Executive Summary
One of the key financial restructuring cases in the UK market during 2014 was the restructuring of the Apcoa Group (the “Group”). In Apcoa Parking Holdings GmbH & Ors (“Apcoa 1”),[1] the English court sanctioned inter-conditional schemes of arrangement of nine Group companies (the “Scheme Companies”) pursuant to Part 26 of the Companies Act 2006 (the “CompaniesAct”). Notwithstanding that seven of the nine Scheme Companies were not incorporated in England and did not have their centre of main interests (“COMI”) in the UK, the court held that there was a sufficient connection between the Scheme Companies and the English jurisdiction for it to accept jurisdiction over the schemes. The court reached this view on the basis of the governing law and jurisdiction clause of the facility agreement under which the Scheme Companies were obligors having been amended from German law and the jurisdiction of the Frankfurt courts, to English law and the jurisdiction of the English courts. This amendment to the facility agreement was expressly made to enable schemes of arrangement to be proposed.
In the subsequent case of In the matters of Apcoa Parking Holdings GmbH and Ors (“Apcoa 2”)[2], the Scheme Companies proposed further schemes through which the Group could effect a debt for equity swap. In Apcoa 2, Mr Justice Hildyard restated his decision in Apoca 1 that the court had jurisdiction in respect of the schemes in that case, and held that the court continued to have jurisdiction over the Scheme Companies on the principles that applied in Apcoa 1.
Taken together, these are the first reported cases involving foreign debtors who have changed the governing law and jurisdiction clause of their finance documents specifically for the purposes of establishing sufficient connection with England and Wales in order to propose a scheme of arrangement.
Schemes of arrangement under English law
A scheme of arrangement is an English statutory procedure that enables a company to reach a compromise or arrangement with its creditor or shareholders, or with certain classes of them. It is important to note that schemes are a creature of the Companies Act rather than the UK Insolvency Act 1986. They are therefore not an insolvency process under English law, nor are they listed in Annex A of the EC Insolvency Regulation[3] (the “Regulation”) as a collective insolvency proceeding for the purposes of EU law. Notwithstanding this, schemes are commonly used by insolvent or financially distressed companies to implement debt restructurings, and can be used to implement anything from a simple amendment to a company’s finance agreements, to complex debt for equity swaps.
There are three stages to a scheme of arrangement. First, the company proposing the scheme applies to court for permission to convene meetings of each class of creditors that will be affected by the scheme (the “leave to convene hearing”). It is the task of the company to determine what classes its creditors are put into, and the test is whether the rights of the creditors affected by the scheme are not so dissimilar from each other as to prevent the creditors consulting together as to their common interests.[4] If, at the leave to convene hearing, the court is satisfied that it has jurisdiction over the scheme and that the class(es) of creditors have been correctly constituted, the court will grant leave for the company to call meetings of each class of creditors in order for them to vote on the scheme proposal.
In the second stage, the company convenes the meeting(s) of all classes of creditors affected by the scheme in order for each class of creditors to vote on the scheme proposal. Each class of creditors must approve the scheme. A class approves the scheme if (a) at least 75 per cent. in value and (b) more than 50 per cent. in number of the creditors in that class who are present and voting at the scheme meeting (in person or by proxy) vote in favour of it.
If, at the meetings, each class of creditors approves the scheme proposal, the third stage is for the company to request the court to exercise its discretion to sanction the scheme at a sanction hearing. When deciding whether to sanction the scheme, the court will consider, amongst other things, whether (a) the scheme is such that an intelligent and honest man and a member of the class of creditor voting in respect of his interests might reasonably approve it, (b) each class was fairly represented at the creditors’ meeting(s), and that there was no coercion of the minority by the majority, and (c) the procedural requirements have been complied with.[5] The sanction hearing is also the forum for creditors challenging the scheme proposals to raise their objections before the court. If the court sanctions the scheme, a copy of the sanction order must be filed at Companies House, at which point the scheme becomes effective and, crucially, binds the company and all of its creditors, regardless of whether each individual creditor voted for or against the scheme or voted at all.
Schemes of arrangement of foreign companies
Schemes of arrangement have proved an effective tool for implementing financial restructurings of varying size and complexity. Increasingly, foreign companies have looked to schemes to implement restructurings which could not be achieved using the procedures available under their domestic laws. A body of case law has therefore developed in recent years in which the English court has been prepared to accept jurisdiction over, and sanction schemes of arrangement of, companies which are not incorporated under the Companies Act and which have varying degrees of connection with the jurisdiction.
In order for the English court to accept jurisdiction over any scheme of arrangement, the company proposing the scheme must be liable to be wound up in England and Wales. An unregistered company may be wound up under section 220 of the Insolvency Act 1986 (the “Insolvency Act”). Unregistered companies include companies which are not incorporated under the Companies Act and therefore a foreign company is a type of company which may be subject to a scheme of arrangement.
For the court to exercise its discretion to sanction a scheme of a foreign company, the court must be satisfied of two important factors. Firstly, there must be a “sufficient connection” between the company proposing the scheme and England and Wales.[6] A range of factors may be relevant when determining whether a foreign company has sufficient connection with England (for example, whether the debtor has assets or creditors in the jurisdiction, or whether it has its COMI in the UK). One line of recent cases shows that the courts are prepared to find a sufficient connection where the finance documents relating to the debt being restructured have been governed by English law and the parties have submitted to the jurisdiction of the English court (notwithstanding the fact that the scheme company does not have its COMI in the UK).[7]
Secondly, the court must be persuaded that it is likely that the proposed scheme will achieve its purpose. In the case of schemes of foreign companies, an important consideration for the court in this regard will be whether the court’s order sanctioning the scheme is likely to be recognised by the courts in the debtor’s jurisdiction of incorporation and other jurisdictions where the debtor has significant assets against which a creditor might seek to enforce its claims.
Background to the Group
The Group is a major European car park operator owned and managed by APCOA Parking Holdings GmbH, a German company. The Scheme Companies were all borrowers and guarantors under a facility agreement originally dated 23 April 2007 (the “Senior Facilities Agreement”). At its inception, the Senior Facilities Agreement was governed by German law and the parties submitted to the jurisdiction of the courts of Frankfurt am Main. The facilities under the Senior Facilities Agreement were:
(a) priority facilities, comprising a tranche A facility, a guarantee facility and a revolving credit facility in an aggregate principal amount of approximately €595 million and £33.8 million (the “Priority Senior Facilities”); and
(b) a subordinated term loan facility in an aggregate amount of approximately €65 million (the “Second Lien Facilities”),
together, the “SeniorFacilities”. The Senior Facilities each had an original maturity date of 25 April 2014.
Apcoa 1
The Group concluded that it would be unable to repay the amounts outstanding under the Senior Facilities when they fell due in April 2014. It therefore commenced negotiations with the lenders under the Senior Facility Agreement as to the terms of a debt for equity swap to restructure the Group’s indebtedness. However, it became apparent that negotiations would not conclude before the maturity date of the Senior Facilities and that the Group needed to extend the maturity of the Senior Facilities whilst the terms of a restructuring could be agreed. Such an extension required the unanimous consent of the lenders under the terms of the Senior Facilities Agreement. The Group had managed to obtain consent to a short-term extension from over 75 per cent. by value of the lenders, but was unable to obtain unanimous lender consent. The Group therefore proposed to use a scheme of arrangement of the obligors as a means of extending the maturity of the Senior Facilities with less than unanimous lender consent.
Whilst two of the obligors under the Senior Facilities Agreement were English companies, the other obligors had no discernible connection with England. In order to establish sufficient connection with the jurisdiction, the obligors therefore sought the consent of the lenders to amend the governing law and jurisdiction clause of the Senior Facilities Agreement to English law and the jurisdiction of the English courts. As such an amendment was not identified within the Senior Facilities Agreement as a matter requiring unanimous lender consent, the amendment could ostensibly be made with the consent of a majority of the lenders (in this case, those representing two thirds of the principal amount of the debt). In the event, the Group obtained the consent of over 80 per cent. of the lenders to the amendment, following which the Scheme Companies launched nine schemes of arrangement, each of which proposed an extension of the maturity of the Senior Facilities in exchange for the payment of a fee to the lenders. In the evidence filed in support of the scheme applications, the Scheme Companies stressed that if the schemes failed, an insolvency filing of the parent company (and potentially other Group companies) would likely need to follow shortly thereafter.
At the leave to convene hearing, the court had to consider two key questions:
1.Had the class of creditors been properly constituted for the creditors’ meeting? and
2. Did the court have jurisdiction over the proposed schemes? This question required the court to consider whether the amendments to the Senior Facilities Agreement had been validly effected, as well as the broader jurisdictional questions that the court must consider in relation to any scheme of a foreign company.
In answer to the first question, the court held that all of the lenders under the Priority Senior Facilities and the Second Lien Facilities could be constituted into a single class for the purposes of voting on the scheme proposal on the basis that: (i) notwithstanding their different rights to the payment of fees and margin, their rights against the Scheme Companies were not so dissimilar as to prevent them from consulting together on the scheme proposal, and (ii) if the schemes were to take effect, the extension to the maturity of the Senior Facilities would affect all lenders in the same way, and they would all be entitled to receive the same pro rata consent fee.
In relation to the question of jurisdiction, Mr Justice Hildyard held that it was a matter of German law as to whether the amendment to the governing law and jurisdiction clause in the Senior Facilities Agreement had been validly effected such that the contract could now be said to be governed by English law and subject to the English court’s jurisdiction. The judge was reassured by the expert evidence on German law adduced in court, which asserted that the amendments to the Senior Facilities Agreement had been validly effected under German law.
Further, the court cited the line of scheme cases, beginning with the leading case of Re Rodenstock[8], involving foreign companies where sufficient connection had been established by virtue of the debtor’s finance documents being governed by English law and subject to the English court’s jurisdiction, even if (as in the case of Apcoa) the companies concerned did not have their COMI in the UK. Finally, the court was satisfied by the evidence of legal experts in the jurisdictions of the Scheme Companies which submitted that the courts in those jurisdictions were likely to recognise the English court’s orders sanctioning the schemes, and themselves give effect to the schemes. In this way, the English court was reassured that sanctioning the schemes would not be in vain.
Whilst Mr Justice Hildyard noted that there were “rumblings of discontent” among a small minority of creditors who had not voted in favour of the schemes, the Scheme Companies’ application to the court to convene the creditor meetings was not opposed. Nevertheless, the court issued a cautious judgment, noting that the forum for any dissenting creditors to challenge the fairness of the schemes was at the sanction hearing, and that none of his preliminary conclusions on the jurisdictional issues would preclude a subsequent challenge being heard. Accordingly, the court granted leave for the Scheme Companies to convene the creditor meeting, at which the scheme proposals were subsequently approved by a high proportion of creditors.
In his judgment at the sanction hearing, Mr Justice Hildyard noted the general concern raised by the case was whether creditors were deprived of an essential part of their bargain in that a provision requiring unanimous consent (i.e., the extension of the maturity of the Senior Facilities) had been altered by less than unanimous consent through a statutory procedure and court process which was not contemplated by the parties at the time that the Senior Facilities Agreement was entered into. In rejecting that argument, and ultimately sanctioning the schemes, the judge took comfort from the fact that (i) a change of governing law and jurisdiction by the majority of lenders was not expressly prohibited under the terms of the Senior Facilities Agreement, (ii) the purpose of the amendment was properly explained to creditors at the time their consent to the amendment was requested, (iii) the evidence of German legal experts indicated that the amendment was valid and effective as a matter of German law, and (iv) no creditor had sought to challenge the amendment before the court. The court therefore sanctioned the schemes.
Apcoa 2
Having achieved an extension to the Senior Facilities Agreement in Apcoa 1, the Group sought to agree the terms of a comprehensive debt restructuring with its lenders. Whilst the Group was able to secure the consent of the vast majority of its creditors to the proposed transaction, two creditors, FMS Wertmanagement Anstalt öffentlichen Rechts (“FMS”) and Litespeed Master Fund Limited (together, the “dissenting creditors”), did not agree to the deal. The Group therefore once again sought to use a series of schemes of arrangement to bind the dissenting creditors to the terms of the restructuring, and again argued that in the absence of successful schemes, the Group would be required to file for insolvency within a short period of time.
The objections to the schemes on grounds of jurisdiction
The issues raised before the court in Apcoa 2 were more extensive than those raised in Apcoa 1, not least because the schemes were more complex and, unlike in Apcoa 1, were fully contested before the court. FMS objected to the schemes on a number of grounds, many of which are beyond the scope of this article. However, one of the grounds of FMS’ challenge was the question of the UK court’s jurisdiction over the schemes. As these arguments were not raised and therefore not considered in detail by the judge in Apcoa 1, they are discussed further below.
Notwithstanding that FMS did not formally object to the schemes in Apcoa 1, it raised objections which would have (and, the Scheme Companies argued, should have) properly been raised in that case. Specifically, FMS argued that the court should not accept jurisdiction over the schemes in Apcoa 2 on the basis that the amendment to the governing law and jurisdiction clause in the Senior Facilities Agreement to English law and the English courts created a sufficient connection to England. FMS’s contention was that this was not the parties’ original choice of law and the amendment had been made solely in order to enable schemes of arrangement to be proposed. This, argued FMS, was akin to forum shopping because, (i) the Senior Facilities Agreement did not expressly contemplate the ability to amend the governing law and jurisdiction clause, (ii) there was no commercial purpose to the amendment other than to enable schemes to be proposed such that minority creditors’ rights could be compromised, and (iii) the amendment and the compromise of rights enabled by it, was carried out against the wishes of minority creditors.
To support its argument, FMS tried to draw a distinction between the present case and Re Rodenstock, the first case in the line of recent authorities on schemes of foreign companies. In Re Rodenstock, a German company’s facility agreement was (and had always been) governed by English law and the parties had submitted to the jurisdiction of the English courts. On this basis, the judge in that case concluded that the creditors under the facility agreement could properly be said to have contemplated that their rights could be altered under an English law process such as a scheme. FMS argued that in the case of the Senior Facilities Agreement, there was no such conscious choice by all parties to that agreement when it was entered into, and that the whole point of the schemes was to bind the very minority that had not consented to the change of governing law.
The court’s response
The judge observed that according to Article 2 of EC Regulation 593/2008 (“Rome I”), the parties to a contract dealing with civil and commercial matters (as the Senior Facilities Agreement evidently did) were free to change the governing law of their contracts, and the consequence of Rome I was that English law applied from the moment the amendment had been validly made. Once the amendment had been effected, the court noted that the governing law and jurisdiction clause was no less valid than the original choice of law and jurisdiction had been. The court also held that the German expert evidence which was adduced in court confirmed that there was no requirement for unanimous lender consent to the amendment – under German law generally, or under the terms of the Senior Facilities Agreement as originally governed by German law – in order validly to amend the governing law and jurisdiction clause. Finally, the court noted that the lenders under the Senior Facilities Agreement were sophisticated commercial parties who did not need special protection from the operation of these general legal principles.
Importantly, the judge acknowledged that there may be a limit to the extent to which the court would be prepared to accept jurisdiction over, and sanction, arrangements which resulted in a choice of law which “is entirely alien to the parties previous arrangements…or if the change of law has no discernible rationale or purpose other than to advantage those in favour at the expense of the dissentients”[9]. However, the court did not consider that the present case raised such concerns.
Commentary
During the global recession of recent years, many foreign debtors in financial distress have sought to avail themselves of English schemes of arrangement to restructure their debts. Schemes of arrangement provide a flexible and efficient means of achieving an array of restructuring outcomes which many foreign debtors (and their creditors) consider to be impracticable or impossible to implement under the debtors’ domestic laws.
The decisions in Apcoa 1 and 2 are important as they demonstrate that foreign debtors with finance agreements governed by laws other than English law and with limited or no other connections to the English jurisdiction may, nonetheless, be able to find a route into the English courts in order to restructure their debts. The cases show the willingness of the English courts and restructuring practitioners to develop the law in this rapidly expanding area in order to facilitate increasingly complex cross-border restructurings.
In the wake of Apcoa 1 and Apcoa 2, there has been some speculation that the cases will prompt lenders to identify the governing law and jurisdiction clause in finance documents as a provision which may only be amended with unanimous lender consent, which is a position not typical on most European financing deals presently. It remains to be seen if this practice develops or becomes a point of tougher negotiation when debtors put in place their financing arrangements. In the meantime, it is expected that the English courts will continue to be a desirable destination for foreign debtors, particularly those with an international creditor-base.
Finally, schemes of arrangement are seldom contested by dissenting creditors. The judgments in both cases demonstrate the English court carefully weighing the arguments of minority creditors, whilst adopting a pragmatic and commercial approach to an urgent and complex restructuring case in which insolvency and therefore loss of value to all parties was considered to be the only likely alternative.
[1] [2014] EWHC 1867 (Ch)
[2] [2014] EWHC 3849 (Ch)
[3] Council Regulation (EC) 1346/2000 on Insolvency Proceedings [2000] OJ L160/1
[4] Re Hawk Insurance Co Ltd [2001] EWCA Civ 241
[5] Re Hawk Insurance Co Ltd [2001] EWCA Civ 241
[6] Re Drax Holdings Ltd [2003] EWHC 2743 (Ch)
[7] Re Primacom Holdings GmbH (No 1) [2011] EWHC 3746 (Ch); Re Rodenstock GmbH [2011] EWHC 1104 (Ch); Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch)
[8] Re Rodenstock GmbH [2011] EWHC 1104 (Ch)
[9] [2014] EWHC 3849 (Ch) at paragraph 251.
