Have SOAs reached their limit?

Author: | Published: 25 Jan 2016
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Struggling foreign companies keep finding new ways to restructure in England. But their tactics are facing tougher scrutiny by the courts

In recent years England has become a popular choice for non-English companies forum shopping for a suitable jurisdiction in which to obtain approval of their restructuring proposals. These companies increasingly seek to restructure their business or debt by means of an English law scheme of arrangement, which is an attractive alternative to negotiating a unanimous restructuring with creditors or shareholders, and is often presented by the relevant company as the only feasible alternative to insolvency proceedings. These companies' lawyers have presented innovative structures and arguments in their efforts to demonstrate that the company has a sufficient connection with England, in the hope that an English court might exercise its discretion and accept jurisdiction to sanction the relevant scheme. In the recent Van Gansewinkel and Codere schemes, the court indicated that it is taking a more robust view of foreign companies seeking the sanction of a scheme. The potential application of certain EU regulations further complicates the question of jurisdiction. However, the English court remains flexible in exercising its discretion to accept jurisdiction, and receptive of the broad range of arguments available to satisfy the sufficient connection test.

The last few years have seen the development of a wide range of arguments to establish this sufficient connection. The more arguments that are presented, the more likely it is that English courts will exercise their discretion to sanction.

Establishing a connection

A physical presence

It has long been established that a sufficient connection may be demonstrated if the relevant company is based in England, or carries on its business through an English branch. The presence of assets in the country can also assist in establishing a sufficient connection. The Heron International scheme of 1994 is considered the earliest example of an English court accepting jurisdiction to sanction a scheme on the basis of the company having substantial assets in the country. In the 2003 Drax Holdings scheme, the sanctioning judge noted that assets in England could be persuasive in the establishment of a sufficient connection. The requisite connection was established on the basis that the relevant finance documents were governed by English law, and security had been granted over shares in English companies and a power station in England.

In recent years, some overseas companies have sought to establish a sufficient connection by moving their centre of main interests (Comi) to England. Further to the EC Regulation on Insolvency Proceedings (Insolvency Regulation), a company filing for insolvency should do so in its jurisdiction of incorporation, unless it can demonstrate that its Comi is within another member state. Overseas companies have successfully argued that if an English Comi means that England is the appropriate forum for insolvency purposes, it should also be the appropriate forum for scheme purposes. In 2013, Magyar Telecom, a Dutch company with Hungarian operations, launched a scheme to restructure its New York law-governed notes, subject to the non-exclusive jurisdiction of the New York courts. A few weeks before the convening hearing, the Comi was shifted to England. The judge noted that the only practical alternative to the scheme would be formal insolvency proceedings, and that further to the Comi shift, these proceedings would take place in England under English law. On that basis, he found the Comi shift to be persuasive in establishing a sufficient connection with England. He noted that overwhelming creditor support for the scheme supported his decision to sanction the scheme.

Schemes: back to basics

For many years, English companies have benefited from the Companies Act scheme of arrangement procedure, which allows a company to vary or compromise the rights of its shareholders or creditors. The scheme is a popular alternative to lengthy and costly negotiations to reach a unanimous restructuring. If a restructuring proposed by means of a scheme achieves the support of a majority in number and 75% in value of each class of shareholders or creditors whose rights are amended by the proposals, and the scheme is subsequently sanctioned by the English court, it becomes binding on all affected shareholders and creditors. The first step is the convening hearing, at which the company seeks an order of the English court to convene the relevant meeting of shareholders or creditors. After the meeting has been held, the company returns to the court for the sanction hearing, at which it will seek the sanction of the scheme.

English courts have jurisdiction to sanction the scheme of any company liable to be wound up under the Insolvency Act 1986. Sections 220 and 221(1) of that statute give an English court jurisdiction to wind up an overseas company. In addition, the court will query whether an order to sanction the scheme will be recognised in the relevant overseas jurisdictions. The English court will not sanction a scheme, if its jurisdiction will not be recognised in the relevant overseas jurisdictions. It will also ask whether the company has a sufficient connection with England.

The last few years have seen the development of a wide range of arguments to establish this sufficient connection. The more arguments that are presented, some of which are discussed below, the more likely it is that English courts will exercise their discretion to sanction.

Governing law

In May 2011 an English court sanctioned a scheme proposed by Rodenstock, a German-incorporated company. Although Rodenstock had its Comi in Germany, and no assets in England of relevance to the scheme proposals, the scheme sought to vary the terms of its English law-governed senior facilities agreement, pursuant to which the parties submitted to the exclusive jurisdiction of the English courts. The sanctioning judge determined that the governing law and exclusive jurisdiction provision established a sufficient connection with England. In his sanction judgment relating to the Primacom Holding scheme of 2013, the judge noted that an English law-governed intercreditor agreement can also assist in building the case for sufficient connection.

In April 2014, a scheme proposed by Apcoa, a German parking services provider, was sanctioned. Apcoa had no assets or business in the UK, and its indebtedness was governed by a German law-governed facilities agreement, subject to the exclusive jurisdiction of the courts of Frankfurt am Main. A majority lender vote pursuant to the terms of the facilities agreement meant that the governing law and jurisdiction clauses were amended to English law. The English court determined that this established a sufficient connection with England. The sanctioning judge concluded that there is no reason why English law should have any less status or effect as the governing law when it has arisen as a result of a change in governing law, rather than being the relevant governing law when the contract was first entered into.

This approach was followed by the English court in April 2015 in its sanctioning of a scheme proposed by DTEK Finance, a company incorporated in The Netherlands, with the purpose of restructuring its New York law-governed high yield bonds. Further to a consent solicitation and exchange offer that ran parallel to the scheme process, more than 91% of creditors voted in favour of a change in the bonds' governing law. Counsel for the company demonstrated to the court that the change was effective under the original governing law, by presenting opinions from New York law experts. The court then sanctioned the scheme, satisfied that the English governing law established a sufficient connection. The judge noted that as an alternative, sufficient connection could have been established on the basis that DTEK had moved its Comi to England before the launch of the scheme. However, the judgment can be distinguished from other Comi-shift examples as the judge concluded that on its own, the change of governing law was enough to establish sufficient connection.

The Insolvency Regulation and Judgments Regulation

In July 2015, schemes proposed by the Van Gansewinkel group of companies were sanctioned. The companies were incorporated in Belgium and The Netherlands. In a written judgment that followed his sanction of the scheme, the judge identified certain key questions that courts should analyse before accepting jurisdiction to sanction a scheme proposed by a foreign company.

The judge was satisfied that the Van Gansewinkel companies were liable to be wound up under the Insolvency Act. As is standard practice with respect to any scheme by an overseas company, expert evidence was presented to the English court confirming that the courts in the jurisdiction of the relevant companies' incorporation would recognise the scheme.

"In Van Gansewinkel and Codere, the court indicated that it is taking a more robust view of overseas companies seeking the sanction of a scheme"

Addressing the sufficient connection point, it was noted that although the Van Gansewinkel companies did not have their Comi, significant assets or any business establishment in England, the liabilities to be restructured were governed by English law. This governing law led the judge to conclude that there was sufficient connection with England.

There has been considerable debate in recent years regarding the application of certain EU regulations to schemes proposed by a company with its Comi in another EU member state. At the Van Gansewinkel sanction hearing, the judge asked whether the EC Judgments Regulation or Insolvency Regulation might prevent the court from accepting jurisdiction.

The prevailing view of the English judiciary is that the Insolvency Regulation does not limit the original jurisdiction of the English courts, because schemes are not proceedings within the scope of the Insolvency Regulation. However, it was the application of the Judgments Regulation, and the potential restrictions that it may impose on the court's jurisdiction to sanction the scheme of a company with its Comi in another member state, which caused the judge some concern.

He concluded that the Judgments Regulation does apply to schemes, on the basis that article 1(1) provides that the Judgments Regulation applies to 'civil and commercial matters, whatever the nature of the court or tribunal'. He then asked whether 'jurisdiction to entertain the scheme could in fact be found within its provisions.' The judge first considered article 25(1) of the Judgments Regulation, which gives a court jurisdiction if the parties to the relevant agreements have agreed to submit to the relevant court for the purposes of settling disputes. The facility agreement documenting the Van Gansewinkel indebtedness included a 'one way' submission to jurisdiction clause pursuant to which obligors, but not the creditors, submitted to the English court's exclusive jurisdiction. This is somewhat unusual in today's leveraged finance market. The Loan Market Association's standard form leveraged facility agreement, which is considered to reflect English law market practice, contains a jurisdiction clause pursuant to which all parties submit to the jurisdiction of the English courts. The judge did not accept the argument that the court could accept jurisdiction on the basis of a facility governed by English law and a 'one way' submission to jurisdiction clause.

With article 25 unavailable, the judge asked if the court could justify taking jurisdiction pursuant to article 8(1) of the Judgments Regulation, which provides that a person domiciled in an EU member state may also be sued 'where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided that the claims are so closely connected that it is expedient to hear and determine them together'. The judge followed the sanction judgment in the Rodenstock scheme, where it was noted that as scheme creditors are entitled to appear in the English court and oppose the relevant scheme, they could be considered to be 'defendants' for the purposes of article 8(1).

In the absence of the creditors submitting to the exclusive jurisdiction of the English courts, the judge noted that the focus must be on the scheme creditors' domicile. If a sufficient number of scheme creditors are domiciled in England and Wales, an English court can take jurisdiction further to article 8 of the Judgments Regulation. While in Rodenstock more than 50% of scheme creditors were domiciled in England, the percentage of Van Gansewinkel creditors domiciled in in the country was around 14% by number and 12% by value. However, the judge was comfortable that this was a significant number and value, and sufficient to allow the English court to take jurisdiction pursuant to article 8.

The edge of what the English Court can do?

In September 2015, Codere, a Spanish company operating in the European and South American private gaming industry, proposed a scheme to its creditors. The scheme sought to restructure bonds issued by a Luxembourg entity, resulting in a transfer of majority control in the business to its creditors. At the convening hearing, the judge reluctantly made an order for the scheme meeting to proceed, having raised concerns as to the manner in which the debtor sought to establish sufficient connection with England. An English company had been acquired by Codere for the purpose of assuming the issuer liabilities of the Luxembourg vehicle. The judge observed at the convening hearing that 'It seems to me that this is at the edge of what an English Court can do'. He noted that if the Codere scheme were to be sanctioned, the English court could arguably sanction a scheme proposed by 'any company anywhere in the world'.

Codere was not the first overseas company to establish or acquire an English entity for scheme purposes. In 2015, Affinion did the same. However, its use of this structure may be distinguished from Codere on the grounds of 'commercial necessity'. The technique was used in the Affinion scheme to avoid triggering events of default under New York-law governed finance agreements, and the judge noted that this approach had a 'solid grounding in commercial necessity'. The Codere convening hearing was the first time that the 'new entity' approach had been strongly criticised by an English court.

At the sanction hearing on December 17 2015, the judge (not the judge who had heard the convening hearing) noted that Codere's forum shopping might be considered undesirable if the objective were to take advantage of a more favourable insolvency regime. However, in this case he noted that forum shopping should be encouraged if it achieves the best possible outcome for the creditors. Contrasting an estimated 47% recovery for creditors pursuant to the scheme with a likely recovery of zero under Spanish insolvency proceedings, he determined that the Codere scheme 'appears to be very much in the interest of the group of creditors' and so should be sanctioned. In addition, the judge recognised that the fact that the scheme proposals were formulated in close consultation with the creditors, and the 'overwhelming' level of creditor support, with 98.78% voting in favour (not a single creditor challenged the scheme), supported his decision to sanction the scheme.

"Many companies will continue to head to London to seek approval of their proposals by way of a scheme"

While Codere had sought to establish a jurisdictional connection by means of the English company assuming the issuer liabilities, the judge noted other evidence presented to support the sufficient connection argument. Referring to the Magyar Telecom scheme judgment, counsel for Codere argued that a sufficient number of creditors subject to the jurisdiction of the court could supply the necessary connection, as those creditors would be bound to act in accordance with the scheme, both within and outside the jurisdiction. In this case, creditors representing 97% in value had confirmed in writing their submission to the jurisdiction of the English court, an indication of their support for the scheme procedure and willingness to be subject to English law procedures. The connection argument was supported by evidence that 22% of scheme creditors by value were domiciled in England; this also being a sufficient number to allow the judge, following the Van Gansewinkel judgment, to justify taking jurisdiction pursuant to article 8 of the Judgments Regulation. The intercreditor agreement and lock-up agreement (signed by approximately 97% of creditors) were both governed by English law, adding further weight to the sufficient connection argument. In addition, the judge observed that the note and security trustees carried out their roles from their London offices. Although some of these supporting arguments, if taken in isolation, may not have been sufficient to establish a sufficient connection, together they served as a persuasive body of evidence to support the principal argument of a transfer of liabilities to an English entity.

What's next?

Further to concerns identified at the Van Gansewinkel sanction hearing and Codere convening hearing, restructuring practitioners may have wondered if the English courts would become more reluctant to exercise their discretion to sanction a scheme. However, while the courts continue to take a robust and stringent approach in assessing whether or not to sanction a scheme, recent judgments have added to the restructuring lawyer's 'sufficient connection toolkit' and provided further clarification on how a court will exercise its discretion. Foreign companies proposing schemes in the future may wish to present as many 'sufficient connection' arguments as possible to increase the likelihood that the discretion to sanction is exercised.

As Lord Denning observed in The Atlantic Star [1973], 'if the forum is England, it is a good place to shop in, both for the quality of the goods and the speed of service.' Many foreign companies planning a restructuring take the same view, and will continue to head to London to seek approval of their proposals by way of a scheme.

By Milbank Tweed Hadley & McCloy associate Matthew Czyzyk in London