In July 2023, while Cineworld emerged from Chapter 11 bankruptcy in the U.S., its UK operations entered administration. Despite the commercial success of the much-anticipated “Barbenheimer” film releases that month, the boost was not sufficient to prevent Cineworld’s UK arm from facing financial collapse. The effect of Covid-19 and the writers’ strike proved too much for the cinema chain.
In a bid to save Cineworld’s UK operations, a month later, several Cineworld creditors agreed a debt for equity swap restructuring plan. The swap however has proved to be insufficient to save the cinema chain, as just over a year later, Cineworld continued to seek to restructure their debts. This restructuring case serves to highlighted that companies need to carefully consider the body of their creditors as a whole when looking to agree a restructure.
Case background
Cineworld’s latest restructuring proposal sought to “address its lease portfolio and rental terms with landlords in the UK”, as well as provide “Cineworld with the opportunity to obtain further funding to meet its working capital needs, reduce its liabilities, and to benefit from a significant capital expenditure programme in the UK.” The terms of such a plan, some landlords reportedly felt were unfair. Especially, given the landlords had previously been provided with side letters whereby Cineworld had promised not to seek further compromise of their leases.
On 18 September 2024, a creditors meeting was held. Cineworld’s creditors voted to approve the restructuring plan. Under the Companies Act 2006, such a plan requires the support of 75% of creditors by the value of their claims and will bind all creditors regardless of how they vote. While not all creditors endorsed the proposal, the plan received significant backing. Notably, landlords including British Land, Landsec and Legal & General reportedly opposed the plan. Other creditors (namely lenders, some of whom benefitted from the debt for equity swap in the earlier restructuring plan and form the largest class of creditors) voted overwhelmingly in favour of its adoption.
However not all was lost for those creditors who did not vote in favour of the restructuring plan, as the plan still required the approval of the High Court. The High Court is not obliged to approve the proposed plan simply because the 75% creditors threshold has been met. The High Court must be satisfied that the cinema chain’s creditors would be materially better off as a result of the restructuring plan, than they would be should the company enter insolvency. The court has discretion as to what it believes the alternative may be and those dissenting creditors may be able to demonstrate that they are being unfairly overlooked in Cineworld’s plan.
The High Court’s decision
Mr Justice Miles recently approved the Cineworld’s restructuring plan, stating “the court should exercise its discretion in favour of sanctioning the plans”. Such a judgment, therefore, enforces the likelihood that should a restructuring plan receive consent passing the 75% threshold (as required by the Companies Act), the court is inclined to approve the plan.
In reaching the judgment, the court held that no dissenting creditor would be worse off by the restructuring plan as the alternative to the court approving the plan was insolvent administration.
The court considered the principle of fairness should be to the body of the creditors as a whole and not to an individual creditor or group of creditors (such as the landlords). Therefore, should the court not have approved the restructuring plan, it would undermine the pari passu principle. On the other hand, should the court have enforced the side letters and held the landlords as distinct group of creditors and therefore not be bound by the restructuring plan, it would mean those creditors would be in a significantly better position, again offending the pari passu principle.
The court also held that the equity retained by those creditors who participated in the debt for equity swap in the previous restructuring was justified; it is for the creditors who are “in the money” to determine the allocation of the equity.
Impact of the High Court’s decision
The decision by Mr Justice Miles means that the dissenting creditors are bound by the judgment and therefore the company’s portfolio of leases and other liabilities will be renegotiated. Whilst one creditor, the Crown Estate, was initially granted permission to appeal, on hand down of the judgment, it dropped its opposition and are consequently bound by the plan.
This judgment highlights the need for companies to carefully consider the body of their creditors of a whole when seeking to agree a restructuring plan. In addition to considering how to continue the company’s operations in a manageable manner, any restructuring plan should have the principle of fairness for the body of the creditors as a whole at the heart of the proposals.
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