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Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd.

Stephen Jourdan QC, James Tipler and Imogen Dodds appear in decision on the effect of a restructuring plan under Part 26A of the Companies Act 2006 on an original tenant and a guarantor. 

On 15 August 2022, Deputy Master Arkush handed down judgment in Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd.

Stephen Jourdan QC and Imogen Dodds, instructed by Teacher Stern, appeared for the Claimant landlord, Oceanfill, and James Tipler, instructed by Eversheds Sutherland, appeared for the Defendants, Nuffield Health and Cannons Group.

The claim

The claim was for rent by Oceanfill, the landlord under a 25-year lease of a gym in Leeds. It was brought against Nuffield, the original tenant and Cannons, the original guarantor under the lease.

Nuffield had assigned the lease to Virgin Active Limited ("VAL") back in 2000, at which time Nuffield had entered into an authorised guarantee agreement guaranteeing the performance of VAL as tenant ("the AGA") and Cannons had given a guarantee of Nuffield's obligations under the AGA ("the GAGA").

Over twenty years later, on 12 May 2021, the High Court approved a restructuring plan ("the Plan") proposed by VAL and associated companies under new Part 26A of the Companies Act 2006: see Re Virgin Active Holdings Ltd [2021] EWHC 1246 (Ch) (Snowden J).

The effect of the Plan on ‘Class D Landlords’ such as Oceanfill (all of whom had voted against the Plan) was that no past, present or future rent, service charge or other liabilities would be payable by the plan companies under their various leases. Instead the landlord would be entitled to a Restructuring Plan Return – in Oceanfill’s case, less than 1p in the pound.

Oceanfill therefore claimed the arrears from the Defendants as guarantors, making an application for summary judgment. It was this application which the Court was required to determine.

Restructuring plans under Part 26A of the Companies Act 2006

Part 26 of the Companies Act 2006 provides for the court to sanction schemes of arrangement for companies seeking a compromise or arrangement with creditors or any class of creditors.  The provisions allowing the court to make an order giving effect to a scheme of arrangement were first introduced by section 2 of the Joint Stock Companies Arrangement Act 1870.  They have been re-enacted in successive Companies Acts up to and including the current Part 26 of the Companies Act 2006.

Under Part 26, creditors are usually divided into classes, and a scheme can only be approved if 75% by value of the creditors in each class vote in favour.

Part 26A was introduced into the Companies Act 2006 with effect from 26 June 2020, by Schedule 9 of the Corporate Insolvency and Governance Act 2020. Part 26A introduced a "cross-class cram down" feature that allows dissenting classes of creditors to be bound to a restructuring plan. This means that classes of creditors who vote against a proposal, but who would be no worse off under the restructuring plan than they would be in the most likely alternative outcome were the restructuring plan not to be agreed cannot prevent it from proceeding.

The judgment

The first question for the Court was the effect of the Plan on the liability of Nuffield and Cannons. Had the Plan varied the Lease and released the tenant, VAL, from liability, such that the sums claimed from the Defendants had not fallen due? Or had the Plan merely altered the liability of VAL under the lease by operation of law, leaving the liabilities of Nuffield and Cannons unaffected?

The Court concluded that the latter was the correct analysis. The Deputy Master agreed with the Claimant’s submissions that Parliament had plainly intended for Part 26A schemes to have the same effect as schemes under Part 26 of the Companies Act 2006, and their statutory predecessors, which (it is now well-established) take effect by operation of law and therefore do not affect the rights of third parties liable for the same debt as the creditor which is subject to the scheme. The "parity of language between Part 26 and Part 26A" led him to that "inescapable conclusion".

The second issue was as to the construction of the GAGA and the AGA. The AGA provided that Nuffield covenanted that VAL "will to pay the rents and observe and perform its covenants in the Lease". The Defendants argued that, because of the Plan, no rent was payable by VAL so there was no breach.

The Court disagreed, noting that the Licence expressly provided that the obligations of Nuffield and Cannons would not be released by any variation of the lease, or any other act or thing save for a release under seal given by the landlord. Although the Plan contained a provision deeming it to take effect by deed, that notional deed would merely confirm that VAL had been released from its obligations by operation of law, and so would not operate as a release under seal given by Oceanfill to the Defendants.

It followed that Oceanfill was entitled to summary judgment on the claim.

The full judgment is available here.

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