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Law360, London (May 12, 2021, 1:27 PM BST) -- A London court approved Virgin Active's planned restructuring on Wednesday despite opposition from a group of major landlords who objected to plans to wipe out overdue rent on most of the gym operator's sites after the pandemic sent revenues plummeting.
Virgin Active has won a High Court case brought by a group of landlords that approves the gym chain's restructuring and allows it to to wipe out overdue rent on most of its sites. (iStock)
The judge wrote in his 72-page ruling that under the arrangement "no member of a dissenting class will be any worse off than they would be in the relevant alternative. In all the circumstances...I will therefore sanction the plans in the terms sought."
The gym chain secured court approval by using a new insolvency tool that forces objecting creditors to accept a restructuring scheme. The plan will affect 67 leases on 45 properties in the U.K. In addition to its debts to secured creditors under a previous £200 million ($282 million) financing deal, Virgin had expected to owe its landlords up to £30 million in unpaid rent arrears by May, according to Wednesday's ruling.
Secured creditors and one subset of landlords — for sites seen as the most profitable and critical to Virgin Active's survival — overwhelmingly supported the restructuring, Judge Snowden noted. Those "Class A" landlords will be paid in full under the plan. Less profitable sites will be treated less favorably under the arrangement, with rent cuts and unpaid rent bills wiped out, and leases for sites that are loss-making may not be retained, according to Wednesday's judgment.
A group of landlords — including British Land, Land Securities, Knight Frank and subsidiaries of Aberdeen Standard — argued against the plan at a trial in April, claiming they would be unfairly treated under the scheme compared with secured creditors and shareholders.
The Virgin Active companies told the court that they were in a strong and sustainable financial position before the COVID-19 pandemic. But their financial position was severely affected by government-imposed shutdowns, which led to member cancelations and suspended membership payments, they added.
The companies said they suffered a drop in income of £185.4 million in 2020 from the year before, and a £53 million fall for the first two months of 2021 compared with early 2020. At the same time, Virgin Active still had fixed costs and overheads, including its obligations under its leases, as well as obligations to secured creditors under the senior facilities agreement.
The landlords were not part of the negotiations, which led to the formulation of the restructuring plan, the judge said in his Wednesday ruling.
Virgin argued in written submissions for the April hearing that the small group of landlords had not proposed a viable alternative to the plan laid before the court. It also suggested that they took a stand in this case to prevent similar restructuring plans set out by other companies under the new Part 26A of the Companies Act 2006.
"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 said at the time.
Virgin Active was given a go-ahead by the court on April 1 to take the planned restructuring to creditors for approval. But the company did not secure the 75% approval needed from the landlords, according to its written submissions. That was why it asked the court to sanction the restructuring plan under "cram down" provisions in the new law.
The proposed restructuring plan includes the capitalization of about £350 million in debts, waiving or deferring approximately £24.8 million in liabilities under licensing arrangements, and the provision of £45 million in loans, according to the April 1 ruling by the court.
Representatives for the two sides did not immediately respond on Wednesday to Law360's requests for comment on the decision.
Virgin is represented by Tom Smith QC, Ryan Perkins and Lottie Pyper of South Square, instructed by Allen & Overy LLP. Travers Smith LLP advised Virgin Active on its restructuring plan.
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.
Update: This story has been updated with additional counsel information for Virgin Active.
For a reprint of this article, please contact reprints@law360.com.
