Take Your Seats: Cineworld Draws an Audience in UK High Court

Background 

Cineworld had been subject to financial difficulty for some time. It had been significantly prejudiced by the post-COVID 19 "bounceback" being slower than expected, a screenwriters' strike, and increases to UK minimum and living wages. 

While Cineworld's U.S. affiliates underwent a chapter 11 reorganization plan in 2022–2023, the UK Cineworld group had traded on, relying on further funding from the United States. The UK Cineworld group also agreed to various compromises with individual creditors, including that Cineworld would not seek a second compromise of that creditor's claim in any subsequent restructuring. 

After its reorganization, Cineworld's financial position continued to deteriorate, the funding provided by the United States approached maturity, and Cineworld faced significant quarterly liabilities such as rental and insurance payment obligations. Cineworld therefore proposed an RP in September 2024. Had Cineworld not done so, it would have been exposed to a cashflow deficit and likely would have filed for insolvency. 

Proposed Restructuring  

In order to right-size its balance sheet and to partially write down its unsecured liabilities to a more sustainable level, Cineworld proposed the following under its RP: 

Lease Restructuring. Cineworld followed previous UK examples by dividing its leases into various classes. Each class received differing treatment based on the profitability of the properties in that class.  

Debt Compromises. Secured and unsecured loan obligations were compromised in exchange for equity warrants or reduced payment terms. Cineworld's U.S. affiliates also agreed to inject a further £16 million (subject to the RP receiving sanction). 

Excluded Liabilities. Cineworld excluded various creditors from the RP. Most of these creditors constituted those considered critical for the day-to-day operation or future success of Cineworld—for example, trade creditors and customers.  

Objections 

Although the RP received the requisite approvals from the voting classes of its creditors, two significant creditors, UK Commercial Property Finance Holdings Limited ("UKCP") and the Crown Estate Commissioners (the "Crown Estate"), objected to the RP compromising their leases. UKCP and the Crown Estate based their objections on each of them having agreed to rent reductions in 2023 in reliance upon side letters by which Cineworld had agreed not to further compromise those leases in any future restructuring, including, expressly, by way of an RP. UKCP and the Crown Estate sought to enforce the negative covenants in these side letters by way of injunction. 

To determine whether to grant an injunction or sanction the RP, the Court was in effect asked to consider whether to uphold the commercial rationale for Cineworld's prior bargain with UKCP and the Crown Estate—as neither would have agreed to the 2023 lease amendments without the side letters—or the collective, class-based nature of the RP procedure.  

This required the Court's review of issues with wider application. In particular, the Court, further to its judgments in the Adler and Aggregate RPs, considered again the central nature of the pari passu principle. Were the RP not to be sanctioned and were Cineworld to enter into an insolvency process, the side letters would not provide UKCP and the Crown Estate with additional rights compared with other landlords. In light of this, the Court found that there was no justification to provide the UKCP or the Crown Estate with special treatment in the RP due to the existence of the side letters. 

The Court also criticized the UKCP and the Crown Estate's decision to apply for an injunction late in the process (rather than, for example, objecting at the convening hearing). The Court highlighted that its conclusions were based on Cineworld having acted in good faith and Cineworld's financial position having deteriorated since it entered into the side letters. 

The Court therefore sanctioned Cineworld's RP, although UKCP has permission to appeal the judgment. 

The Judgment's Impact 

The most impactful part of this judgment likely will be the Court's confirmation that a restructuring plan may compromise pre-restructuring covenants made prior to the relevant process. 

Arguably, this judgment may create difficulties for distressed companies looking to agree to bilateral arrangements with individual creditors (while they navigate temporary periods of financial strain). The risk for such companies from this judgment is that creditors could be less willing to agree to bilateral arrangements—such as payment reductions or deferrals—if there is a risk that they may ultimately suffer another round of compromise by a subsequent formal restructuring process (such as a restructuring plan). 

However, the recent trend has been for borrowers to seek to agree to bilateral arrangements in order to avoid the risk, cost, and negative publicity of being involved with a formal restructuring process. Counterparties have often been willing to agree to contractual amendments, extensions, and variations in order to possibly find an arrangement acceptable to both parties outside of a formal process. In our view, it seems unlikely that this judgment will substantially reduce the use by parties of bilateral arrangements outside of formal processes, given the benefits of doing so. 

Finally, this judgment will also maintain the collective nature of restructuring plans and, in so doing, close off another potential avenue of challenge to these plans.