The recent High Court decision in the Cineworld restructuring plans case [2024] EWHC 2475 (Ch) again illustrates how even the most pro-active landlords cannot insulate themselves from the effects of a statutory restructuring scheme under Part 26A of the Companies Act 2006, despite determined and novel tactics by the two landlords, the Crown Estate Commissioners and UK Commercial Property Finance Holdings Limited (the “Landlords”). We understand that the judgment is already the subject of an appeal.
Cineworld, a major player in the cinema industry, has been grappling with severe financial difficulties exacerbated by the Covid-19 pandemic and subsequent industry disruptions, including the screen actors’ and writers’ strikes in 2023. The US company which owns Cineworld in the UK itself only recently came out of Chapter 11 proceedings. Cineworld in the UK took the view that if it were to thrive even after inward investment from the group, it must rid itself of those of its leases which were described in the judgment as “over-rented”. This strategy was to be part of four restructuring plans (the “Plans”) for which it sought court approval before it became liable for the next round of quarterly rental payments, which it would not be able to meet.
The Landlords had already been engaging with Cineworld and had agreed to compromise extensive arrears of rents in various locations, including Glasgow, Harlow and Newcastle. This had been done by way of side letters from July and August 2023, in which Cineworld agreed that it would not include these leases in any subsequent restructuring process. Separately, other landlords – Aviva and M&G – had also arrived at rent and arrears compromises with their Cineworld tenants and those leases were not included in the Plans.
The Landlords had previously issued an injunction against Cineworld, petitioning for the compromised leases to be excluded from the Plans on the grounds that this placed Cineworld in breach of its undertakings in the side letters. The injunction had not been granted and the court had been critical of the Landlords’ innovative way of seeking to avoid being included in the Plans.
In this judgment, pursuant to sections 901F and 901G of the Companies Act 2006, Miles J was specifically critical of the Landlords for failing to object to the inclusion of these leases during the convenor hearings that had taken place earlier in the year. He went on to find that the statutory conditions for a cross-class cram down had been satisfied and that the Landlords were “out of the money” in the relevant alternative, which would be an insolvent administration in which they would have got nothing. He concluded that the Plans were fair and necessary to save Cineworld from insolvency, in which creditors would be materially worse off.
It is difficult not to feel a certain sympathy with the Landlords. They had been proactive and renegotiated the terms of the leases and in return arguably had some reasonable expectation that in return Cineworld would not, in breach of its undertakings, involve the relevant leases in the Plans. The compromises with other landlords, who had avoided being included in the Plans, must have rubbed salt in the wounds, although the court found that Cineworld had not acted in bad faith.
In the end though, a court is enabled by the legislation to look at the bigger picture, including the view of Parliament that a “rescue culture” for ailing companies is positive for society and more important than individually negotiated contractual rights. All insolvency situations involve economic sacrifices and it will be interesting to see whether the Landlords will be able to persuade an appellate court that theirs was “A Bridge too Far“.
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