The growing number of foreign companies that seek to take advantage of the UK Scheme of Arrangement (a “Scheme”) is set to increase further as a result of two recent cases that have both stretched the boundaries applicable to Schemes and reiterated the willingness of the English courts (the “Courts”) to extend their jurisdiction to foreign companies looking to use a Scheme to compromise their creditors.
A Scheme is a compromise between a company and its creditors (or any class of them) made pursuant to the Companies Act 2006. It is not an insolvency process, but can be implemented in conjunction with a formal insolvency proceeding such as an administration or liquidation, or on a standalone basis. The compromise becomes legally binding on the company and any such creditors if a majority in number representing not less than 75% in value of each class of creditors present and voting at the Scheme meeting vote in favour of the Scheme, and the Scheme is sanctioned by the Court after the creditors’ meeting.
It is well established law that in order to implement a Scheme it is necessary to demonstrate to the Court that it should exercise discretion to sanction the proposed Scheme, and that it is fair for it to do so. The Court will likely exercise its discretion to sanction a Scheme in respect of a foreign company if it is satisfied that the foreign company has a “sufficient connection” with England and that the Court’s order will be recognised and given effect in the foreign jurisdiction(s) concerned.
A recent spate of cases has highlighted the continued preparedness of the Courts to extend jurisdiction to foreign companies in order that they are able to complete a restructuring by means of a Scheme. There are a number of precedents that establish the principle that a company has “sufficient connection” with England if the finance documents to which it is subject and in respect of which the restructuring is proposed are governed by English law and are subject to the jurisdiction of the English courts (E.g. Re Rodenstock [2011] EWHC 1104 (Ch)).
The Apcoa case (Re APCOA Parking (UK) Ltd & Ors [2014] EWHC 1867 (Ch)) presented an interesting extension of this principle. The Apcoa group comprises a German parent with a variety of European subsidiaries. From the outset, the “centre of main interests” (the “COMI”) of APCOA was in Germany, and Apcoa had no material connection with England at all. In order to avoid the German parent filing for insolvency, Apcoa needed to extend the maturity date in certain of its finance documents (the “Finance Documents”), which were governed by German law and were subject to the jurisdiction of the Frankfurt courts. However, in accordance with the terms of the Finance Documents, it would require unanimous consent of the lenders in order to make this amendment. Although the vast majority of Apcoa’s lenders were supportive of the proposal, a small minority were not, and so Apcoa was not able to implement the amendment on a consensual basis. As German law does not provide a statutory regime out of formal insolvency proceedings for binding a dissenting minority, Apcoa proposed an English law Scheme to bind all the lenders (including the dissenting minority) to the extension of the maturity date.
As part of the restructuring, Apcoa proposed an amendment of the Finance Documents to change the governing law from German law to English law, and to change the jurisdiction clause from Frankfurt courts to the English Courts. In order to implement these amendments, the consent of two thirds of the lenders was required and this was duly obtained by way of formal amendments in compliance with the terms of the Finance Documents. Apcoa then requested the English Court to sanction the Scheme.
The judge in Apcoa recognised that this represented an incremental, but nevertheless significant, development from the line of cases that had previously been before the Court, and therefore carefully considered the issues arising. The Court sanctioned the Scheme, finding that Apcoa had a sufficient connection with England on the basis of the governing law and jurisdiction of the Finance Documents, notwithstanding that those provisions had been amended specifically for the purpose of invoking the jurisdiction of the Courts. However, the judge sounded a clear note of caution. In particular, he noted that in coming to his conclusions, he had relied on the following points: (1) the Scheme was unopposed (indeed at least 50% of the lenders appeared by counsel in support of the Scheme); (2) there was significant support for the proposal from lenders at the Scheme meeting (100% of the lenders present or represented voted in favour of the Scheme); (3) the lenders were sophisticated parties, who had been independently and properly advised; (4) the proposed Scheme was simple; it only sought the extension of the maturity date under the Finance Documents; (5) independent expert opinions obtained in each relevant foreign jurisdiction confirmed that the amendments had been properly effected and that the proposed Schemes would be recognised and given effect; (6) if the Scheme was not implemented, it was likely that Apcoa parent would need to file imminently for insolvency in Germany; and (7) at the time the consent of the lenders was sought for the change in the governing law and jurisdiction clauses, the lenders had been advised that the changes would be used as the basis to implement a Scheme in England.
The judge concluded that the Apcoa case was in line with the natural progression of existing caselaw in this area, and that he could see no reason to depart from the current position. This decision therefore represents another step forward for foreign companies hoping to avail themselves of a Scheme.
Another example of the Courts displaying a willingness to sanction Schemes in respect of foreign companies was Magyar (Re Magyar Telecom BV [2013] EWHC 3800 (Ch)). Magyar was incorporated in the Netherlands and its principal activity was providing telecommunication services in Hungary. Magyar had issued a series of notes (with a value of €345m) that were governed by New York law, with a non-exclusive jurisdiction clause in favour of the New York courts. The notes were guaranteed by other group members and were secured by way of a pledge.
Magyar became unable to pay the interest on the notes and so, in order to avoid formal insolvency, it proposed a Scheme under which (a) new notes totalling €155m would be issued to the beneficial owners of the existing notes in exchange for the surrender of rights against Magyar and its group, and (ii) the noteholders would be given 100% of the equity in a new company which was established to hold c.50% of Magyar’s share capital. Over 97% of the creditors in number, representing over 99% in value, voted in favour of the Scheme, which was then put forward to the English Courts for approval.
The judge first considered whether Magyar had a sufficient connection to England. In contrast to Apcoa, the Magyar notes were governed by New York law and therefore it was not possible to find a sufficient connection to England based on the governing law of the debt that was being compromised as part of the Scheme. However, Magyar had moved its centre of main interests or “COMI” to England before making the application for the Scheme and so, as a consequence of that, the judge held that (a) any insolvency process in relation to Magyar would be capable of being conducted in England and (b) on the facts, the only practical alternative to the Scheme was an insolvency procedure in England. On this basis, the judge found a sufficient connection to England. In this regard, Magyar is a useful reminder that the governing law of debt instruments in not necessarily determinative of the availability or otherwise of a Scheme.
The judge then turned to the second question of whether the Scheme was reasonably likely to achieve its purpose. The Court heard detailed evidence on Hungarian, Dutch and New York law as to whether the Scheme would be given effect in those jurisdictions. Critically, the Scheme needed to release not only the debt of the company proposing the Scheme, but also the related guarantees provided by group members in favour of the noteholders. It was therefore deemed particularly important that the Scheme was effectively able to release the third party guarantees, otherwise the purpose of the Scheme would be defeated as creditors might seek to proceed directly against the guarantors.
Given that the Scheme involved varying rights attaching to notes that were governed by New York law, there was a particular focus on whether the US court would recognise the Scheme and give effect to it under Chapter 15 of the US Bankruptcy Code. Based on the expert evidence, the judge was satisfied that the Scheme would be given effect in the relevant jurisdictions, and he took particular comfort from the fact that sufficient majorities of the noteholders had not only supported the Scheme but also had contractually waived any right to challenge the Scheme.
Taking into account all of these factors, the judge was satisfied that Magyar had a sufficient connection to England and that the Scheme would be reasonably likely to achieve its purpose.
Subsequently, in order to satisfy an express condition of the Scheme, Magyar sought an order recognising the Scheme as a “foreign main proceeding” under the US Bankruptcy Code. The US Bankruptcy Court granted the order under Chapter 15 of the US Bankruptcy Code, giving full force and effect to the Scheme in the US. Its order also enjoined noteholders from commencing enforcement proceedings against Magyar.
Both Magyar and Apcoa provide further evidence of the Court’s preparedness to extend the application of Schemes to foreign companies. However, it is noteworthy that in both cases there was no opposition from minority lenders. It therefore remains to be seen whether the Courts will maintain their robust position in the face of a challenge from a dissenting lender.
