Dobbies Garden Centres set to bloom again under court approved Restructuring Plan

A Scottish court has approved a Restructuring plan under Part 26A of the Companies Act 2006, with the recent opinion by Lord Braid in the Court of Session providing valuable insight into the courts consideration of key elements of such a plan, including the use of the cross-class cram down power and the assessment of fairness to creditors.

Dobbies Garden Centres Limited (the “company”) was applying to the court for sanction of a Restructuring Plan (the plan) to alleviate its financial difficulties. The well-known business operates a chain of garden centres across the UK but has suffered significant financial pressures. In a bid to avoid insolvency, the company was seeking to financially restructure by compromising its unsecured creditors and make changes to its secured liabilities. If the plan was approved, then it would have access new funding and avoid insolvency.

What was proposed

While there is a lot of specific detail to the plan, the broad proposal that the court was being asked to sanction was that:

• obligations under secured lending facilities would be amended and extended.
• obligations under certain leases and certain general property agreements would be amended and compromised in exchange for a payment greater than the relevant creditors would receive if the company were to go into administration. Landlords were grouped into four different classes with differing returns and conditions proposed for each.
• certain parent company guarantees would be amended and compromised in exchange for a payment greater than the relevant creditors would receive were the relevant guarantees to be enforced following the guarantor entering liquidation.
• business rates would be compromised in exchange for a payment greater than the relevant local authority would receive if the company were to go into administration. The compromise would cover both arrears and future rates liabilities until the end of the current rates tax year on 31 March 2025, reflecting the expectation that the affected premises would be vacant and be eligible for vacant property relief during this period if the company were to go into administration.
• group intercompany liabilities of around £130m would be discharged.

Certain categories of creditors were being excluded from the plan and would not be compromised. These included liabilities owed under certain leases not included in the plan; liabilities owed to trade creditors; liabilities owed to customers (unused gift vouchers); employee related liabilities (including any pension contributions); liabilities owed by the company to HMRC; and liabilities owed to Barclays Bank plc (company credit cards).

Separate, but contingent on the approval of the plan, new funding of up to £23m would be provided by the company secured creditors to finance the business turnaround plan going forward.

The court’s consideration

Lord Braid’s opinion goes into significant detail on his consideration of the various matters which are set out under the Companies Act 2006 to allow the court to sanction and approve a Part 26A Restructuring plan.

For those involved in advising on restructuring schemes, it helpfully provides an insight into how the court considers these matters. This is only the second plan considered by the Scottish courts and no written Opinion was issued  in respect of the first. Lord Braid therefore wished to issue a written decision providing full reasons, providing insight and also because this case included a point of general principle in relation to what constitutes a meeting and where he differed from English authority.

The court was satisfied that the company’s classification of creditors to be compromised into seven different classes was appropriate. This was after taking account of the similarity of rights within each class and the dissimilarity of rights between classes.

In relation to the excluded creditors, the court noted that it was well established that a plan can compromise the rights of only some creditors. However, this can only be done where there is a good reason or proper basis for doing so and that this is explained to creditors who are being compromised so that they can assess whether they are being fairly treated. The court accepted the rationale for excluding certain creditors from the plan as their continued support was deemed crucial for the company’s future viability or their expected full repayment if the company were to go into administration.

The court confirmed the tests set down in legislation to exercise the cross-class cram down power were met. Dissenting creditors could be bound by the plan if no dissenting creditor would be worse off under the plan than in the “relevant alternative” (i.e., the likely outcome of the company entering administration), and the plan does not unfairly discriminate against dissenting creditors.

The court was satisfied that the plan was fair to all creditors. The court acknowledged the differing treatment of classes but found it justifiable given the existing ranking of creditors and the secured creditors’ provision of essential new funding.

Ultimately, the court exercised its discretion to approve the plan and bind all creditors to its terms.

When is there a meeting?

The court also addressed, as part of its considerations, the issue of whether a meeting with only one creditor present constitutes a valid meeting and whether a meeting where only the chair as a single proxy holder is present (but representing several creditors) constitutes a valid meeting.

In the context of this restructuring plan, it was of importance as the secured creditors were the only assenting class and, if they did not hold a meeting, the resolution purportedly passed would be of no effect and the cross-class cram power could not be exercised.

While acknowledging the precedent in English court cases requiring two or more persons to be present for a meeting to be held, Lord Braid deemed it unnecessary to reach a definitive conclusion on this point, as the affected class was ultimately a dissenting class.

On the more substantive point of whether a meeting is properly held where only the Chair attends and was the sole proxy holder for creditors voting, Lord Braid did require to reach a conclusion. Again, the English precedents might suggest that two or more persons must be present, but Lord Braid reached a different conclusion. Lord Braid noted that there is nothing in the language of section 901G to suggest that a meeting can take place only if two or more natural persons come together. Indeed, the section expressly provides for two methods by which a person may attend a meeting: “in person or by proxy”. Lord Braid noted that other interpretations would result in illogical and unworkable situations arising.

At least as far as Part 26A meetings in Scotland are concerned it appears that a single proxy holder representing multiple creditors will ensure a valid meeting, however the position of a single creditor meeting is still much less certain.