Legal Briefing

Schemes of arrangement of overseas companies

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Finance | 01 September 2014

A scheme of arrangement under Part 26 of the Companies Act 2006 is a court-driven process that permits a restructuring on the basis that the requisite majority, by number and value, of the insolvent company’s creditors (or any class of them) vote in favour of it. Where there are different classes of creditors, the company will have to identify these classes in its first application to court seeking permission to convene and hold the meetings. The results of the voting at the statutory creditors’ meetings have to be formally reported to the court at a final hearing seeking the court’s order sanctioning the scheme.

The advantage of a scheme is that it is a way of binding dissentient minorities and is therefore attractive to groups wishing to restructure but whose local jurisdiction does not permit such an effective result. However, the English court’s sanction will only be given to a scheme in relation to an insolvent company if it can be shown on an objective basis that, broadly, the scheme is to the overall benefit of the company’s creditors. By reference to recent case law, this article reviews in outline the jurisdictional issues facing a foreign group wishing to implement a scheme under English law.

RODENSTOCK

In a detailed judgment in the case of Rodenstock GmbH [2011], the Court gave guidance for foreign companies wishing to implement a scheme of arrangement in England. The Court had to interpret the meaning of the phrase ‘liable to be wound up under the Insolvency Act 1986’1 so as to ascertain whether the German company applying to implement a scheme fell under the jurisdiction of the English court.

The Court had to consider some technically complicated arguments relating to jurisdiction and gave lengthy reasons for deciding that neither the EC Regulation on Insolvency Proceedings (EC/1346/2000) (the Insolvency Regulation) nor the Council Regulation (EC) No 44/20012 (the Judgments Regulation) restricted the jurisdiction of the English court to make an order sanctioning the scheme in relation to the German company, while making it clear that its decision was specific to the particular facts of the case. The Court referred to the three conditions which case law has established are to be considered in exercising its discretion to make an order in relation to a foreign company:

  • a sufficient connection with England which can include assets within the jurisdiction;
  • a benefit to those applying for the order; and
  • jurisdiction over the persons interested in a distribution of the company’s assets.

Although by no means the first overseas company to be subject of a scheme under English law, the Court’s decision in Rodenstock seems to have opened the door to a series of applications by foreign companies seeking to implement schemes of arrangement. Some of the recent schemes sanctioned are discussed below and, taken together, they provide further useful guidance on the requirements for a restructuring of a foreign group by means of a scheme sanctioned by the English court.

VIETNAM SHIPBUILDING INDUSTRY GROUP

The Court sanctioned a scheme of arrangement in relation to a company incorporated in Vietnam. Its business was shipbuilding on a very significant scale and it had been affected by the downturn in global shipping demand leading to its financial difficulties. It became insolvent and defaulted on several occasions in the payments due under a $600m loan facility agreement. It was in the process of restructuring the loan facility and its other liabilities.

The purpose of the scheme was to replace the existing claims of lenders with notes to be issued by a state-owned entity guaranteed by the government of Vietnam. The replacement notes were to have a maturity date some years after the maturity dates of the existing loans. The company had no connection with England except that the loan facility agreement was subject to an English law clause and the non-exclusive jurisdiction of the English courts. On the facts of the case this was held to create a sufficient connection between the company and the jurisdiction to allow the Court to take jurisdiction. The Court was further satisfied that it had jurisdiction to sanction the proposed scheme because, firstly, the company was liable to be wound up by the English court in line with the decision in Re Drax Holdings Ltd [2004] and secondly, there was sufficient connection with the English jurisdiction because the facility was governed by English law, again followingRe Drax Holdings.

There was a further issue in relation to jurisdiction because at least two of the lenders were domiciled in EU member states other than the UK. These creditors had commenced proceedings to enforce the loan agreement. The Court therefore had to consider the effect of Council Regulation (EC) No 44/2001 (the Judgments Regulation) and whether, in the light of the domicile of those creditors, the Court did in fact have jurisdiction in relation to the scheme of arrangement. The Court decided that Article 23 of the Judgments Regulation provides that the jurisdiction shall be as agreed between the parties in the facility agreement, that is, the English court.

ZLOMREX INTERNATIONAL FINANCE SA

Zlomrex was a French registered company, part of a Polish group trading in scrap metal. It was the group finance company and it issued the loan notes involved in the scheme and lent them on into the group. The rights of repayment in respect of loans were its principal asset. The loan notes secured payment of €118m. The notes were repayable in February 2014 and were subject to New York law and the non-exclusive jurisdiction of the New York court. The notes had a single trustee for note holder. The beneficiaries of the notes traded their interests on various trading registers and exchanges.

A few months before the hearing, the company moved its principal place of business and its principal office to London with the intention of giving it a close connection with the English jurisdiction and also moving its centre of main interests (COMI) here. As part of this move the company did the following in London:

  • acquired premises and phone lines;
  • appointed two English directors;
  • opened a bank account and transferred its funds into it;
  • received correspondence;
  • moved contact details;
  • applied for a certificate of tax residency from HMRC;
  • entered into a contract for corporate management functions with an English company; and
  • held all key meetings, including board meetings.

Only the registered office remained in France. The Court noted that the purpose of the move was to establish jurisdiction in order to have the scheme in England and that no attempt was made to hide that motivation. The company had considered restructuring in France and in New York but these would have led to worse recoveries for creditors. The English scheme was perceived as being the most cost effective and clearest way of restructuring the debts of the company. The Court was satisfied on the facts that, for the purposes of the Insolvency Regulation, the company’s COMI was in England at the commencement of the proceedings. The company was insolvent and in winding up or administration proceedings the appropriate test for establishing jurisdiction would have been the location of the company’s COMI. The Court was satisfied that for the purposes of a scheme, the test of sufficient connection with the jurisdiction was satisfied.3

The Court noted that if it were necessary to bring the proceedings within the Judgments Regulation, then Article 6 would apply because at least one of the beneficial note holders was domiciled in England. A Polish law expert had given clear advice that the Polish courts would recognise the scheme as a foreign judgment. New York was a greater problem because of the fact that New York law applied to the notes and the courts there had jurisdiction which might permit creditors there to side-step the scheme. The company obtained the opinion of a New York lawyer stating that the Bankruptcy Court sitting in New York could reasonably be expected to recognise the scheme, including the non-consensual assignment of claims against non-debtor guarantors, under Chapter 15 of the US Bankruptcy Code. In January 2014 the English court sanctioned the scheme and Chapter 15 recognition in the New York Bankruptcy Court was granted later in the same month.

MAGYAR TELECOM BV

The English court sanctioned a scheme for the Netherlands company, Magyar Telecom BV, part of a Hungarian telecommunications group, in November 2013. The company’s principal liabilities arose under an issue of €345m of notes pursuant to an indenture governed by the law of New York and subject to the non-exclusive jurisdiction of the courts of New York. The company’s obligations under the notes were guaranteed by other group companies.

The scheme was proposed as part of a financial restructuring of the group. The company was unable to service its obligations under the notes having defaulted in payment of half-yearly instalments of over €15.6m due in June 2013. If the restructuring was not implemented the company and the group would be forced to enter formal insolvency proceedings with significant destruction of value in the group. Under the proposed scheme the note creditors would give up their rights, including their rights against the guarantors of the notes, in exchange for new notes to be issued by the company and also a 100% equity interest in a new company which would hold 49% of the share capital of the company (thereby giving an indirect interest of almost 49% in the main Hungarian operating company).

The Court found that the company satisfied the jurisdictional requirement that it was liable to be wound up under the Insolvency Act 1986. The Court accepted the evidence that the company had effectively moved its COMI to England which established a sufficient connection with the jurisdiction, particularly since any insolvency process of the company would have to be undertaken under English law. Because the company was registered in the Netherlands and because the notes were governed by New York law, further jurisdictional issues arose as to whether it was appropriate to sanction the scheme. Expert evidence of US law established that it was reasonably likely that the US court would recognise and give effect to the scheme under Chapter 15 of the US Bankruptcy Code notwithstanding that it altered and replaced rights governed by New York law. There was expert evidence that the courts of the Netherlands would recognise and give effect to the scheme, as would the courts of Hungary, where some of the guaranteeing companies and secured assets were located.

Following Rodenstock, the Court did not consider that any issue arose under the Judgments Regulation. The Court said that an application to sanction the scheme of arrangement was a civil and commercial matter for the purposes of Article 1.1. In this case the company relied on Article 6, enabling a person domiciled in a member state to be sued in the courts of the state where any of the defendants is domiciled, provided the claims are closely connected. Since a number of the note creditors were domiciled in England, this position applied to give the English court jurisdiction. The scheme released the rights of a number of guarantor companies which was commercially important. The Court confirmed that such a release can properly form part of a scheme on the basis of established case law.4


RE HIBU FINANCE

Eight companies in the Hibu group applied for orders convening scheme meetings for an intended scheme of arrangement with creditors as part of a restructuring of the group overall. The group business was the production of traditional business directories in the UK, the USA, Spain and parts of South America. The traditional business was failing and regarded as no longer viable so the group intended to refocus on the provision of ‘digital marketing services’. This involved reshaping the business model and undertaking some financial restructuring.

The principal group funding of some £2.3bn was provided under a senior facilities agreement (the SFA). There were different repayment terms within the SFA comprising term loans in US dollars; in sterling and in euros. Each of the loans was underpinned by the same security and, under the terms of the SFA and associated documents, ranked pari passu in the event of insolvency. The SFA was governed by English law with the courts of England to have non-exclusive jurisdiction.

The borrowers under the SFA were three finance subsidiaries: the English company Hibu Finance Ltd; a US entity, Hibu (USA) LLC; and a Spanish company Hibu Connect SAU. These entered into primary obligations under the SFA and were guaranteed by each group company that utilised the finance facilities. As between those guarantors there were cross-guarantee arrangements so that each lender had an actual or contingent claim against each company benefiting from the SFA ranking pari passu with every other lender in the event of insolvency. The five other group companies party to the proposed scheme were guarantors and all were incorporated in the USA.

The principal group company was in administration and other group companies were effectively insolvent and would have been in an insolvency regime if the lenders under the SFA had exercised their rights in respect of events of default. The restructuring included a modest cash payment to the lenders; a debt for equity swap in respect of some of the indebtedness and an amendment and restatement of the existing facilities. These terms were set out in a lock up and restructuring framework agreement.

The Court noted that English law governed the rights of the parties under the SFA, which were the rights to be altered by the scheme of arrangement. That in itself was a sufficient connection with the English Court. The Court also found that the Spanish and the US companies were technically liable to be wound up by the Court.5 In relation to the Spanish company, the Court considered the effect of the Judgments Regulation. The existence of the non-exclusive jurisdiction clause in the SFA engaged Article 23 of the Judgments Regulation, following the decision in Vietnam Shipbuilding, thereby allowing jurisdiction to the English court.

The Court also needed to be satisfied that it would exercise jurisdiction for some purpose. It was satisfied by the expert evidence in relation to the United States and in relation to Spanish law that the schemes of arrangement would be recognised and given effect to in the US (through the mechanism of Chapter 15) and in Spain (through the mechanism of the Rome Regulation).

APCOA PARKING HOLDINGS GMBH

Seven of the nine companies were incorporated overseas and each had its centre of main interest overseas. The only real connection with England was the selection of its laws pursuant to a change of law clause in the facility agreement governing the indebtedness of the scheme companies.

Each of the schemes was of limited scope, dealing with the imminent threat to the companies’ concern about the fast-approaching termination date in respect of the group’s loan facilities. If the schemes were not sanctioned, the board of the ultimate parent company (incorporated in Germany) would have had to file German insolvency proceedings. This would have precipitated further insolvency proceedings down the line and would have been destructive of value when compared to the outcome of a consensual reconstruction. There were ‘rumblings of discontent’ from certain creditors especially in relation to the cross-border aspects of the schemes. However, as it turned out, no objections to the schemes were formally made.

The Court said that English law had moved to the point that the English forum was regarded as capable of constituting sufficient connection with this jurisdiction, even without the fact of the majority of creditors being present here, provided that it was clear that the courts of the jurisdictions where the creditors would be likely to seek enforcement would recognise the effectiveness of the English court order.

The novel point of Apcoa was the fact that both the choice of English law and the selection of English courts as having exclusive jurisdiction were not the original choice in the facilities agreement. The creditors had changed the governing law to English law a short time before the application to court under a provision of the agreement enabling creditors to select a different jurisdiction. Expert evidence was produced in relation to each of the jurisdictions concerned, which indicated that the changes would be effective and given recognition. The Court said it took comfort from the fact that no creditor suggested that it was not properly advised as to the reasons for and the effect of the changes.

SUMMARY

As demonstrated by the recent cases, all heard by the High Court in London in the space of less than a year between June 2013 and April 2014, English judges are currently willing to take jurisdiction over foreign companies that can satisfy the somewhat complicated jurisdictional requirements to grant permission to hold scheme creditors meetings and to sanction schemes in relation to foreign companies. The analysis required to ascertain whether the English court is able to take jurisdiction is complex but there is now plenty of guidance contained in the judgments referred to above. It is not impossible of course that a review of these jurisdictional issues by the Court of Justice of the EU might alter what has become in the last year a somewhat easier process than was the case before Rodenstock.