Fairness back in fashion: River Island restructuring plan provides guidance on evidentiary requirements for cross-class cramdowns

River Island, the high-street fashion retail chain, sought to restructure certain of its financial and leasehold liabilities through a Part 26A English Law restructuring plan (the “Plan”) following difficulties experienced by the business in light of, among other things, a high cost-base associated with leases at its physical stores, combined with a reducing footfall at its store locations.

In summary, the Plan sought to compromise debts owed to the landlords of certain retail sites, local authorities in respect of business rates and certain other unsecured creditors alongside an extension of 2 years to the maturity date of the group's £240m senior secured facility from Blue Coast (an affiliate of the River Island group but which was run as a commercially separate entity).  In addition, Blue Coast – who were supportive of the Plan – provided new money by way of a £40 million RCF, which was used in part to fund the Plan, and otherwise to fund working capital.

In deciding to sanction the Plan – which provided for a cross-class cramdown of 5 classes of opposing Plan Creditors – the Court gave specific mention to certain steps which were taken by the Plan Company in submitting its case to the Court and which had contributed meaningfully to its determination that the Plan being proposed was fair.

Firstly, River Island included in its evidence a Plan Benefits Report, which set out, in percentage terms, the level of return that each class of Plan Creditor was anticipated to receive in respect of its contribution to the benefits preserved, or generated, by the Plan. The submission of the Plan Benefits Report addresses concerns raised by the Court of Appeal decision in Petrofac. The Plan Benefits Report was ultimately successful in demonstrating to the Court that the treatment of the dissenting classes was not out of line with that of the assenting classes.  In particular, the benefits derived by Blue Coast, as secured lender and the most significant contributor to those benefits were proportionate to the contribution being made by other Plan Creditors.

Comments made by Sir Alastair Norris in his judgment, in particular that the “burden lies upon the plan company to persuade the Court that there is a fair sharing of the burdens and of the benefits […]” - as well as the emphasis in the Petrofac Court of Appeal judgment on the importance of a fair sharing of the plan benefits - suggests that the submission of a plan benefits report (which was first used in the context of restructuring plans in the Independent Builders Merchant Group restructuring plan) which accurately demonstrates how the benefits generated, or preserved, by a restructuring are distributed among stakeholders, is going to become an essential part of a plan company's evidentiary toolkit, especially where a cross-class cramdown is envisaged.

Secondly, Sir Alastair Norris made it clear in his judgment that, notwithstanding that the shareholder would receive nil return in the relevant alternative (being an administration of the group), it was not unfair that the shareholder should suffer no dilution, and retain 100 per cent of their equity, upon implementation of the Plan.  

The Plan provided that the compromised unsecured creditors would receive payments from a plan creditor fund (“Fund”) which was constituted by the Plan Company's shareholder.  The Fund provided for a payment equal to 200% of the unsecured creditors' estimated return in the relevant alternative and the right to participate in a Profit Share Fund, which would provide for the payment to compromised creditors of their pro rata share of 25 per cent of profits in excess of £55 million, before interest and tax, generated by the business during the five years following the Plan becoming effective.  The Fund was found by the Court to be a contribution to the Plan by the shareholder by virtue of the future equity value in the Plan Company it was giving up.

In his judgment, Sir Alastair Norris stressed that when “considering the sharing of the burdens and the benefits the Court is entitled to take into account the source of the benefits (how the value is preserved or generated by the plan)”.  The contributions made by the shareholder, combined with the evidence presented to Court that compromised creditors would receive distributions materially in excess of what they would receive in a relevant alternative appears to have satisfied the Court that the River Island plan was not unfair.  This decision therefore reinforces the principle from Adler, Thames Water and Petrofac, that providing out-of-the-money creditors with de minimis returns is unlikely to be acceptable (unless shown to be fully justified) to the Courts in Part 26A restructuring plans going forward.

River Island underlines a number of the issues around fairness which have been features of successful challenges to restructuring plans in recent months.  In addition, Sir Alastair Norris, in his reserved judgment, sought to set out certain principles which he sought to apply in determining whether the River Island restructuring plan met the fairness test. One of these principles was that the Court would have regard to “the evolution of the restructuring plan”.  In Waldorf, the Court found that the failure to engage sufficiently with dissenting creditors in advance of implementing the plan meant that the plan company had failed to discharge its burden of proving the plan was fair, whereas in River Island, Sir Alastair Norris made specific mention of the fact that the Plan Company had sought to engage early with the creditors who ultimately voted against the Plan.  In that context, Sir Alastair Norris's reference to the Court paying attention to the “evolution” of the Plan seems to support the Court's prevailing view that companies seeking to implement a restructuring plan should seek to engage early and meaningfully with all creditors who will be impacted by the plan in order to satisfy the Court that they have made a genuine attempt to formulate a fair and reasonable solution. 

We await to see whether plan companies take notice of this principle, and the other guidance included in the River Island ¹ decision going forward.