1. Executive Summary
A scheme of arrangement is a statutory, court-supervised procedure under Part 26 of the UK Companies Act 2006 (the “CA 2006”) which allows a company to make a compromise or arrangement with its members or creditors (or a class of them). Schemes of arrangement are not an insolvency procedure although they can be used, amongst other things, to obtain approvals from creditor classes for debt restructurings of insolvent companies where unanimous class approvals would otherwise be required.
Over the last decade, dozens of companies incorporated outside the UK (“foreign companies”) have used schemes to restructure their debt. Foreign companies have used, and the English courts have been willing to accept, ever more creative ways of creating a jurisdictional nexus with England.
This article provides a short general overview of the procedural stages which apply to all creditor schemes of arrangement, regardless of the scheme company’s jurisdiction of incorporation. It then considers the means by which a foreign debtor can establish UK jurisdiction, focusing on the two most frequently cited factors: changing the governing law of contracts to English law and moving the centre of main interests (“COMI”) of the foreign company. Finally, this article considers potential limits to the English court’s jurisdiction.
2. Creditor schemes – a brief overview
Before considering the jurisdictional issues associated with schemes of foreign companies, we have summarized the procedural stages of a creditor scheme of arrangement:
- The company launches the scheme of arrangement by sending a practice statement letter (“PSL”) to all creditors. The PSL brings the process to the attention of creditors and sets forth the company’s proposed classification of creditors.
- The company applies to the court for leave to convene creditor scheme meetings by issuing a claim form supported by a witness statement which sets out certain statutory information, gives details of the scheme and meetings and sufficient evidence to enable the court to give directions as to composition of classes. The company also files the scheme (equivalent to chapter 11 plan) and an explanatory statement (roughly equivalent to a Chapter 11 disclosure statement) (“ExPlan”) with the Court. The ExPlan must, among other things, explain what the scheme is intended to achieve, and its economic and legal effect. It must also state any material interest of the directors in the scheme (whether as members or creditors) and the effect of the scheme on those interests as opposed to the effect on the interest of other persons.
- There is a court hearing (the “Convening Hearing”) to convene meetings of the appropriate classes of creditors. The court will also consider jurisdictional issues at the Convening Hearing.
- On the same day as the Convening Hearing, a notice of scheme meetings and the ExPlan are circulated to all known affected creditors.
- The scheme meetings are typically held three weeks after circulation of the ExPlan. The scheme proposals are passed if creditors representing at least 75% by value and majority in number of those attending the meeting in person or by proxy vote in favour of the scheme.
- Following the scheme meetings, the court holds a sanction hearing, where the court reviews the findings of the scheme meeting for procedural propriety, and also considers broader questions of jurisdiction and (as a matter of discretion) fairness. If the court is satisfied, it will issue an order sanctioning the scheme (the “Order”).
- The scheme only becomes legally effective in accordance with its terms upon delivering a copy of the Order to the Registrar of Companies.
- A scheme typically takes around six to eight weeks from filing of the claim form to registration of the Order with the Registrar of Companies. However, structuring of the transaction and preparation of documentation prior to filing of the claim form will often take many more weeks.
3. Jurisdictional nexus: establishing UK jurisdiction
Overview
The English courts will exercise their jurisdiction to sanction a scheme of arrangement of the creditors of a foreign company if the foreign company has a “sufficient connection” with England and the scheme will have a “substantial effect”. [FN1] The court will consider the extent of the company’s connections with England and will be concerned to see that the scheme will be recognized in the jurisdictions where the debtor is incorporated or has substantial assets. It should be noted that schemes of arrangements cannot be used in respect of the shareholders of foreign companies.
There are a number of ways in which the “sufficient connection” requirement may be satisfied:[FN2]
- the presence of assets within the English jurisdiction;
- the presence of a sufficient number of creditors within the English jurisdiction;
- the rights of creditors are governed by English law;
- the COMI of the company is in England. This factor in it itself creates a sufficient connection with England as, under Regulation EC 1346/2000 on insolvency proceedings (the “European Insolvency Regulation”), English courts have jurisdiction to institute an insolvency process in respect of foreign companies whose COMI is in England; and
- the finance documents are subject to the jurisdiction of the English courts (exclusive [FN3] or non-exclusive)[FN4].
Of the factors set forth above, the two most frequently cited, in persuading the English court to accept jurisdiction are COMI within the UK and the governing law of the debt documents being English law.
With respect to the issue of governing law, although in earlier scheme cases the relevant finance documents provided for both English governing law and English jurisdiction (exclusive or non-exclusive), David Richards J, a leading English High Court judge, specifically held in Vietnam at [9] that “I take the view that the fact that the loan agreement is governed by English law is of itself sufficient to create that necessary connection” (sanctioning a scheme of arrangement of a Vietnamese shipbuilding company).
The question of “substantial effect” is closely related to the question of “sufficient connection”. The court is concerned that it is not exercising its jurisdiction in vain, and many of the factors which help persuade the court to accept jurisdiction (such as assets within England or a substantial number of creditors within England) are also relevant to the question of “substantial effect”. If the debtor has assets within England, the English court can enforce its order by preventing execution against the debtor’s assets located in England, while creditors located in England are subject to the personal jurisdiction of the English court.
Where a foreign company is subject to a scheme of arrangement, it is vital to obtain robust expert evidence from a respected practitioner or legal academic in the debtor’s jurisdiction of incorporation and any other jurisdictions where the debtor has significant assets confirming that the relevant foreign court will give effect to the English scheme. Without such expert opinions, the English court will be reluctant to sanction a scheme.
Although, as set forth above, there are a number of ways for a foreign company to create a “sufficient connection” with England, this article focuses on the two most frequently-used options: (i) a change of governing law of the finance documents to English law; and (ii) moving the COMI of a foreign company to England. In certain cases, such as In re DTEK Finance BV [2015] EWHC 1164 (Ch) (“DTEK”), both a change of governing law and a COMI-shift were implemented to strengthen the argument that the English court had jurisdiction.
Changing contracts’ governing law to English law
Two recent English cases are authority for the proposition that amending the governing law of finance documents from foreign law to English law creates a “sufficient connection” with England to persuade the English courts to exercise their jurisdiction to approve schemes of arrangement of foreign companies: In re Apcoa Parking (UK) Ltd GmbH and others [2014] EWHC 1867 (“Apcoa I”) (implementing an “amend and extend” scheme (the “Extension Scheme”), In re APCOA Parking Holdings GmbH and others (No 2) [2014] EWHC 3849 (Ch) (“Apcoa II”, together with Apcoa I, the “Apcoa Cases”) (implementing a more fundamental balance sheet deleveraging negotiated in the breathing space created by the Extension Scheme) and DTEK.
In the Apcoa Cases, “sufficient connection” was created by changing the governing law from German law to English law and the jurisdiction of the facility agreement to the English courts. In DTEK, “sufficient connection” was created by, among other things, changing the governing law of the indenture from New York law to English law.
However, the Apcoa II judgment makes clear that changing the governing law of a debt document to English law will not automatically lead the English court to exercise jurisdiction:
“it seems to me that the onus placed on the court in exercising its jurisdiction to make an order which will be given recognition elsewhere may well require it to be especially wary if, for example, the new choice is of a law which appears entirely alien to the parties’ previous arrangements and/or with which the parties had no previous connection; or if the change in law has no discernible rationale or purpose other than to advantage those in favour at the expense of the dissentients; or even more generally, where in its discretion the court considers that, in the places in which the parties are, the extent of the alteration of rights between the parties for which sanction is sought would be considered a “step too far”.” (at [251])
In Apcoa II, Hildyard J held that the changed choice of law was not “alien or indiscriminate or such as could not reasonably have been contemplated by commercial parties aware of the Rome 1 Regulation”,[FN5] and found that the following factors supported that conclusion:
- The change in governing law was approved by a super majority of the existing lenders, including creditors who were placed at a disadvantage by one particular aspect of the scheme.
- When that approval was sought by the scheme companies all lenders had been advised that the change would be a gateway to the implementation of a scheme under English law.
- The existing facility agreement in its original form and as executed by all parties had identified and selected English law for certain (albeit limited) purposes.
- Two of the scheme companies were incorporated in England, and a number of the lenders were managed from London offices.
- The agent under the existing facility agreement and the security trustee were both English companies incorporated in England and operating out of London.
- Although itself governed by German law the existing intercreditor agreement, which was drafted by Clifford Chance in English, stipulated London as the exclusive place of performance for all rights and obligations under any finance document.
- None of the creditors had objected to either the choice of law or the jurisdiction of the English court for the purposes of the Extension Scheme.
In DTEK, the court applied the points made by Hildyard J in Apcoa II and found that the change of governing law to English law created a sufficient connection with England. The court held that, as the indenture had always included provision for a change of governing law, this was the bargain noteholders had signed up to. Further, “English law is not alien or indiscriminate in this case but is commonly used in debt obligations in the capital markets. Some of the noteholders are based in England and some of the 2015 Notes have been listed on the London Stock Exchange” (at [16]). Further circumstances which created a sufficient connection in DTEK were:
- The fact that certain of the guarantees given by certain group companies were, and always had been, governed by English law.
- DTEK had moved its COMI to England.
- DTEK had substantial assets in the jurisdiction, namely the cash in its London bank accounts.
As a factual matter, in every case involving a creditor scheme of a foreign company, there have been connections with England (such as assets or creditors in the jurisdiction) other than the governing law of the debt documents. However, even absent these considerations, it is important to remember that the clear line of authority (in Vietnam, Primacom Holding GmbH vs Credit Agricole [2011] EWHC 3746 (Ch) and DTEK) is that English governing law alone creates a sufficient connection to give the English court jurisdiction to sanction the scheme.
Changing COMI to the UK
COMI has been defined in European Union and UK case law interpreting the European Insolvency Regulation and in UK case law interpreting the Cross-Border Insolvency Regulations 2006 (“CBIR”) (which is the UK implementation of the UNCITRAL Model Law on Cross-Border Insolvency, adopted in the United States in Chapter 15 of the Bankruptcy Code (“Chapter 15”)). The English courts have held that COMI bears the same meaning in both the European Insolvency Regulation and the CBIR. [FN6]
There is a rebuttable presumption that a debtor’s COMI is the location of its registered office (Article 3(1) of the European Insolvency Regulation). The presumption that COMI is the location of the registered office can be rebutted only if “factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect” [FN7]. In the subsequent case of Interedil Srl (In Liquidation) v Fallimento Interedil Srl (C-396/09), the European Court of Justice held that COMI must be determined by attaching greater weight to the place where the company’s actual centre of management and supervision and of the management of its interests is located in a manner that is objectively ascertainable to third parties, in particular the company’s creditors. The ECJ held that, while the presence of company assets and the existence of contracts for financial exploitation of those assets in a member state other than that in which the registered office is located are objective factors and, if in the public domain, may well be ascertainable by third parties, they are insufficient in themselves to rebut the presumption that COMI is in the member state of the registered office. To rebut the presumption, a comprehensive assessment of all the relevant factors must make it possible to establish, in a manner ascertainable to third parties, that the company’s actual centre of management and supervision and of the management of its interests is located in that other member state.
Recent English cases provide guidance on steps which can be undertaken successfully to move COMI to England. In Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch.) (“Hellas”), the court was satisfied that the following ascertainable and objective facts upon which the company relied showed that it had shifted its COMI from Luxembourg to the UK:
- Its head office and principal operating office were now in London.
- The company’s creditors were notified of its change of address around that time and an announcement was made by way of a press release that its activities were shifting to England.
- It had opened a bank account in London and all payments are made into and from that bank account although there still remained a bank account in Luxembourg to deal with minor miscellaneous payments.
- It had registered under the Companies Act in England, although its registered office remained in Luxembourg and it remained potentially liable to pay tax in Luxembourg too.
Lewison J further stated that one of the most important features of the evidence was that “all negotiations between the company and its creditors have taken place in London” (at [5]). [FN8] The English courts have not, however, given much weight to the location of board meetings as a relevant factor in ascertaining COMI, as this is not a factor readily ascertainable by third parties. [FN9]
COMI is assessed at the date of filing the scheme petition with the court. [FN10] The court will want to be satisfied that the shift of COMI is permanent but there is no requirement, currently, for it to have happened for any particular period prior to the date of filing provided that it is ascertainable to third parties by that date. However, from June 2017, the presumption that a foreign debtor’s COMI is the location of its registered office will not apply where it has moved its registered office to another member state within three months prior to the opening of insolvency proceedings. Instead, the court or officeholder will be tasked with examining jurisdiction ex officio. This change will effectively mean that COMI must be moved at least three months in advance of the scheme.
Importantly, any COMI shift that involves a movement of management and central administration may have tax implications that would need to be carefully considered. COMI shifting is a significant undertaking, which presents significant implementation challenges. To date, all COMI shifts to facilitate schemes have involved holding companies or financing vehicles with few or no employees or trade creditors.
A COMI shift is essential where the foreign (i.e. non UK-incorporated) company wishes to obtain recognition of its scheme under Chapter 15 as a “foreign main proceeding”, and the automatic stay which accompanies such recognition. [FN11]
The future of the English scheme jurisdiction
As this article shows, the English courts have consistently showed a flexible approach to taking jurisdiction in creditor schemes of arrangement involving foreign companies. This has been demonstrated in the scheme of Re Codere Finance (UK) Limited, which was sanctioned by the English court on 17 December 2015.
Codere S.A. (“Holdco”) is the parent of a Spanish group which manages gaming machines, horse racing tracks, casinos, machine halls, bingo halls and sports betting locations across Latin America, Spain and Italy. Holdco is the issuer of various notes governed by New York law (the “Notes”). It is also the borrower under an English-law facility agreement (the “Facility”). The relationship between the Notes and the Facility is governed by an English-law intercreditor agreement.
The Codere group, which has faced severe financial difficulties for some years, wished to effect a scheme of arrangement of the Notes. To establish English jurisdiction, Holdco acquired an English company, Codere Finance (UK) Limited, which has assumed joint and several liability as co-issuer with Holdco under the Notes. At the Convening Hearing, held on 29 October 2015, Mr Justice Nugee expressed severe misgivings about the scheme. Although he was ultimately prepared to convene the scheme meetings, he stated that this seemed a “remarkably aggressive” use of jurisdiction, was “at the edge” of what was permissible for the English court and that these issues would have to be revisited at the sanction hearing.
At the sanction hearing on 17 December 2015, Mr Justice Newey readily sanctioned the scheme. He was satisfied that the scheme did not impermissibly push boundaries. Rather, it fell squarely within a long line of recent authorities where the English court had accepted jurisdiction on the basis of a change in governing law, COMI and, in certain cases, where the scheme company had acceded to the debt documents purely to facilitate the scheme. He noted that the scheme could be characterized as “forum shopping”, but it was forum shopping of the good variety, in the best interests of creditors.
This was a scheme of an English company, which was driven by, and overwhelmingly supported by, the company’s creditors. It was the only possible commercial deal, and the stark alternative was the insolvency of the Codere group, with likely recoveries of 0% for noteholders, as opposed to a minimum of 47% under the scheme.
Interestingly, to provide further comfort to the judge that he should exercise his discretion to sanction the scheme, over 90 creditors had written to the judge expressly submitting to the jurisdiction of the English court for the purposes of the scheme.
The Codere scheme, like most schemes involving foreign companies, had the support of an overwhelming majority of creditors and was unopposed. It remains to be seen what approach the English court would take if faced with a boundary-pushing scheme which was opposed, rather than uncontested, or in schemes involving debtors from a particular country, if a scheme had been successfully challenged in that jurisdiction.
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Footnotes
1. In re Drax Holdings Ltd [2004] 1 W.L.R. 1049 at [29]-[30]
2. for the first four bullet points, see In re Magyar Telecom B.V. [2013] EWHC 3800 (Ch) (“Magyar”) at [21] to [23]
3. In re Rodendstock GmbH [2011] EWHC 1104 (Ch). [2012] B.C.C. 459 (“Rodenstock”) at [68]-[69]]
4. Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch) at [9] (“Vietnam”) and Re hibu Finance (UK) Ltd [2014] EWHC 370 (Ch) at [3]
5. Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (“Rome 1”) sets forth rules for determining the governing law of contractual obligations which must be applied by all EU member states. Rome I applies to all contracts made on or after December 17, 2009. Article 3(2) provides that “the parties may at any time agree to subject the contract to law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation”.
6. Re Stanford International Bank Ltd [2010] EWCA Civ 137 at [53] – [54]
7. Eurofood IFSC Ltd (C-341/04) E.C.R. I-3813; [2006] Ch. 508 at [37]
8. See also Re European Directories (DH6) BV [2010] EWHC 3472 (Ch) at [41], where the fact that restructuring negotiations had taken place in London was a crucial factor in convincing the judge that the company had shifted COMI from the Netherlands to the UK
9. Stanford International Bank Ltd (In Receivership) [2009] EWHC 1441(Ch) at [98] (finding that “the manner in which board meetings took place would not have been ascertainable by third parties”); El-Ajou v Dollar Land (Manhattan) Ltd [2005] EWHC 2551 (Ch) at [7] (finding that “where a board actually meets is not…a matter to be given very much weight in ascertaining where the COMI is. In particular, it is not the sort of thing that a third party would readily be able to ascertain”; while the location of board meetings is not mentioned at all in Hellas.
10. Re Staubitz-Schreiber (Case C-1/04) [2006] B.C.C. 639 at [29]; Shierson v Vlieland-Boddy [2005] EWCA Civ 974 at [55]. Both these cases concerned the opening of bankruptcy proceedings in respect of individual debtors, rather than schemes of arrangement. However, the English court will follow the same approach when assessing the relevant date for assessing the COMI of a foreign company.
11. See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. 2007 Bankr. LEXIS 4762 (Bankr.S.D.N.Y. September 5, 2007) (affirmed on appeal to the District Court)
