Virgin Atlantic restructuring plan: the first of many?

As previously reported in our article of 21 May 2020, the Corporate Insolvency and Governance Act 2020 (Act), introduced a number of new tools for businesses suffering financial distress. One of the new measures introduced by the Act was the 'Restructuring Plan' – a process modelled on the existing scheme of arrangement (Scheme) but with the following key distinctions:

• unlike a Scheme, a Restructuring Plan could only be used by a company which "has encountered, or is likely to encounter, financial difficulties that are affecting, or will affect, its ability to carry on business as a going concern"
• unlike a Scheme, a Restructuring Plan could be imposed on a dissenting class of creditors if they would be no worse off than in the "relative alternative" (i.e. what the court considers would be most likely if the plan was not sanctioned). The introduction of this so called "cross-class cram down" limits the ability of ransom creditors to block a viable restructuring proposal.

Whilst it is still too early to say whether the Restructuring Plan will become widely used, it has been reported that Virgin Atlantic Airways Ltd (Virgin Atlantic) is currently seeking to implement what would be the first use of the Restructuring Plan process (Virgin Plan).

Virgin Atlantic have, in recent months, made no secret that the COVID-19 pandemic has had a negative impact on its financial wellbeing. The Virgin Plan proposes, amongst other things: shareholders providing financial support, creditors providing deferrals and the introduction of new secured financing from Davidson Kempner Capital Management. Virgin Atlantic is also proposing to have the plan, if sanctioned, recognised in the USA via the Chapter 15 process (preliminary proceedings with respect to this have already commenced).

Much like a Scheme, a Restructuring Plan is implemented by a multi-stage process set out in statute, which includes two main court hearings: (1) on convening meetings of classes of creditors; and (2) on sanctioning the plan (if appropriate). The first of these hearings in relation to the Virgin Plan, was held on 4 August 2020 – the judgment of which has recently become available to the public.

At the hearing, the court held that:

• it had to be satisfied that the company (in this case Virgin Atlantic) had encountered, or was likely to encounter, financial difficulties which affected its ability to carry on business as a going concern and that a compromise or arrangement (in this case the Virgin Plan) was proposed to eliminate, reduce, mitigate or prevent those difficulties. The court held that those conditions were satisfied in this case in that Virgin Atlantic had encountered financial difficulties which had put it on the brink of collapse
• the term "compromise or arrangement" was to be understood in the same way as it was for the purposes of a Scheme and that the aim of eliminating, reducing, preventing or mitigating the effect of financial difficulties was to be construed expansively
• with respect to jurisdiction, there was no reason why the principles in DAP Holding NV, Re [2005] EWHC 2092 (Ch) (i.e. the court had jurisdiction to sanction Schemes proposed by a company incorporated in the EU but not in the UK) should not apply to a Restructuring Plan in the same way as they apply to Schemes. Virgin Atlantic was a company incorporated in England and Wales and was liable to be wound up under the Insolvency Act 1986, therefore the court had jurisdiction
• the court would take broadly the same approach to class constitution as was required under a Scheme on the basis that whilst there were differences between a Restructuring Plan and a Scheme they were not such as to require a difference in approach, the court held that:

"a class had to be confined to those persons whose legal rights were not so dissimilar as to make it impossible for them to consult together with a view to their common interest. Under a Scheme, the question of whether consultation was possible depended largely on whether there was more to unite the relevant creditors than to divide them. That approach was equally applicable under a Restructuring Plan. In this case, the four categories of plan creditors should each vote as a single class. Even though the trade plan creditors had not consented to the proposals and had claims that differed in their terms and quantum, their rights were sufficiently similar for them all to be placed in the same class."

Whilst the Virgin Plan is yet to be formally sanctioned, the court's decision on the 4 August is a welcome sign to insolvency practitioners and advisors alike that the court is likely to follow current precedent on Schemes when questions of interpretation arise with respect to the new Restructuring Plan. The court's decision to follow Scheme precedent can only serve to help the adoption of the Restructuring Plan process as a tool for businesses suffering financial distress.

What will be interesting to see is whether the Restructuring Plan process will be used regularly in the mid-market. Currently, Schemes (on which Restructuring Plans are based) are primarily used by large international companies. Mid-market companies looking to achieve a statutory compromise with creditors more commonly use CVA's because they are often significantly cheaper to implement. Whilst it is still too early to say, the court's decision to remove some of the ambiguity of interpretation should help to reduce costs and broaden the circumstances where the Restructuring Plan might be the most attractive option for directors of mid-market businesses; especially where they are looking for a way to rescue the company as a going concern in the face of multiple out of the money secured creditors.