Syncreon: The English Patient
On 1 October 2019, the landmark cross-border restructuring of the Syncreon group completed. Pursuant to the restructuring, the Syncreon group’s funded debt was reduced by approximately U.S. $625 million and the Syncreon group was provided with approximately U.S. $250 million of new financing. The restructuring of the Syncreon group is widely considered to be the first-ever use of English schemes of arrangement or “schemes” to restructure debt issued by a U.S. based global enterprise. The restructuring serves to emphasise the utility of schemes in global reorganisations and illustrates that, in some cases, there may be an alternative English solution to the use of Chapter 11 proceedings for U.S. based debtors.
What is an English scheme?
The restructuring of the U.S. headquartered Syncreon group was implemented through two identical and inter-conditional schemes proposed by Syncreon Group B.V., a Dutch registered company and the primary borrower of the debt concerned, and Syncreon Automotive (UK) Ltd., an English registered company and a guarantor of the debt concerned.
A scheme is not technically an insolvency or bankruptcy procedure, but rather a mechanism contained in English corporate legislation (Part 26 of the Companies Act 2006) which allows the English court to sanction a “compromise or arrangement” that has been agreed between a company and its members or creditors (or any class of them). Schemes can be used to effect solvent reorganisations of companies, but are also often used to implement reorganisations of insolvent companies (such as by way of a debt for equity swap).
As a scheme is not technically an insolvency or bankruptcy procedure, there is no provision in the Companies Act 2006 which allows a company that is proposing, or intending to propose, a scheme to obtain a moratorium in order to be protected from the claims of its members and/or creditors. There are other means of obtaining protection from such claims, for example by obtaining a stay of any individual proceedings brought against the company or by combining a scheme with insolvency proceedings which do allow the company to benefit from a statutory moratorium on member and/or creditor actions, such as an English administration.
For a scheme to be approved, a majority in number, representing at least 75 per cent in value, of those voting within each class of the members and/or creditors must approve of it. There is no mechanism which allows a cross-class cram down in connection with a scheme, nor is there an absolute priority rule which would require the claims of a dissenting class of members and/or creditors to be satisfied in full before the claims of a more junior class are satisfied, so the scheme needs to be approved by each class of members and/or creditors. The English court’s permission is needed to convene the meetings of the relevant classes of members and/or creditors in order that they may vote on the scheme. That permission is sought at a convening hearing. If permission is granted to convene the meetings and the relevant classes of members and/or creditors approve the scheme at the meetings, the English court will decide at a further hearing whether to sanction the scheme. Once sanctioned, the scheme will bind all affected members and/or creditors and the company, regardless of any contractual restrictions which would otherwise operate.
Why was the Syncreon group able to use an English scheme?
Schemes have been used as a restructuring tool by companies from the United Kingdom, the European Union and beyond. By way of example, in RE Vietnam Shipbuilding Industry Groups [2013] a scheme was used to restructure the debts of a company incorporated in Vietnam, in RE Noble [2018] a scheme was used to restructure the debts of a company incorporated in Bermuda and in RE Agrokor DD [2019] a scheme was used to restructure the debts of a company incorporated in Croatia.
In order to accept jurisdiction over a non-English company which wishes to propose a scheme, the English court must be satisfied that the company has a sufficient connection with England. This requirement is considered in each case in the context of the applicable factual circumstances. However a sufficient connection is usually established for non-English companies which wish to propose a scheme to their members and/or creditors either (i) by the relevant company evidencing that it has its centre of main interests or “COMI” in England, or (ii) by the relevant debt documents being governed by English law.
Establishing a sufficient connection with England via route (i) above can be challenging if the relevant company is not a mere holding company. If, for example, the relevant company holds an operating business or assets directly, moving COMI can require complex legal and tax analysis, detailed operational planning and significant corporate reorganisation steps, which may simply be impractical. Establishing a sufficient connection with England via route (ii) above can therefore sometimes be the preferred route, as the English courts have accepted that the governing law and/or jurisdiction clauses in a company’s foreign law governed debt documents may be amended to English law and/or jurisdiction in order to establish a sufficient connection with England (if of course the terms of the underlying debt documents permit such amendments and the requisite contractual creditor consents can be obtained). This was the route used in connection with the Syncreon schemes. Shortly before the schemes were convened, the governing law of the relevant debt documents was changed from New York law to English law and the jurisdiction clauses in the relevant debt documents were changed to confer non-exclusive jurisdiction on the English courts, in each case pursuant to the majority amendment powers in those debt documents.
Why was an English scheme the best tool for the Syncreon group restructuring?
The Syncreon group submitted to the English court, and the English court accepted in its judgment, that “the use of the English jurisdiction and the scheme process [was] regarded as the only viable route for restructuring the scheme companies on a going concern basis“. The Syncreon group had explored a number of other implementation options for the restructuring, including U.S. Chapter 11 proceedings. However, it submitted that there were no viable alternatives to the schemes due to, among other things, the following factors:
- Recognition: Key members of the Syncreon group, including Dutch-registered Syncreon Group B.V. as the principal borrower of the debt concerned, were organised under the laws of various European Union countries. It was therefore important that the tool used to restructure the Syncreon group offered a well-trodden path to recognition in the European Union, thereby avoiding the need for fragmented proceedings which would make it exceedingly difficult to sell the Syncreon group as a going concern and also avoiding exposing the Syncreon group to potential enforcement actions by local creditors. Many schemes of non-English companies which have been sanctioned by the English court have been recognised by countries in the European Union pursuant to the provisions of the EU’s Recast Judgments Regulation (Regulation (EU) No 1215/2012), for example because the relevant company has creditors domiciled in England and/or because the parties to the debt documents have submitted to the jurisdiction of the English court. S. Chapter 11 proceedings do not benefit from automatic recognition by countries in the European Union, although Chapter 11 proceedings are often recognised by creditors in practice as a result of the extra-territorial application of the Chapter 11 stay. It should be noted that, post-Brexit, the position on recognition of schemes in the European Union will be less certain as the application of the Recast Judgments Regulation will no longer extend to English proceedings. As such, the position on recognition will need to be kept under review as the legislative framework for Brexit is developed.
Ancillary proceedings in the U.S. and Canada were used in order to obtain recognition of the Syncreon schemes in those jurisdictions. This was the first time CCAA recognition of an English scheme of arrangement was granted by the Canadian court.
- Approach to Release of Guarantors: The Syncreon group needed to obtain a release of the guarantors of its debt. Schemes can be used to release guarantees even if the guarantor is not a party to the schemes. The practical consequence of this was that only two Syncreon schemes were proposed and the need to propose separate schemes of arrangement or commence other proceedings in order to compromise the guarantees provided by the other group entities was avoided.
- Stigma: As noted above, a scheme is not an insolvency procedure. The use of schemes could therefore mitigate against the likely value-destructive effect on the business of the Syncreon group of formal insolvency proceedings, including potential termination of customer and supplier contracts, defaults under other debt documents, and negative press.
- Cost: The use of schemes was considered to be more cost-efficient than U.S. Chapter 11 proceedings.
- No need for moratorium: As noted above, schemes do not offer a moratorium. However, the need for an automatic stay was not viewed as a critical factor.
More U.S. based debtors to become English patients?
The restructuring of the Syncreon group serves to illustrate that schemes are a powerful harmonising tool that can be used to implement global reorganisations that help nurse companies back to financial health. It paves the way for other distressed U.S. based debtors to use schemes to address their financial woes and demonstrates that there is an alternative remedy to U.S. Chapter 11 proceedings in some cases. The impact of Brexit on the recognition of schemes in the European Union remains to be seen, but regardless they are likely to continue to be a popular and flexible tool for implementing restructurings.
By Akin Gump LLP
