applications for injunctions by two landlord creditors seeking to enforce undertakings given by Cineworld not to make further amendments to their leases through a future restructuring plan were rejected by the court.

The restructuring plans in this case sought to restructure Cineworld’s portfolio of leases following the model used in Virgin Active. Very shortly prior to the sanction hearing, two landlord creditors (the “objectors”) applied for injunctions to the effect that the relevant plan companies had agreed not to make further amendments to their specific leases through a future restructuring plan, and these agreements should be enforced by removing these leases from the plans.

A director of the plan companies gave evidence to the effect that, at the time of the negotiations with these landlords, it was not anticipated that restructuring plans would become necessary. The financial position of the group had worsened since the side letters were negotiated.

The court held as follows:

• The judge accepted that the trading performance of the group had deteriorated, and that this deterioration had been greater than was being projected at the time of the side letters.
• The judge cited Adler which was to the effect that when assessing restructuring plans where (as in the instant case) the relevant alternative was an insolvent administration, the pari passu principle should prima facie be applied to the distribution of the benefits of the plan using the outcome in the relevant alternative as a reference point. Here there was potentially a serious tension between the equitable jurisdiction to enforce a negative covenant to exclude particular creditors, and the application of the pari passu principle.
• The objectors argued that, though the restructuring plan procedure allowed compromises of contractual rights generally, the promise in this case was specifically one not to invoke those provisions – that was the special feature of this case. The judge held, however, that this argument gave too little weight to the collective nature of restructuring plans and that the usual specific enforcement principles could not be applied as if this were merely an inter partes dispute.
• The judge held that the convening hearing judge had been right to hold that that there was jurisdiction to modify these rights under the side letters depending on the court's discretion.
• Furthermore, the convening judge had been right to hold that the side letters did not create any class issues.
  • Where, as here, a restructuring plan was being proposed as an alternative to a formal insolvency procedure, the assessment of "rights in" required the court to identify the rights that creditors would have in those alternative insolvency proceedings, rather than rights they would have if the company were to carry on its business in the ordinary course.
  • In the relevant alternative, the objectors would be in the same position as other landlords within the same class and the side letter rights would be immaterial.
• Given the group’s acceptance that the plans could viably proceed without the objectors, the objectors submitted that the relevant alternative was not administration but a plan with them excluded. This submission was rejected: the relevant alternative was what would happen to the companies absent the proposed plans. It would lead to absurdity if any particular creditor could say to the court that the alternative to the plan was the same plan with that particular creditor excluded.
• As regards discretion, the judge noted that the feature of the cases where there may be good reasons or justification for the exclusion of some creditors was that it would facilitate or enhance the prospects of a successful restructuring, in the interests of the collective. There was no such feature here. Furthermore, it was noted that there was no evidence that the other creditors were responsible for the side letters or could be regarded as having unfairly benefited at the expense of the objectors. Nor was there any case of bad faith on the part of the plan companies.
• Finally, the objectors had submitted that the enforcement by the court of the promises in the side letters would send a salutary signal in favour of consensual bilateral renegotiations, and that this was to be encouraged as it might avoid the need for expensive restructurings. The court accepted there was some force in this point but ultimately rejected it.

Accordingly, the plan was sanctioned, and the injunctions were dismissed.

In regards to the UK Commercial Property Finance Holdings Limited v Cine-UK Limited and Others [2024] EWHC 2475, Chancery Division.

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