Fitness First Clubs Ltd
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Michael Green |
| Judgment Date | 29 June 2023 |
| Neutral Citation | [2023] EWHC 1699 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2023-002298 |
[2023] EWHC 1699 (Ch)
Mr. Justice Michael Green
Case No: CR-2023-002298
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY & COMPANIES LIST (ChD)
The Rolls Building
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
Mr Tom Smith KC and Ms. Georgina Peters (instructed by DLA Piper UK LLP) for the Plan Company
Mr Stefan Ramel and Mr. John Churchill (instructed by Freeths LLP) for Lazari Properties 1 Limited
Mr. Robert Amey (instructed by Hogan Lovells International LLP) for the HL Landlords
Approved Judgment
Transcript of the Stenograph Notes of Marten Walsh Cherer Ltd., 2 nd Floor, Quality House, 6–9 Quality Court, Chancery Lane, London WC2A 1HP. Telephone No: 020 7067 2900. DX 410 LDE Email: Web:
INTRODUCTION
Given my present physical predicament, it is entirely appropriate that I should be dealing with a company that operates a string of gym clubs!
This is the application of Fitness First Clubs Limited (the “Company”), for the court's sanction of a Restructuring Plan, (the “Plan”) between the Company and certain of its creditors, (the (“Plan Creditors”). Sanction is sought under Part 26A of the Companies Act 2006, (the “Act”).
The Company seeks to avail itself of the cross-class cram down provisions under section 901G of the Act, as five of the nine classes of creditors did not vote in favour of the Plan, to the requisite 75% majority in value. Those five classes were all of Landlords of premises used by the Company for its business of operating gyms under the name “Fitness First”. The Company is now a relatively small family-owned company with presently 36 open gyms, mainly in London.
The Company is represented by Mr. Tom Smith KC leading Ms. Georgina Peters and instructed by DLA Piper UK LLP. There are five Landlords that have appeared before me to oppose the sanction of the Plan. Lazari Properties 1 Limited, (“Lazari”), is a Class B1 Landlord (I will explain in due course the classes of Landlords). It is represented by Mr. Stefan Ramel and Mr. John Churchill, instructed by Freeths LLP. The four other opposing Landlords are all Class B2 Landlords and they are represented by Mr. Robert Amey, instructed by Hogan Lovells International LLP. They are Daejan Investments Limited, the Crown Estate, Vanquish Properties GP Nominee 3 Limited and Vanquish Properties GP Nominee 4 Limited, which together I will refer to as the “HL Landlords”. I am grateful to all counsel and their legal teams for their clear and helpful submissions.
As is the way with these Plans and Schemes, there is always some urgency to them. Whether there is or is not real urgency is sometimes difficult to discern but, in any event, we had the hearing on Monday and Tuesday of this week and, given my other commitments, in particular starting a 12-day trial today, I thought it best to deliver this judgment as soon as possible today so that the parties know where they stand, but I am delivering it orally to enable that to happen and that inevitably means that it will not be as polished as one might expect from a fully reserved written judgment.
By way of short introduction, the Company has encountered significant financial difficulties in recent years. In large part these have been caused by the COVID-19 pandemic and the associated lockdowns and then the subsequent changes in consumer habits. In particular, the Company's portfolio is concentrated in Central London and its membership numbers rely heavily on office workers, a large proportion of whom no longer work and may never again work in the City five days per week. Accordingly, membership numbers have not returned to their pre-pandemic levels and they are taking longer than expected to increase again and are not at a level where the Group can operate profitably. That is the view of the Company's board.
The Group has been kept afloat by funding from its major shareholder in recent years in the form of debt of equity. However, that shareholder, who is the Company's only Secured Creditor now, is not prepared to continue funding the business unless the Plan is sanctioned.
The Plan restructures the Company's liabilities principally by reducing the rent payable on its leases. Both the Secured Creditor and HMRC will be hardly impaired by the Plan on the basis that they are, in the jargon of restructuring, the only “in the money” creditors in the event of an insolvency process. The Landlords, however, who are said to be “out of the money”, according to the unchallenged valuation evidence put forward by the Company, have been divided into classes and all except one class will be forced to accept a reduced rent for a three-year period or, in some cases, no rent at all. They are, therefore, significantly impaired by the Plan, but the evidence from the Company shows that they will be better off than in the Relevant Alternative. I will obviously come on to consider all these points in detail.
There is now a substantial body of authority as to the exercise of this jurisdiction, in particular the magisterial judgment of Snowden J (as he then was) in Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch) (“ Virgin Active”) which, not only because it concerned gyms, has strong parallels to the present Plan in the way it treated the Landlords and this Plan really builds on the form of Plan that was approved by Snowden J in that case. Of course, each Plan needs to be scrutinised on its own merits and by reference to the particular facts and context in which it is promoted. There have in recent months been some Plans that have not been sanctioned by my colleagues. This is because the court has an important role to play in ensuring that the broad cram-down powers are being exercised properly and fairly.
Mr. Smith maintained that the opposing Landlords are Unsecured Creditors who would be out of the money in the Relevant Alternative to the Plan. As such, on the authorities, he says that their views should carry little or no weight for the purposes of the court's exercise of its discretion. Mr. Ramel, on behalf of Lazari, submitted that his client was not out of the money and that therefore its interests should be considered when the court comes to exercise its discretion as to whether there has been a fair distribution of the Company's assets and the “restructuring surplus”, as it is called.
Mr. Ramel's other points concerned the lack of engagement and provision of documents and information by the Company. But, more particularly, he focused on the position of Maddox Holdings Limited (“Maddox”), the Company's parent, in respect of a guarantee from Maddox to Lazari of the rent due from the Company but which is being compromised in the Plan. He also sought to query why Maddox is outside of the Plan and the unfairness he said that arose with its debts not being compromised as compared to the Landlords.
Mr. Amey, on behalf of the HL Landlords, opposed the Plan by reference to Condition A and whether the Relevant Alternative was really what the Company suggested, namely an administration with an accelerated M&A process. He said that the Company had not proved that it could not have survived outside of an insolvency process and, on the figures, it could have continued to trade utilising a £1.5 million facility that was still available to it. He also submitted that on the discretion point, the Company and its shareholder and Secured Creditor had effectively artificially manipulated the position by requiring the Plan to be sanctioned by 30th June 2023 so as to force the court's hand. Whether that latter point is an accurate characterisation of what the Company is doing I will consider in due course, but what I can say at this stage is that 30th June date has certainly brought a great deal of pressure on the court to produce a judgment before then, hence my oral delivery of this judgment.
I should add that we also managed to squeeze in some oral evidence at the start of the hearing on Monday. Two of the Company's witnesses, a Mr. Anthony Riley, who is the Company's Finance Director, and Mr. Matthew Smith, of Teneo Financial Advisory Limited (“Teneo”), were cross-examined by Mr. Amey. The opposing Landlords decided that they did not want to cross-examine the shareholder or in relation to the valuation evidence adduced by the Company. They must therefore be taken to have accepted that evidence.
BACKGROUND
I will now set out some of the essential background to the application. As I have said, the Company is a wholly-owned subsidiary of Maddox. They operate 36 gyms at sites across the UK. The shareholder and Secured Creditor that I have referred to is Ms. Jayne Alison Best. She owns 75.08% of the ordinary share capital of Maddox. The remaining 24.92% is held: by Mr. David Whelan, who is Ms. Best's father, with 9.89%; Mrs. Patricia Whelan, with 5.01% — she is Ms. Best's mother; Scott Best, who is Ms. Best's husband, owns 5.01%; and Mr. Matthew Sharpe, who is Ms. Best's son, owns the remaining 5.01%. Together with Mr. Riley, Mr. Whelan and Mr. Best are the other two directors of the Company. Mr. Best is the Company's Chief Executive.
It is clear that the Group is owned and controlled by the Whelan family. It acquired the Company in 2016 through Dave Whelan Sports Limited, (“DWS”). In September 2019, as part of a wider reorganisation, DWS sold the Company to Maddox. DWS subsequently, in August 2020, entered administration, together with certain other members of the Group. This led to the loss of 72 gyms, a very large number of members and the Group's entire retail and e-commerce business.
Prior to the COVID-19 pandemic, the Company had operated a profitable business. However, it suffered badly during the pandemic as I have said and the...
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