Two years ago, the government enacted Part 26A of the Companies Act 2006. The aim was to offer protection for companies during the Covid-19 pandemic, allowing the option of arranging a sanctioned restructuring plan. This includes the possibility of a moratorium on the company’s debts.
However, one aspect of this not specifically covered by the Act, and not previously tested in court, is the position of third-party guarantors when such a moratorium is in place. However, a judgement has now been given on this matter, which could affect both creditors and guarantors in this position.
The Case in Question
This case concerned a restructuring plan for Virgin Active Limited (VAL), operating as a gym and leasing premises from landlord Oceanfill Ltd. Being forced to close during lockdown, VAL had no income that would allow it to pay the rent due, but successfully applied to the courts for a sanctioned restructuring plan under Part 26A.
While this allowed VAL a breathing space, however, it meant that the landlord was short of a considerable sum of income. Since the lease was guaranteed by Nuffield Health Wellbeing Ltd and Cannons Group Limited, the landlord requested the unpaid rent from them.
The Claims on Either Side
The case turned on the exact nature of the changes that the plan implied. Did it, in effect, rewrite the terms of the lease, or did it merely alter VAL’s liability in respect of the unpaid rent?
The guarantors’ position was that the terms of the lease were changed, meaning that none of the sum owed by VAL to the landlord was due at all. The landlord, on the other hand, contended that only VAL’s own liability was affected, leaving creditors free to seek the money from other sources — such as guarantors.
In the end, the judge supported the landlord’s position. The key point here was that Oceanfill Ltd hadn’t agreed to the plan — it had been accepted by the original court hearing, with them as a dissenting party. This meant that they were bound by operation of law, and not by virtue of an actual or deemed agreement. Therefore, the lease couldn’t be considered to have changed.
What Are the Lessons from the Case?
While the lockdown conditions that triggered Part 26A are over, this doesn’t mean that the situation won’t arise again — especially if the coming recession proves to be as deep as many fear. One consequence of this is that, if you are acting as a guarantor for another company, a Part 26A plan won’t necessarily protect you from liability.
On the other hand, if you’re a struggling creditor whose owed money has just been written off, there may still be avenues you can pursue. Give me a ring, if you’re in this position, for a discussion about your options.