Over the last 20 years, the scheme of arrangement under what is now part 26 of the Companies Act 2006 has become one of the most successful methods of restructuring and rescuing larger companies and groups which have encountered financial difficulty. That success has been achieved in parallel to a similar rise in popularity of the scheme as a method for achieving the takeover of highly solvent and successful public companies. The attraction of the scheme in the restructuring context is due in no small measure to the inherent flexibility that comes from a simple statutory code and the common law system of precedent that has enabled the scheme to be adapted to changes in business needs. That flexibility is complemented by the market-leading expertise and innovation among the English legal profession, and the practical and constructive approach of the experienced judges of the Business and Property Courts which oversee the scheme process.
In a world which has increasingly (and rightly) emphasised the collective and co-operative nature of international insolvency, and has adopted the centre of main interests (Comi) as the basis for the assumption of jurisdiction, the English courts have adopted a more flexible jurisdictional test of 'sufficient connection' for scheme cases. This has, in particular, permitted schemes to be sanctioned in England for overseas companies whose Comi is in another country or for groups of companies whose Comis are in many jurisdictions, but where their connection with England consists of the fact that the debts to be restructured are governed by English law and a material proportion of their creditors are based here.
It should be borne in mind that in such cases it is not the English courts that have gone out of their way to attract overseas business. It is the overseas companies themselves who have sought the assistance of the English courts to overcome the lack of suitable restructuring procedures in their own countries and thereby to preserve value for their creditors. That necessity has led, in some cases, to companies and groups seeking to shift their Comi to the UK or to change the governing law of their debt to English law.
Notwithstanding that the development of the scheme in such cases has been demand-led, some commentators and overseas professionals have been critical of such cases as a potentially exorbitant exercise of jurisdiction by the English courts. But that view also ignores the fact that when deciding whether or not to exercise its discretion to sanction a scheme, the English court will always have regard to the question of the practical effectiveness of the scheme. In the case of an overseas company, that means that the judge will wish to understand and have persuasive evidence of the extent to which the scheme will be acceptable to and recognised by the courts in other jurisdictions in which the company conducts its operations and has significant assets.
This requirement for practical effectiveness and recognition is likely to be one of the main areas of debate in international scheme cases in the next few years. For cases in which the Comi of the scheme company is in England, there is unlikely to be much issue over recognition in countries such as the US that have adopted the UNCITRAL Model Law. The same should apply in the EU even though few EU member states have adopted the Model Law. The scheme has never been part of the EU's Comi-based Insolvency Regulation, and it self-evidently will not be covered by the European Commission's Comi-based proposed directive on preventive restructuring. But the fact that the scheme has not been classed as an insolvency proceeding has not proved a barrier to the prevailing view that it would be recognised in other EU countries, and where the Comi of the scheme company is in England, it is difficult to envisage on what principled basis an English scheme would be denied recognition by an EU member state.
The position where the Comi of the scheme company is not in England may raise more difficult questions. But in such a case, recognition can be afforded to a scheme under the UNCITRAL Model Law as a foreign non-main proceeding, and there is no reason why the statutory effect of a scheme which requires the sanction of the English court should not, in an appropriate case, be similarly recognised by EU countries under their domestic laws or under a specific regime which might be negotiated as part of the Brexit arrangements.
The English courts understand that a critical factor in achieving such recognition as a matter of discretion in any foreign country will be the view taken abroad of the rigour of the judicial process leading to sanction in England. It is for that reason that English judges have, for the last several years, placed a premium on adherence to the highest standards of procedure and disclosure in scheme cases, both to creditors and to the court, and have been assiduous to scrutinise the fairness of the terms of a scheme even in the absence of opposition from individual creditors. As has been said many times, it is vital that the English court is not seen simply as a rubber stamp for the wishes of the majority.
Another area in which it can be anticipated that the courts will see developments over the next few years is in the area of valuation. The issue of the appropriate approach to valuation of the business and assets of companies which are restructuring to avoid a formal insolvency, is one which has been much debated in the US, but which has received little detailed attention in the UK. The government's consultation on introducing cross-class cram-down in scheme cases would, if implemented, certainly spark that debate in the courts. In such a regime, the involvement of an experienced judge in the process to protect the legitimate interests of minorities whilst preventing illegitimate holdouts is essential, and it remains to be seen whether the implementation of the proposed EU directive in the various EU member states will achieve the right balance in that regard. Even if the UK government's proposals are not implemented, it should not be assumed that the valuation issue will go away. It is inherent in the debate as to which creditors are in or out of the money and could be rekindled in the context of the current framework under which a company's business is restructured by the use of a scheme combined with a sale in a pre-pack administration.
A third obvious area for potential debate in the next few years is the extent to which the common law principle that substantive amendments to contractual rights should only be permitted in accordance with the law that the parties have chosen to govern those rights should apply in a restructuring context. The issue of precisely when party autonomy should give way to the needs of collective procedures is a difficult one upon which views differ, both in the common law and civil law worlds.
Returning to the broader picture, none of the essential features of the English system which have contributed to the success and worldwide acceptance of the scheme of arrangement will change after Brexit. The unrivalled depth of expertise and the flexibility available in London will still be available, and provided that there is a sufficient connecting factor, can be used to provide an effective and co-ordinated solution for overseas companies or groups who do not have a suitable solution available elsewhere. Moreover, for so long as there is a desire to restructure debts to avoid formal insolvency proceedings and English law retains its pre-eminence as the law of choice in financial matters, the availability of a restructuring solution in the country whose law has been chosen by the parties to govern their rights will remain highly relevant.
Accordingly, as the UK faces the challenges of Brexit and the EU contemplates the Commission's proposed restructuring directive, the judiciary in England are ready to play their part in ensuring that the scheme of arrangement continues to be an accessible and innovative restructuring technique. The key to achieving that goal is to maintain a rigorous judicial process with suitable protection for minorities, so that the scheme jurisdiction is exercised only where it is appropriate to do so, and continues to attract approval and recognition in other countries.
|About the author|
The Hon. Mr. Justice Richard Snowden
Mr. Justice (Richard) Snowden studied law at Downing College, Cambridge from 1981 to 1984, graduating with a first class degree. He was awarded the Joseph Hodges Choate Fellowship to Harvard University in 1984 and obtained an LL.M degree from Harvard Law School in 1985.
Mr. Justice Snowden was called to the Bar in 1986. He was appointed Junior Counsel to the Crown (A Panel) in 1999 and served as a member of the Insolvency Rules Committee between 2002 and 2012. He was appointed Queen's Counsel in 2003, a Recorder of the Crown Court in 2006 and was authorised to sit as a Deputy High Court Judge in 2008. He was appointed as a High Court Judge of the Chancery Division in April 2015 and was appointed to the Financial List in October 2015.
At the Bar, Mr. Justice Snowden specialised in corporate, corporate insolvency and financial services litigation. Notable insolvency cases included BCCI, Maxwell, Federal-Mogul and Lehman Brothers. Since appointment to the High Court he has given judgments on a variety of topics including stock market manipulation, cross-border insolvency and reconstructions (he is the assigned judge for the Nortel insolvencies) and financial market instruments and derivatives.
Mr. Justice Snowden is one of the editors of Lightman and Moss on the Law of Administrators and Receivers of Companies, and a contributor to Commentary on the European Insolvency Regulation (ed. Bork and Van Zwieten).