Re Listrac Midco Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Trower |
| Judgment Date | 23 January 2023 |
| Neutral Citation | [2023] EWHC 78 (Ch) |
| Docket Number | Case Nos: CR-2023-000160, CR-2023-000161, CR-2023-000162, CR-2023-000163, CR2023-000164, CR-2023-000165, CR-2023-000166 |
| Court | Chancery Division |
[2023] EWHC 78 (Ch)
Mr Justice Trower
Case Nos: CR-2023-000160, CR-2023-000161, CR-2023-000162, CR-2023-000163, CR2023-000164, CR-2023-000165, CR-2023-000166
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES COURT (ChD)
Royal Courts of Justice
7 Rolls Building
Fetter Lane, London
EC4A 1NL
Tom Smith KC, Paul Fradley and Annabelle Wang (instructed by Willkie Farr & Gallagher (UK) LLP) for the Applicant Companies
Tina Kyriakides (instructed by Harrison Clark Rickerbys Limited) for Mr Justin Tydeman
Hearing date: 17 January 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on [date] by circulation to the parties or their representatives by e-mail and by release to the National Archives
(see eg https://www.bailii.org/ew/cases/EWCA/Civ/2022/1169.html).
This judgment is concerned with an application by seven companies (the “Plan companies”) forming part of the Lifeways group (the “group”) for orders that meetings of creditors be summoned under section 901C(1) of the Companies Act 2006 (“CA 2006”) for the purpose of agreeing restructuring plans (the “Plans”) under Part 26A of CA 2006. At the end of the hearing, I said that I would make the order sought by the Plan companies. I indicated that I would give my reasons in writing because the application raised a point on the application of section 901C(3) of CA 2006 which might prove to be of more general interest.
The group of which each of the Plan companies forms part is the leading supported living specialist in the UK, providing specialist residential support and care services for around 4,200 adults with complex needs. It has approximately 10,000 employees.
It is not necessary for me to explain the group structure in any detail for the purposes of this judgment. It suffices to say that four of the Plan companies Lifeways Community Care Ltd (“LCC”), Living Ambitions Limited (“LAL”), Autism Care (UK) Limited (“ACUKL”) and Vitavia Property Management Limited (“VML”) are subsidiaries of Lifeways Finance Limited (“LFL”). LFL is itself a subsidiary of Listrac Bidco Limited (“Bidco”) and Bidco is itself a subsidiary of Listrac Midco Limited (“Midco”). Bidco and Midco are intermediate holding companies within the group.
Midco has two classes of issued shares: class A ordinary shares and class B ordinary shares. Its majority A shareholder is Listrac Intermediate Holdings Limited (“Intermediate Holdings”). The B shares were issued to existing and former members of the group's management as part of a 2019 management incentive plan (the “MIP”), which was put in place in order to incentivise the management team, with the consent of the existing secured creditors, to deliver a sale of the group. There is a put option associated with the B shares to which I will revert later in this judgment.
The evidence contains a detailed description of the target group's current financial difficulties. In broad terms, the Plan companies' case is that those difficulties have been caused by onerous obligations under some of its leases, nomination agreements and other liabilities in its residential supported living sectors, together with an unsustainable level of secured debt. The context in which those onerous lease liabilities have been incurred is that they relate primarily to properties which are either empty, or unfit for future occupation by service users, or on rents which are higher than market rates and on long and inflexible terms.
The Plans are proposed as part of a broader restructuring designed to ensure the continued operation of Bidco and its subsidiaries (the “target group”) by putting in place a sustainable capital structure. The intention is that an improved quality of care services will thereby be enabled for the benefit of all of the target group's stakeholders. Continuity of care is said to be a crucial concern for the Plan companies.
The essence of the proposal is that the secured creditors of the target group will acquire ownership in exchange for the reduction of their secured indebtedness. It is also proposed that they will provide further liquidity under a new super priority secured loan facility on the condition that the target group's onerous lease and other contractual liabilities are reduced or released. LCC is the tenant of most of the leases sought to be compromised. Midco, as the top Plan company in the group, will then be wound down on a solvent basis.
The Plan companies' evidence is that, if the Plans are not put in place, the group will run out of cash by the 28 February 2023. It is said that new capital is highly unlikely to be available from any party other than the existing secured creditors.
The primary financing for the group has been advanced under a secured facilities agreement of which Bidco, LFL and LCC are borrowers with the remaining Plan companies as guarantors. The amount currently outstanding is in excess of £190 million, repayment of which has been temporarily deferred. These temporary deferrals and waivers have been extended for the duration of a lockup agreement. They can be terminated at the option of the secured creditors if the Plans are not sanctioned, or will terminate automatically on the occurrence of a 28 February 2023 longstop date.
The current beneficial owner of the group is a corporation forming part of the Ontario Municipal Employees Retirement Scheme (“OMERS”) which acquired the group in 2012. It will cease to be the beneficial owner of the target group as a result of the restructuring of which the proposed Plans form part. The group is also indebted to OMERS in a sum of just under £10 million which is subordinated to the senior facilities agreement and remains outstanding. OMERS has made clear that it will not provide any further financial support to the group.
There are two broad categories of non-finance creditor whose claims against the Plan companies are also proposed to be compromised by the Plans. Four of the seven Plan companies (LCC, LAL, ACUKL and VML) are party between them to approximately 77 leases of care homes and offices, the vast majority of which benefit from guarantees granted by another Plan company (in almost all cases LFL). The liabilities in respect of 27 of these leases are proposed to be compromised under the Plans. They are typically on terms of 20 years or more and were identified having regard to an estimated rental value or ERV analysis.
So far as the landlords under these 27 leases are concerned, they are divided into class A landlord creditors, class B1 landlord creditors and class B2 landlord creditors.
a. Class A landlord creditors are those in respect of whose premises the ERV analysis determined that the contractual rent payable was approximately 40% above ERV in respect of the properties let to one of the Plan companies and 20% above ERV in respect of the properties let to another. Those leases are considered by the relevant Plan company to be uneconomic on current terms. The proposal is that they will have their rents reduced for a compromised period of three years.
b. The leases of class B1 landlord creditors are not currently viable for the target group and could not be so even if the contractual rent payable under them were to be reduced. In part this is because their leases are uneconomic, and the premises are empty or wholly unsuited for any future use even at market rent levels. It is proposed that the claims of these landlords will be compromised in full.
c. So far as class B2 landlords are concerned, they are in the same position as class B1 landlord creditors, but the premises to which their claims relate have been sublet by LCC to a third party.
The second broad category of creditor comprises unsecured creditors with certain miscellaneous types of claims, including those arising under seven of what are called the nomination agreements, those made by former advisers and those made by former senior management executives. The liabilities under the nomination agreements arise because LFL is required to pay what are called void costs to landlords in lieu of the rent which the landlord would otherwise have received directly from a resident individual requiring supported living services. There are also superior landlords who are contingent creditors of LFL in respect of such obligations, the liability to whom may arise if the landlord's own lease is forfeited by the superior landlord.
In all instances in which claims in this second broad category are compromised, they will be released in full in return for the receipt of 110% of each creditor's estimated insolvency return on the amount of its allowed claim against the relevant Plan company, or its claim as admitted under the Plans as the case may be. The estimated insolvency return is a figure computed by EY based on work done by FRP Advisory (“FRP”) and is intended to represent the best-case valuation of creditors' returns in the relevant alternative (as to which see section 901G(4) of CA 2006), which is said to be an administration for all but two of the companies and a liquidation for Bidco and Midco. It is the Plan companies' case that an optimistic valuation of the achievable sale price has been used and that the actual returns to creditors in an administration sale may be materially lower.
A number of the target group's liabilities are unaffected by the Plans. Amongst these are obligations under the group's defined...
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