The UK High Court has ruled that the obligations of third-party guarantors are not affected by a part 26A restructuring plan being sanctioned in respect of the underlying obligations. This approach mirrors the way guarantees are dealt with in a part 26 scheme of arrangement.
The case of Oceanfill Ltd. v Nuffield Health Wellbeing Ltd & Cannons Group Limited examined whether a restructuring plan under part 26A of the Companies Act 2006 (the “Act”) had the effect of releasing liability arising under a third-party guarantee.
The landlord was successful in its arguments that the original tenant and guarantor remained liable for guaranteed rent, despite the sanction of a part 26A restructuring plan which reduced the liability of their assignee, Virgin Active.
The court considered the possibility that in allowing claims against guarantors to proceed, so-called “ricochet” claims could surface against the plan company, which might have the ability to undermine the purpose of the restructuring plan. This did not alter the court’s decision to allow the landlord’s claim, however, it does raise the issue of how ‘ricochet’ claims might be dealt with in future plans – see our further comments on this below.
The claimant, Oceanfill Limited (“Oceanfill”), is a landlord of a gym in Leeds which was originally let to Nuffield Health Wellbeing Limited (“Nuffield”). Cannons Group Limited (“Cannons”) was a party to the original lease as a guarantor of Nuffield’s obligations.
The lease was assigned to Virgin Active Limited (“VAL”) in 2020 and Oceanfill benefitted from a guarantee of VAL’s obligations under the lease from Nuffield, and a guarantee of Nuffield’s obligations from Cannons.
On 12 May 2021, the High Court approved a restructuring plan for VAL pursuant to part 26A of the Act. Under the plan, no present or future rent, service charge or other liabilities would be payable by VAL under its lease. Instead, Oceanfill would be entitled to a (significantly less valuable) restructuring plan return.
Oceanfill issued proceedings applying for summary judgment seeking payment from Nuffield and Cannons of amounts due under the lease. The total amount claimed was £141,255.22.
Nuffield and Cannons raised two grounds of defence:
- The nature of restructuring plans: it was argued that the restructuring plan had the effect of preventing the rent becoming due at all by effectively re-writing the terms of the lease; and
- The obligations in the licence: it was argued that they had been released by variations to the lease in respect of their obligations under the licence to pay rents and observe and perform the covenants.
The court rejected both defences and ruled that Oceanfill was entitled to judgment on the claim.
In considering the first limb of the defence the court ruled that a restructuring plan under part 26A of the Act takes effect as a statutory scheme by operation of law. It is well established that a scheme of arrangement under part 26 of the Act takes effect in this way, and the Oceanfill judgment states that the “parity of language between Part 26 and Part 26A leads to the inescapable conclusion that a restructuring plan under Part 26A takes effect as a statutory scheme by operation of law in the same way as a Part 26 scheme of arrangement takes effect”.
Any change to underlying contracts would require agreement by the contract parties and, in the case of deeds, an amendment signed as a deed.
The court ruled that as the part 26A plan takes effect by operation of law, there is not the necessary ‘agreement’ of the parties required to make changes to underlying contracts, which results in their substance remaining unaltered following the approval of a part 26A plan.
The second limb of the defence turned entirely on interpretation of the contractual terms and we will not consider it further here, other than to note that the court did not agree with the defendants’ argument.
What this means for landlords and plan companies?
This ruling is good news for landlords as their recourse to guarantors is preserved even in the event that their tenant is the subject of a part 26A restructuring plan. This is consistent with the position if their tenant were to undergo a part 26 scheme of arrangement, or even a company voluntary arrangement under the Insolvency Act 1986 where it has been established that stripping a creditor of recourse to a guarantee is likely to be unfairly prejudicial, and therefore not permitted, unless fair value is provided for the guarantee.
However, a note of caanution should be raised. During consideration of VAL’s restructuring plan, Snowdon J (as he was then), in approving the plan noted that guarantees that had been provided in respect of VAL’s obligations by other group companies (which were also a party to the restructuring plan) would be compromised in order to prevent “ricochet” claims against the plan companies which would defeat the purpose of the plan.
In considering this, the High Court acknowledged that leaving the guarantee obligations of Nuffield and Cannons intact created “ricochet” claims of the type that Snowdon had discussed. It was noted, however, that in his judgment Snowdon J had indicated explicitly that he was not addressing “ricochet” claims from third parties, which were unaddressed by the plan. It was critical to the High Court’s reasoning in allowing the landlord’s claim, that these obligations had not been addressed by the plan itself. This suggests that with careful drafting it might be possible for such claims to be brought within the ambit of future part 26A restructuring plans and explicitly compromised.
Special attention should be paid to “ricochet” claims by all parties when a part 26A restructuring plan is proposed. For plan companies they should be mindful that such claims have the ability to undermine the plan. And while landlords can, at present, rest easy that their claims against guarantors remain unaffected by the sanctioning of a restructuring plan they too should be careful to consider plan terms to see how these types of claim are addressed in future proposals.