Restructuring Plans in Operation: guarantor liability

September 2022

On 15 August 2022, the High Court delivered its verdict in Oceanfill Limited v Nuffield Wellbeing Limited and another [2022] EWHC 2178 (Ch). The case involved an application for summary judgment by a landlord, Oceanfill, who was claiming arrears from the guarantors of a lease, the terms of which had been modified by a restructuring plan under Part 26A of the Companies Act 2006 (“CA 2006”).

The verdict found in favour of the landlord. The court determined that despite the tenant having been released of their obligations under the lease, the guarantors’ obligations had not been. As such the guarantors were deemed to be liable for the tenant’s rent arrears.

At first glance this seems like a strange decision. Law students have forever been taught that once the terms of the principal agreement have been rewritten, as a result of the variation, the guarantor(s) are released of their obligations since there is no longer anything to guarantee. But it is consistent with other rulings on non-contractual modifications to obligations.

Background

Oceanfill are the landlords of a property in Leeds, the lease of which was assigned to Virgin Active Limited. Nuffield and Cannons Group gave guarantees in the licence to assign (the “Licence”). Nuffield and Cannons also agreed to indemnify Oceanfill against any non-performance on the part of Virgin.

In May 2021, a restructuring plan (the “Plan”) was approved for Virgin. The Plan released Virgin from their obligations and liabilities arising in connection with the Leeds property.  

Virgin stopped paying rent. Nuffield and Cannons made some rental payments before concluding that they too had been released of any obligations. When payments from Nuffield and Cannons ceased, Oceanfill brought proceedings against them.

What is a Part 26A restructuring plan?

Part 26A restructuring plans are a form of insolvency procedure inserted into the CA 2006 by Schedule 9 of the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”). They are similar to schemes of arrangement (“Schemes”).

Key features:

• Creditors and shareholders are divided into classes;

• The restructuring plan is proposed to the classes who are asked to vote and give approval;

• Approval of at least 75% in value of each voting class is needed;

• If the voting threshold is not achieved, the court can force the plan on dissenting classes if it has been approved by higher ranking creditors (cross-class cram down);

• If the court sanctions the plan, it is binding on all creditors.

The key difference between Schemes and restructuring plans is that the court has greater powers to sanction a restructuring plan using cross-class cram down. In doing so the court will ask whether or not the stakeholders would be any worse off under the plan than they would have been in the relevant alternative.

The relevant alternative here was administration and although Oceanfill (and others) objected to the Plan, the court used the cram down procedure applying the test above.

The court’s decision

The court found for Oceanfill - the imposition of the Plan had not affected the obligations of the guarantors. Even though Virgin was no longer obliged to pay rent to Oceanfill, the guarantees were still active and Nuffield and Cannons remained liable for the rent arrears.

Decision points

1. A Scheme under Part 26 takes effect as an operation of law and does not affect the rights of a creditor bound by a scheme against third parties who are also liable for the same debt. As the wording of Part 26A is equivalent, it must have been intended that a restructuring plan would also be by operation of the law and therefore be a non-contractual modification.

2. The Plan did not mean that the terms of the lease had been rewritten, it was a compromise reached between the landlord and the tenant. If the lease was rewritten, it was only rewritten between the landlord and the tenant; the Plan did not therefore compromise Oceanfill’s rights against Nuffield and Cannons.

3. The Licence expressly stated that Nuffield and Cannons would not be released of their obligations in the event that either Virgin’s lease was varied or by any matter by which the tenant was absolved of its obligations under the Licence.

4. There were no other compelling reasons why the matter should be heard at a full trial.

Comment

This judgment will be welcomed by landlords/creditors. Depending on the terms of the particular restructuring plan imposed, it may be open to them to recover rent and other sums reserved by the lease or agreement in full from third parties. It will be greeted less enthusiastically by those who have given guarantees.

In the light of this decision landlords and guarantors alike would be well advised to consider the wording of any assignments under consideration carefully and to review any existing ones. From a guarantor’s perspective, there is no reason why they could not contract out of the operation or this decision with an appropriately worded guarantee. Commercially this may of course be more difficult.