Virgin Atlantic Airways Ltd, Re

At the conclusion of a hearing conducted remotely on 2 September 2020 I indicated that I would sanction a restructuring plan (the “Restructuring Plan”) between Virgin Atlantic Airways Limited (the “Company”) and four classes of its creditors (the “Plan Creditors”). It was the first such restructuring plan to come before the court under the new provisions of Part 26A of the Companies Act 2006 (“Part 26A” and the “CA 2006”) and it had the support of the overwhelming majority of the Plan Creditors. I indicated that I would give my reasons in writing, which I now do.

The Company operates a major international airline based in the UK and is a member of the Virgin Atlantic Group of companies (the “Group”). The Company is indirectly owned by Virgin Atlantic Limited (“VAL”) which in turn is owned as to 51% by Virgin Investments Limited (“VIL”) and 49% by Delta Air Lines, Inc (“Delta”). The ultimate beneficial owner of VIL is Sir Richard Branson.

The Company’s airline business is fundamentally sound, but its financial position has been severely affected by the ongoing COVID-19 pandemic, which has caused an unprecedented reduction in passenger numbers and disruption to the global aviation industry. As a result, the Company is now undergoing a liquidity crisis. Without a restructuring and an injection of new money, it is projected that the Company’s cash flow would drop to a critical level by the week commencing 21 September 2020. This would trigger the rights of certain bondholders under a securitisation to commence an enforcement process over the Company’s valuable landing and departure slots at Heathrow Airport. Even if this did not occur, it is projected that the Company would run out of available (free) cash altogether during the week commencing 5 October 2020.

In such circumstances, without a restructuring of its liabilities and an injection of new money, the Company’s directors would have no choice but to place the Company into administration in mid-September 2020 in order that its business could be wound down in an orderly manner and its assets sold. The Company has received independent expert advice from Alvarez & Marsal that this process would be likely to result in a very poor outcome for the Company’s creditors of between 10.5p to 21.4p in the £, and that it might take a couple of years before a first dividend was paid in the administration.

To avoid this outcome, the Company has proposed the Restructuring Plan as part of a

The Restructuring Plan involves four classes of Plan Creditors:

The debts owed to these four classes of Plan Creditors will be varied under the Restructuring Plan as follows.

The Restructuring Plan will make various amendments to the terms of the RCF, including: (i) converting the RCF into a term loan facility; (ii) extending the final maturity date to 17 January 2026; (iii) changing the repayment schedule so that the currently drawn loans are repayable in three annual instalments starting on 17 January 2024; (iv) increasing the margin payable on the outstanding balance by 1% per annum; (v) amending the suite of covenants and events of default to enhance the position of the RCF Plan Creditors; and (vi) inserting a mechanism that enables the RCF Plan Creditors to receive repayment of any deferred amounts out of the Group’s excess cash flow (a “cash sweep”) together with certain of the Company’s other stakeholders.

In addition, one of the aircraft engines that is currently part of the security package for the RCF will be released from the security (so that it can be used as security for a new money facility). In exchange, the Company will grant the RCF Plan Creditors security over a bank account with a credit balance of $23.3 million pending the addition of a new engine to the security package in 2021.

The Operating Lessor Plan Creditors are entitled to choose between three options. The first option involves a deferral of rent for a defined period of time; the second option involves a 20% reduction of rent coupled with a deferral; and the third option involves the termination of the relevant lease and redelivery of the aircraft.

In the event, all of the Operating Lessor Plan Creditors have chosen the first option (“Option 1”). The basic terms of Option 1 are as follows:

The Operating Lease Deferral Period is deemed to commence on 1 April 2020. Since that date, the Company has paid (or part-paid) various instalments of rent that have fallen due. In some cases, the Company has paid less than the 15% entitlement of the relevant lessor under Option 1 above. In other cases, the Company has paid more than the 15% entitlement of the relevant lessor under Option 1 above. Accordingly, under Option 1 the rent paid since 1 April 2020 will be subject to a “true-up” arrangement to equalise the amounts that such lessors have received so as to ensure that all Operating Lessor Plan Creditors are treated fairly. The Operating Lessor Plan Creditors will also benefit from the cash sweep, in priority to the RCF Plan Creditors.

The Restructuring Plan will make the following amendments to the Connected Party Plan Agreements:

The Restructuring Plan will vary the rights of the Trade Plan Creditors as follows:

Any claims of the Trade Plan Creditors in respect of goods or services supplied after

The Restructuring Plan itself is a relatively short document. Its key provisions are clauses 3, 4 and 5.

Under clause 3, each Plan Creditor appoints the Company as its attorney and agent with power to execute and deliver documents on its behalf which implement the relevant provisions of the Recapitalisation as regards that creditor. Those documents include a Restructuring Implementation Deed which sets out the key terms and mechanics for the entire Recapitalisation. There are also separate suites of documents to amend and restate the RCF, the Operating Lease Agreements and the Connected Party Plan Agreements.

Clause 4 of the Restructuring Plan provides for the giving of an instruction (and waiver of liability) from the RCF Plan Creditors to the agent and security agent under the RCF to enter into the relevant documents to give effect to the Recapitalisation.

It has become very common practice in complex restructurings in recent times for a scheme of arrangement under Part 26 CA 2006 to confer a power of attorney on the scheme company or other designated person to execute the necessary restructuring documents on behalf of scheme creditors. Such restructuring documents amend the terms of the relationship between the scheme company and the scheme creditors, or between the scheme creditors and third parties (such as guarantors). I recently considered and endorsed this practice in Re ColourOz Investment 2 LLC [2020] EWHC 1864 (Ch) at [74]-[75], following a decision to similar effect in Scotland: see Re Premier Oil plc [2020] CSOH 39 at [218]-[230] per Lady Wolffe. I see no obvious reason why the same technique should not be used in relation to a restructuring plan under Part 26A, or why it should not be used to provide for an instruction to be given on behalf of scheme or plan creditors to a third party for the purposes of varying the relevant finance documents.

In contrast to the other arrangements set out above, the variation of the debts of the Trade Plan Creditors will not be implemented through a power of attorney structure. Instead, the terms of the arrangement with the Trade Plan Creditors are directly set out in Clause 5 of the Restructuring Plan.

A number of parties are not included in the Restructuring Plan but are the subject of bilateral arrangements with the Group as part of the wider Recapitalisation. These include lessors and lenders whose claims amount to almost $1 billion under various finance lease agreements for further aircraft (the “Finance Lease Creditors”). The Finance Lease Creditors were originally intended to be included in the Restructuring Plan, but due to the technical complexity of amending their contractual arrangements, a decision was made to deal with them all consensually. Bilateral arrangements will also be entered into, in particular, with the bondholders under the securitization of the Company’s slots at Heathrow airport, and with the credit card acquirers with whom the Company deals.

A significant number of trade creditors of the Company will not be subject either to the Recapitalisation or to the Restructuring Plan at all (the “Excluded Trade Creditors”). As such, their claims against the Company will not be reduced or deferred. Most significantly for present purposes, the categories of Excluded Trade

As indicated above, if the Restructuring Plan is not sanctioned, the most likely alternative is an administration of the Company which would attempt to achieve an orderly wind-down of the Company’s affairs and the sale of any realisable assets for the benefit of creditors. In order to estimate the likely outcome for Plan Creditors of an administration, the Company instructed Alvarez & Marsal to produce an administration outcome analysis, using valuations of the Company’s assets by a specialist firm of aviation valuers. That original analysis was summarised in some detail in the Explanatory Statement provided to Plan Creditors.

The Alvarez & Marsal report has since been updated using figures to 20 August 2020 which show a deterioration in the Company’s position. The updated Alvarez & Marsal analysis suggests that if an administration is commenced in the week starting 14 September 2020, it is likely that the unsecured creditors of the Company (including the Trade Plan Creditors) would receive a return in the range of 21.4p (best case) to 10.5p (worst case) in the £ and that a first dividend would only be likely to be paid two years after the commencement of the administration.

In contrast, if the Restructuring Plan is sanctioned and the Recapitalisation becomes effective, each class of Plan Creditors is predicted to receive a much better return than they would receive in an administration. In particular, as indicated above, the Restructuring Plan provides for Trade Plan Creditors to receive 80p in the £ in respect of their existing claims in a total of nine instalments commencing shortly after the Recapitalisation becomes effective and with quarterly payments from 31 December 2020 together with interest on the outstanding amounts at a rate of 1% per annum.

Thus, in approximate terms, if all goes well, the Trade Plan Creditors will receive an amount under the Restructuring Plan that is significantly greater than the amount that they could expect to receive in an administration, and will beat their likely outcome in an administration between four and six months after the Restructuring Plan becomes effective.

These projections for returns under the Restructuring Plan are, of course, not guaranteed, but are subject to a number of risk factors. These include the possibility of the Company being adversely affected by a “second wave” of COVID-19 which might further delay a return to normal flying operations. These risk factors were identified and explained in the Explanatory Statement sent to Plan Creditors.

By 13 July 2020 the Company had entered into support agreements with a large number of Plan Creditors and other key stakeholders who undertook to support the Recapitalisation and (where relevant) to vote in favour of the Restructuring Plan.

At 13.30 hours on 14 July 2020 the Company sent a letter to all Plan Creditors pursuant to the Practice Statement (Companies: Schemes of Arrangement under Part26 and Part 26A of the Companies Act 2006) (the “Practice Statement Letter”). That letter outlined the Company’s proposals and gave notice of a hearing to obtain a court order convening meetings of the Plan Creditors to consider and vote on the Restructuring Plan (the “Convening Hearing”). The Company subsequently also held a virtual webinar for Trade Plan Creditors on 21 July 2020 to discuss the background and terms of the Recapitalisation and the Restructuring Plan.

The Convening Hearing took place on 4 August 2020. By that date, the Company had entered into support agreements with all of the RCF Plan Creditors, all of the Operating Lessor Plan Creditors and all of the Connected Party Plan Creditors which committed those Plan Creditors to vote in favour of the Restructuring Plan.

Trower J gave a detailed judgment on 4 August 2020: see Re Virgin Atlantic Airways

A comprehensive Explanatory Statement in relation to the Restructuring Plan was circulated to Plan Creditors in accordance with the Convening Order on 4 August 2020 and the four Plan Meetings took place by Zoom conference on 25 August 2020. The technology worked well and only one Plan Creditor, which had already appointed a proxy to vote in favour of the Restructuring Plan, encountered technical problems attending.

The Restructuring Plan was approved at all four Plan Meetings. As anticipated in the support agreements, it was approved by 100% in number and value of the RCF Plan Creditors, the Operating Lessor Plan Creditors and the Connected Party Plan Creditors (with a turnout of 100% in each class meeting).

The Restructuring Plan was also approved by 99.24% in value of the Trade Plan Creditors who voted at their class meeting. The turnout was 107 out of 162 (i.e. 66.05% in number) of the Trade Plan Creditors, who represented 89.18% by value of all Trade Plan Creditors. Of those who participated, 102 Trade Plan Creditors voted in favour, two Trade Plan Creditors holding 0.39% by value of those attending voted against, and three Trade Plan Creditors holding 0.37% by value of those attending abstained.

In those circumstances, the Company sought an order sanctioning the Restructuring Plan under section 901F of the CA 2006. It also intends to seek recognition of the Restructuring Plan in the United States (where the Company also operates and holds assets of material value) under Chapter 15 of the US Bankruptcy Code.

It is intended that the Restructuring Plan and the wider Recapitalisation will become effective this Friday, 4 September 2020.

The Restructuring Plan is proposed under Part 26A, which was inserted into the CA

There are very considerable similarities between a restructuring plan under Part 26A and a creditors scheme of arrangement under Part 26. Both types of procedure involve a “compromise or arrangement” between a “company” and its creditors (or any class of them). Both procedures involve a convening hearing (at which the court considers the appropriate class composition), followed by one or more class meetings (where the creditors vote on the compromise or arrangement), followed by a sanction hearing (where the court decides whether to exercise its discretion to sanction the compromise or arrangement).

There are, however, a number of important differences in the express provisions of Part 26 and Part 26A.

First, a company that wishes to propose a restructuring plan under Part 26A must satisfy a threshold condition under section 901A CA 2006 that “the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”, and that “the purpose of the proposed compromise or arrangement must be to eliminate, reduce or prevent, or mitigate the effect of, any of [those] financial difficulties”: see sections 901A (2) and (3). There is no such requirement in Part 26, which, as is well-known, is frequently used by solvent companies to promote schemes of arrangement with their members to implement take-overs and other changes to their capital structures.

Secondly, unlike Part 26, sections 901C(3) and (4) in Part 26A make express provision for who must be permitted to participate in a class meeting summoned under section 901C(1). Those sections provide as follows,

“(3)

Every creditor or member of the company whose rights are affected by the compromise or arrangement must be permitted to participate in a meeting ordered to be summoned under subsection (1).

(4)

But subsection (3) does not apply in relation to a class of creditors or members of the company if, on an application under this subsection, the court is satisfied that none of the members of that class has a genuine economic interest in the company.”

Thirdly, under section 901F(1), a restructuring plan under Part 26A is deemed to be approved by a class meeting if it is approved by 75% in value of those present and voting in person or by proxy. Unlike under Part 26, there is no need to obtain a majority in number of those attending and voting.

Fourthly, unlike a scheme under Part 26, which must be approved by each class meeting in order to be capable of being sanctioned by the court, section 901G in Part 26A contains, for the first time in English law, a provision for so-called “cross-class cram down”. Broadly speaking, this gives the court a discretion to sanction a plan notwithstanding that the necessary 75% vote in favour has not been obtained at one or more of the class meetings, provided (i) that another class which would receive a benefit under the relevant alternative to the plan has voted in favour of the plan, and (ii) that members of the dissenting class(es) will not be worse off under the plan than they would be if the plan were not sanctioned.

The introduction of Part 26A by CIGA 2020 was accompanied by Explanatory Notes prepared by the Department for Business, Energy and Industrial Strategy. These Explanatory Notes are admissible as an aid to the interpretation without needing to show that the legislation is ambiguous or unclear: see Flora v Wakom (Heathrow) Ltd [2007] 1 WLR 482 at [15]-[16]. The Explanatory Notes describe the basic purpose of Part 26A and make comparisons with schemes of arrangement under Part 26 as follows (at [9]-[16]):

“[Part 26A] will allow struggling companies, or their creditors or members, to propose a new restructuring plan between the company and creditors and members. The measures will introduce a “cross-class cram down” feature that will allow dissenting classes of creditors or members to be bound to a restructuring plan. This means that classes of creditors or members who vote against a proposal, but who would be no worse off under the restructuring plan than they would be in the most likely outcome were the restructuring plan not to be agreed cannot prevent it from proceeding.

...

In schemes of arrangement [under Part 26] creditors (and sometimes members) are divided into classes (based on the similarity of their rights, which may vary significantly across a company’s creditor base) and each class must vote on the proposed scheme. If all classes vote in favour of the scheme

(requiring 75% by value and a majority by number of each

class), the court must then decide whether to sanction it. Not all creditors or members of a company need to be included within a scheme. A company may propose a scheme in such a way as to exclude some creditors or members from it. Those creditors or members who are not bound by the scheme retain their existing rights.

The new restructuring plan procedure is intended to broadly follow the process for approving a scheme of arrangement (approval by creditors and sanction by the court), but it will additionally include the ability for the applicant to bind classes of creditors (and, if appropriate, members) to a restructuring plan, even where not all classes have voted in favour of it (known as cross-class cram down). Cross-class cram down must be sanctioned by the court and will be subject to meeting certain conditions. As is the case with Part 26 schemes, the court will always have absolute discretion over whether to sanction a restructuring plan. For example, even if the conditions of cross-class cram down are met, the court may refuse to sanction a restructuring plan on the basis it is not just and equitable….

While there are some differences between the new Part 26A and existing Part 26 (for example the ability to bind dissenting classes of creditors and members), the overall commonality between the two Parts is expected to enable the courts to draw on the existing body of Part 26 case law where appropriate.”

From the legislative background to Part 26A, and having regard to the Explanatory Notes, it is clear that the court has a general discretion whether to sanction a restructuring plan under Part 26A. It is also envisaged that the authorities under Part 26 may, where appropriate, assist the court in deciding how to exercise its discretion under Part 26A.

In the instant case, all classes of Plan Creditors have voted in favour of the Restructuring Plan. I am therefore in a similar position to that which would have arisen had the Restructuring Plan been proposed as a scheme of arrangement under Part 26. Accordingly, I shall simply follow the tried and tested approach to the exercise of discretion which has been established under Part 26.

In that regard, I should state for the avoidance of doubt that I do not need to consider whether the power to cram down a dissenting class has arisen under section 901G, or if so, on what basis to exercise it. I say that, in particular, because this Restructuring Plan has an unusual feature in that 100% of the members of three of the four classes of Plan Creditors (the RCF Plan Creditors, the Operating Lessor Plan Creditors and the Connected Party Plan Creditors) had, by the time that the Convening Order was made, already agreed to support the Recapitalisation. Arguably, therefore, such creditors could simply have entered into a consensual agreement with the Company without needing to be parties to the Restructuring Plan (which was the course taken with the Finance Lease Creditors).

Under Part 26, the court would not ordinarily entertain an application to convene scheme meetings or sanction a scheme of arrangement where it was known in advance that all creditors have consented or would be prepared to consent to a variation of their rights against the company. As such, although very high majorities are sometimes locked up in advance to support a scheme, it is not normal practice to include classes in a Part 26 scheme where 100% of the relevant creditors are known to be willing to consent.

In this case, however, it would appear that the three fully consenting classes of Plan Creditors may have been included within the Restructuring Plan with a view to arguing that the cram down power under section 901G would have been available in the event that the class of Trade Plan Creditors had not voted in favour of the Restructuring Plan.

In paragraph 56 of the Convening Judgment, Trower J declined to be drawn on this point. In sanctioning the Restructuring Plan I should also not be taken to have decided that the power to cram down a dissenting class under section 901G can be activated by including within a plan a class of creditors who would otherwise all have been prepared to enter into consensual arrangements to give effect to the restructuring of their rights. Nor do I need to consider whether, if that were effective as a matter of jurisdiction, how the inclusion of such a class should be taken into account as a matter of discretion under section 901G.

The principles which the court regularly applies to the exercise of its discretion to sanction a scheme of arrangement under Part 26 CA 2006 were summarised by David Richards J in Re Telewest Communications plc (No. 2) [2005] BCC 36 at [20]-[22]:

“20.

The classic formulation of the principles which guide the court in considering whether to sanction a scheme was set out by Plowman J in Re National Bank Ltd [1966] 1 All ER 1006 at 1012, [1966] 1 WLR 819 at 829 by reference to a passage in Buckley on the Companies Acts (13th edn, 1957) p 409, which has been approved and applied by the courts on many subsequent occasions:

‘In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with; secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting; but at the same time the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.’

21.

This formulation in particular recognises and balances two important factors. First, in deciding to sanction a scheme under s 425, which has the effect of binding members or creditors who have voted against the scheme or abstained as well as those who voted in its favour, the court must be satisfied that it is a fair scheme. It must be a scheme that ‘an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve’. That test also makes clear that the scheme proposed need not be the only fair scheme or even, in the court’s view, the best scheme. Necessarily there may be reasonable differences of view on these issues.

22.

The second factor recognised by the above-cited passage is that in commercial matters members or creditors are much better judges of their own interests than the courts. Subject to the qualifications set out in the second paragraph, the court ‘will be slow to differ from the meeting’.”

In Re Noble Group Limited [2018] EWHC 3092 (Ch) at [17] I paraphrased those requirements as a four-stage test as follows: