Can restructuring plans strip out third party guarantees?

Can restructuring plans strip out third party guarantees?

By Helen Coverdale (Norton Rose Fulbright LLP) 

The English High Court has considered whether the new restructuring plan under Part 26A of the Companies Act 2006 (CA 2006) can release claims against third party guarantors. This decision has important implications for guarantors and creditors holding third party security in a restructuring scenario.

What was the background?

The case had its origins in the Virgin Active restructuring plan. Virgin Active Limited (Virgin) was the assignee of a lease granted to Nuffield Health Wellbeing Limited (Nuffield) and guaranteed by Cannons Group Limited (Cannons). Under the assignment, Nuffield guaranteed Virgin’s liabilities and Cannons guaranteed Nuffield’s liabilities.

So-called ‘guarantee stripping’ is a controversial issue that has previously been considered by the courts in the context of company voluntary arrangements (CVAs). English courts have accepted that third party guarantees may be released in certain circumstances, but only where  doing so is not unfairly prejudicial (a high bar).

CVAs differ from restructuring plans in various ways, but most notably involve only one class of creditors. This means that they can be used to cram down unsecured creditors if 75% by value vote in favour. However, a restructuring plan can be used to cram down any class(es) of creditors, even where only one class has voted in favour of the plan (subject to certain safeguards).

In any event, the CVA line of cases was not considered in this case as the restructuring plan did not expressly seek to release the third party guarantees. Instead, the question was whether they were released as a by-product of the plan.

The position is also different in relation to the more established schemes of arrangement under Part 26 of the CA 2006, as creditors holding guarantees and third party security would likely vote in a separate class and so could not be crammed down against their will. 

What did the court decide and what are the implications for creditors and guarantors?

The court confirmed the restructuring plan compromised the liability of Virgin (as tenant)​ by operation of law, but on its drafting did not alter the underlying lease or guarantees in the licence to assign​. 

Although this was only a summary judgment, the decision provides helpful guidance. The result is good news for creditors with the benefit of guarantees, as under a similar plan their security would remain in force, even where their primary claims have been crammed down under the restructuring plan. 

By contrast, where a debtor company is looking to ensure that the restructuring plan will leave no claims against guarantors or ‘ricochet claims’ (arising through the guarantor then bringing a subrogated claim against the debtor company), the restructuring plan would need to expressly release the third party security and would need to do so fairly. This will require careful planning and drafting, bearing in mind that under the ‘relevant alternative’ the guarantees may well be enforceable, such as in a liquidation.

* The article was originally published by Norton Rose Fulbright.