Landlords Challenge Virgin Active's Restructuring Plan

By Bonnie Eslinger
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Law360, London (April 29, 2021, 6:33 PM BST) -- Landlords objecting to Virgin Active's proposed restructuring suggested Thursday they weren't invited to the negotiating table because they were the "lunch" as the gym chain seeks to use a new insolvency tool to force objecting creditors to accept the plan.

Thursday marked the start of a four-day High Court hearing for an application from three Virgin Active units for court approval of the arrangement, which they say will prevent the business from going into administration. The gym operator has told the court it is facing mounting financial troubles due to the impact of the COVID-19 pandemic and could run out of money by May.

A group of landlords — including British Land, Land Securities, Knight Frank and Aberdeen Standard units — are challenging the plan, claiming they are being unfairly treated under the scheme compared to secured creditors and shareholders.

Virgin Active Chief Executive Matthew Bucknall was cross-examined on Thursday by Robin Dicker QC of South Square, acting for the ad hoc group of landlords.

"If you're not at the table, that's because you're lunch," Dicker said to the executive. "That's essentially how the landlords were regarded in this process isn't it?"

The deal now before the court was a compromise reached between Virgin Active's shareholders and the company's lenders, the lawyer for the landlords said.

"The aim being whatever deal they came up would involve a contribution to be made by landlords," Dicker said. "That's not fair is it?

Bucknall said the solution will save the company.

"We were running out of cash, but those shareholders had nothing to do with the landlord negotiations at all," the Virgin Active executive said. "They were putting in what we felt was the maximum that we could get from the shareholders and then we looked at the other stakeholders."

The landlords' lawyer also asked Bucknall why Virgin Active was seeking approval for its plan under a new insolvency process put into law in June 2020 that allows a restructuring plan to be imposed on a dissenting class of creditors.

The executive said the landlords were not expected to go along with a company voluntary arrangement, according to an analysis done by Virgin Active's advisers with Deloitte.

The lawyer for the landlords noted that under a company voluntary arrangement, the secured creditors would not be given a vote as they are under the new restructuring tool.

"I suggest to you...a CVA would have given the landlords a stronger negotiating position," Dicker said.

Later in his cross examination, Dicker turned to an internal document provided by Virgin Active's advisers that warned a lengthy timeline for discussions with the landlords was effectively "pre-warning" them and giving them time to prepare their defenses.

Bucknall said the statement was "born out of frustration" after making little headway in talks with the landlords.

Dicker also noted that Virgin Active required landlords to sign non-disclosure agreements when they met individually with the company, preventing them from discussing the negotiations with other landlords. Bucknall said that was also at the advice of Deloitte.

In written submissions to the court, Virgin Active Holdings Ltd., Virgin Active Ltd. and Virgin Active Health Clubs Ltd., argue that the small group of landlords have not proposed an viable alternative to the plan before the court and suggest that they are taking a stand in this case to prevent similar restructuring plans from other companies under the new Part 26A of the U.K.'s Companies Act 2006.

"The present case is not just about Virgin Active," the gym operators said.

"They are willing to spend millions of pounds in pursuit of their challenge...evidently in the hope of deterring other tenants from seeking to use Part 26A to restructure their lease obligations — even if it means that Virgin Active collapses into administration," the company states.

Virgin Active was given a go-ahead from the court back on April 1 to take the planned restructuring to creditors for approval. The company did not secure the 75% approval needed from the landlords, according to its written submissions. That's why it's now seeking the court to sanction the restructuring plan under "cram down" provisions of the new law.

According to the judge's April 1 ruling, the proposed restructuring plan includes the capitalization of about £350 million ($483 million) in debts, the waiver or deferral of about £24.8 million in liabilities under licensing arrangements, and the provision of £45 million in loans.

In addition to its debts to secured creditors under a previous £200 million financing deal, Virgin will owe its landlords up to £30 million in unpaid rent arrears by May, the ruling said. The plan will affect 67 leases relating to 45 properties in the U.K.

Virgin is represented by Tom Smith QC, Ryan Perkins and Lottie Pyper of South Square, instructed by Allen & Overy LLP.

The Ad Hoc Group of Landlords is represented by Robin Dicker QC and Georgina Peters of South Square, instructed by Sullivan & Cromwell LLP.

The cases are Virgin Active Holdings Ltd., Virgin Active Ltd. and Virgin Active Health Clubs Ltd., case numbers CR-2021-000548, CR-2021-000549 and CR-2021-000550, in the Insolvency and Companies List, Chancery Division of the High Court of Justice of England and Wales.

--Additional reporting by Paige Long. Editing by Joe Millis.

For a reprint of this article, please contact reprints@law360.com.

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