Earlier this week the High Court sanctioned the restructuring plans of four UK companies in the Cineworld Group (the Plan Companies). In doing so, it rejected the challenges of two landlords who argued that the Plan Companies should have adhered to their earlier promises not to seek a further compromise of their liabilities to those landlords.        

For a few dollars more

The Plan Companies had been relying upon Cineworld’s US group for financial support for more than a year. They would be unable to pay £19m of quarterly rental and other lease-related obligations when these fell due at the end of September 2024.     

They therefore proposed restructuring plans which would compromise their rental liabilities under the majority of their leases. In common with previous restructuring plans of this kind, the plans divided the leases concerned into a number of categories and reduced the rents in different categories to different extents. The remainder of the Plan Companies’ leases were unaffected by the proposed plans.     

To help restore financial stability, these restructuring plans also involved compromising the Plan Companies’ secured and unsecured loan obligations to the US group, amending and extending time for payment of their liabilities to their secondary secured lenders, and compromising their business rate and other property-related liabilities. If the plans were sanctioned the Plan Companies would receive £16m of new equity funding to assist with their immediate liquidity needs and up to £35m of further new funding towards capital expenditure.   

The commitments 

In the years prior to the restructuring plans, the Plan Companies had already negotiated consensual deals with various landlords to write off arrears and to reduce ongoing rent. In return, the Plan Companies had agreed with two such landlords, UKCP and the Crown Estate (the Objecting), that if they later proposed restructuring plans, they would not seek to compromise the Objecting Landlords’ rents further.  

The present restructuring plans nevertheless placed certain of the Objecting Landlords’ leases into categories where rents would be reduced. The Objecting Landlords’ solicitors wrote to the Plan Companies to request that these leases be withdrawn from the proposed plans, but they chose not to appear at the convening hearing. Shortly before the final sanction hearing, however, the Objecting Landlords applied for injunctions seeking to oblige the Plan Companies to adhere to their contractual promises.

Judgment day

The judge, Mr Justice Miles, declined to grant the injunctions sought. He held that the Plan Companies’ promises to the Objecting Landlords were capable of being compromised by the restructuring plans. He observed that the Objecting Landlords were not being placed in a worse position under the restructuring plans than other landlords whose leases had been placed into the same categories as theirs. Given the importance of the pari passu principle in a collective restructuring, there would need to be some good reason or proper justification to treat the Objecting Landlords more favourably than those other landlords.  

In this regard, the judge was unconvinced that the contractual promises on which the Objecting Landlords were seeking to rely should be afforded a special status in circumstances where, by the very nature of a restructuring plan, various of the Plan Companies’ contractual obligations under their leases were being compromised. He was also influenced by the fact that the Objecting Landlords had chosen not to raise their objections at the convening hearing, where the Court had specifically looked at whether the Plan Companies’ various leases were being placed into appropriate categories.

The judge considered that there was some force to the Objecting Landlords’ argument that granting these injunctions would encourage consensual, bilateral renegotiations between other distressed companies and their creditors in the future and so potentially avoid expensive restructurings. Landlords may be more wary of agreeing concessions if they can nonetheless later be forced to accept further compromises. The judge held, however, that the impact his judgment might have on other situations was not relevant to the question of whether to grant the injunctions sought here. Each case must turn on its own facts.   

Goodfellas

An important factor here is that the judge was satisfied that the Plan Companies had acted in good faith throughout. Their financial circumstances had deteriorated since the original deals with the Objecting Landlords had been entered into and they had not envisaged needing to compromise the Objecting Landlords further when negotiating with them. This is not a judgment which gives tenants carte blanche to renege on previous deals made in the context of a restructuring.                   

Up in the air

The judge has given UKCP leave to appeal, on the basis that the case involved novel points of legal principle and that he considered that there was a realistic prospect of an appeal on them succeeding.  It may be that we will still see a sequel to the present decision.

Trading places

We might only speculate on what would have happened had the Objecting Landlords chosen also to appear at the convening hearing.  

However, two other landlords, Aviva and M&G, were evidently able to employ different negotiating tactics, as they were able to reach agreements with the Plan Companies which ultimately led to their leases being excluded from the restructuring plan altogether. It may be that those two landlords will ultimately turn out to have pursued the shrewder path.