Virgin Active Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 12 May 2021 |
| Neutral Citation | [2021] EWHC 1246 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2021-000548, 549 and 550 |
| Date | 12 May 2021 |
In the Matters of
[2021] EWHC 1246 (Ch)
Mr Justice Snowden
Case No: CR-2021-000548, 549 and 550
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Royal Courts of Justice
Rolls Building
Fetter Lane
London, EC4A 1NL
Tom Smith QC, Ryan Perkins and Lottie Pyper (instructed by Allen & Overy LLP) for the Applicant Companies
Robin Dicker QC and Georgina Peters (instructed by Sullivan & Cromwell LLP) for an Ad Hoc Group of Landlords
David Allison QC (instructed by Hogan Lovells LLP) for the Lender Group
Hearing dates: 29–30 April, 3–5 May 2021
APPROVED JUDGMENT
Index
| Introduction | ¶1 – 2 |
| The Parties | ¶3 – 13 |
| Background to the Restructuring | ¶14 – 48 |
| Summary of the relevant alternative | ¶49 – 55 |
| The Plans in outline | ¶56 – 73 |
| The Convening Judgment | ¶74 – 78 |
| The Plan Meetings | ¶79 – 81 |
| Overview of the witness evidence | ¶82 – 87 |
| The Relevant Alternative Report and the GT Report | ¶88 – 100 |
| The Issues | ¶101 – 105 |
| Issue 1: is the “no worse off” test (Condition A) satisfied? | ¶106 – 207 |
| Issue 2: Should the Court exercise its discretion to sanction the Plans? | ¶208 – 316 |
| Conclusion | ¶317 – 318 |
Introduction
This is an application on behalf of Virgin Active Holdings Limited (“VAHL”), Virgin Active Limited (“VAL”) and Virgin Active Health Clubs Limited (“VAHCL”) (together the “Plan Companies”). The Plan Companies seek an order sanctioning the restructuring plans (the “Plans”) proposed by each of the Plan Companies with certain of their creditors (the “Plan Creditors”) in accordance with section 901F of the Companies Act 2006 (the “CA 2006”).
I have previously handed down two judgments in connection with the Plans. On 1 April 2021, I handed down a judgment explaining my decision to convene class meetings of creditors for each of the Plan Companies (the “Convening Judgment”): see [2021] EWHC 814 (Ch). On 16 April 2021, I handed down a judgment in connection with the ability of certain creditors to recover their costs, a question which I reserved until after the conclusion of the sanction hearing: see [2021] EWHC 911 (Ch).
A. The Parties
The Plan Companies
The Plan Companies are part of the Virgin Active group (the “VA Group”), an international health club operator. A key holding company of the VA Group is Virgin Active Health Club Holdings Ltd (“VAHCHL”). VAHCHL's ultimate shareholders are Brait Mauritius Limited (72.10%) and Sir Richard Branson (17.85%) (the “Shareholders”). The remaining 10.05% of the shares are held by the VA Group's management and an employee benefit trust. VAHCHL remains fully solvent and was recently valued at between £350 – £400 million on an adjusted enterprise value valuation. It also owns a South African business, which is not part of the planned restructuring as it has separate financing arrangements and is not in financial distress.
The Plan Companies are all incorporated in England and are key entities in the VA Group's Europe & Asia Pacific business sub-group (the “Group”). Virgin Active Investment Holdings Limited (“VAIHL”) is the ultimate parent company of the Group. VAHL is a wholly-owned subsidiary of VAIHL and VAL and VAHCL are wholly-owned subsidiaries of VAHL. There are currently a total of 102 clubs in the Group's business located in the UK, Italy, Australia, Thailand and Singapore, of which 39 are operated in the UK.
The Plan Creditors
The Group owes significant debts to certain “Secured Creditors” under a “Senior Facilities Agreement” which was entered into on 28 June 2017, with VAHL as the borrower and VAL and VAHCL (among others) as guarantors. There are currently eight facilities under the Senior Facilities Agreement providing financing of over £200 million, all bar one of which are fully drawn. The Senior Facilities Agreement is secured by various guarantees and security over property provided by, among others, the Plan Companies (the “Charged Property”). The Plan Companies have entered into an intercreditor agreement (the “Intercreditor Agreement”) which regulates the enforcement of security over the Charged Property and the ranking and priority of certain claims. Both the Senior Facilities Agreement and the Intercreditor Agreement are governed by English law.
A sub-set of the Secured Creditors (the “Lender Group”), holding approximately £164 million of the total claims under the Senior Facilities Agreement, appeared by counsel (Mr David Allison QC) at the hearing to support the sanction of the Plans.
The second significant group of creditors of the Group for present purposes are the landlords under the leases of club premises in the UK (the “Landlords” and the “Leases”). There are 46 Landlords, who have granted a total of 67 Leases included within the Plans relating to 45 properties. Of these, 30 Leases have been entered into by VAL, 32 by VAHCL and five are joint leases. Some of the Leases are guaranteed by VAHL, some benefit from guarantees provided by other Group companies, and one is guaranteed by a company outside the Group. The arrears of unpaid rent owed to the Landlords in respect of the Leases will amount to about £30 million by the end of May 2021. Such amounts are all unsecured.
The Plans do not apply to leases of club premises in other jurisdictions. Those clubs are fewer in number, are not predicted to have such large cashflow requirements and the Group has generally been able to reach consensual agreements with the landlords. For example, approximately 90% of rent payments relating to the first lockdown period in Italy were waived, together with further rent reductions post-lockdown; in Thailand and Singapore, all landlords agreed that no rent would be charged for the periods in which clubs were closed; and in Australia, all landlords agreed partial rent waivers in respect of closure periods.
A sub-set of the Landlords (the “Ad Hoc Group” or “AHG Landlords”) appeared by counsel (Mr. Robin Dicker QC) at the hearing to oppose the sanction of the Plans. The AHG Landlords are Aberdeen Standard Investments, The British Land Company plc, KFIM Long Income Property Unit Trust, Land Securities Properties Ltd, and the underlying property owners of the property that are managed by them. The AHG Landlords have been placed in, variously, Classes A to E of the Landlord creditors under the Plans, the significance of which is explained below. In addition to appearing by counsel at the hearing, the AHG Landlords jointly instructed Sullivan & Cromwell LLP (“Sullivan & Cromwell”) and PricewaterhouseCoopers LLP (“PwC”) to advise them.
The third significant group of creditors of the Group for present purposes are approximately one hundred creditors who are not current Landlords in respect of Leases, but whose claims relate in various ways to properties which are or have in the past been occupied by the Group (the “General Property Creditors”). The debts owed to the General Property Creditors are all unsecured.
Many of the claims of General Property Creditors are contingent liabilities which relate to either authorized guarantees (“AGAs”) or guarantees of authorized guarantees (“GAGAs”) or covenants under privy of contract provided to landlords of properties that were assigned to third parties by the Plan Companies between 2014 and 2019. Such claims would arise if the assignee tenant were to default. The definition of General Property Creditors also includes creditors with a variety of other types of claims, which it is not necessary to set out here.
The General Property Creditors were not represented at the hearing and no member of the group made submissions in connection with the sanctioning of the Plans.
Excluded creditors
There are nine categories of liability which will not be compromised by the Plans. These include tax and employee-related liabilities of any nature, business rate liabilities and liabilities owed to trade creditors. The services of the employees are considered essential to the day-to-day business of the Group, as are the goods and services provided by large trade creditors such as utilities and providers of gym equipment. Moreover, given the large number of smaller trade creditors, the cost and complexity of including such creditors in the restructuring was thought to be disproportionate and not feasible in the limited time available.
B. Background to the Restructuring
The Group's financial difficulties
Prior to the COVID-19 pandemic, the Group was in a strong and sustainable financial position. The Group's business model is based on subscriptions, with members of its clubs making monthly payments of membership fees. Additional revenue is generated by ancillary services, including personal training and other forms of individual and group instruction. This drives substantially the whole revenue of the Group. As such, its financial position has been severely affected by the COVID-19 pandemic. Government-imposed shutdowns around the globe have forced gyms to close in all of the Group's territories. Membership payments have been suspended during such closures and many members have opted to cancel or suspend their memberships for longer periods.
The result of the closures has been dramatic. The Group suffered a drop of income of £185.4 million year-on-year in 2020, and £53 million year-on-year for the first two months of 2021. The underlying EBITDA of the...
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