IS THERE ANY ROOM AT THE INN?
A STUDY OF THE ENGLISH SCHEME OF ARRANGEMENT AND
ITS HOSPITALITY TO OVERSEAS COMPANIES
University of Amsterdam
Faculty of Law
European Private Law
DANIEL KEEGAN
Student no: 10866159
Supervisor: Dr. Titia Bos
Table of Contents
CHAPTER I - INTRODUCTION 3
1.1 Background 3
1.2 Research Question 6
1.3 Outline of Paper 7
CHAPTER II - THE ATTRACTION OF SCHEMES OF ARRANGEMENT 8
2.1 An overview of schemes 8
2.2 Insolvency Law Theory 9
2.2.1 Creditors’ Bargain Theory explaining insolvency law as overcoming common pool
problems 9
2.2.2 Theory of Anticommons 11
2.3 Scheme advantages 11
2.3.1 Minority Cramdowns 11
2.3.2 Court discretion 13
2.3.3 Flexibility & Informal Nature 14
CHAPTER III – SCHEMES OF ARRANGEMENT & CONFLICTS OF LAW 17 3.1 Schemes of Arrangement & Jurisdiction 17 3.1.1 Domestic Jurisdiction to Sanction Schemes 17 3.1.2 Impact of European Regulation 23 3.2 Schemes & Recognition and Enforcement 35 3.2.1 Recognition under the Insolvency Regulation 36 3.2.2 Recognition under the Judgments Regulation Recast 36
3.3 Summary 39
3.4 Outlook: Insolvency Regulation Recast 40 3.4.1 Objectives of Insolvency Regulation Recast 40 3.4.2 Scope of Insolvency Regulation Recast 41
CHAPTER IV - SCHEMES & FORUM SHOPPING 43
4.1 Efficient nature of schemes 44
4.2 Fairness of schemes 46
4.3 Forum Shopping & Regulatory Competition 47
CHAPTER IV - CONCLUSION 50
Chapter I - Introduction
1.1 Background
The City of London has long been heralded for its hospitality and receptiveness to financially distressed debtors.1 Much of this can be attributed to the commercially sensible and pragmatic approach of the English legislature and courts to debt restructuring. In the wake of the financial crisis there has been a surge in companies making use of the English scheme of arrangement to reorganise their capital structure. The scheme of arrangement, or scheme, has proved a popular restructuring tool not only for English companies but for non-English companies as well as there have been a number of high profile cases where foreign companies have flocked to English shores to make use of the scheme. Much of this can be attributed to their flexibility and willingness of the English court to sanction schemes in respect of foreign companies. Recent examples include the high profile restructurings of TeleColumbus GmbH, Rodenstock GmbH, PrimaCom Holdings GmbH, Re Metrovacesa S.A., Re Apcoa Parking GmbH, Magyar Telecom N.V. and Zlomrex International Finance S.A.2
The English Scheme of Arrangement is a flexible and long-established Companies Act measure that can by financially distressed companies to reorganise the company’s capital. 3 A scheme of arrangement is essentially a compromise or arrangement between a company and their creditors or members about anything that they can properly agree amongst themselves. Provided this compromise or arrangement receives the support of the statutory majorities of each class of creditor and/or shareholder whose rights are affected by it, and is approved by the court, the
1 J Armour & S. Deakin, Norms in Private Insolvency: The London Approach to the Resolution of 2 TeleColumbas GmbH, unreported,14 Decemb er 2010, Ch (involving a German registered company);
Re Rodenstock GmbH [2011] EWHC 1104 (Ch) (involving a German registered company); Primacom Holdings GmbH [2012] EWHC 164 (Ch) (involving a German registered company); Re Metrovacesa SA, unreported, 29 March 2011, Ch (involving a Spanish registered company); Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch) (involving a German registered company); Re Magyar Telecom B.V. [2013] EWHC 3800 (Ch) (involving a Dutch registered company); Re Zlomrex International Finance S.A [2013] EWHC 4605 (Ch) (involving a French registered company).
3 Origins of schemes lie in the s. 136 of the Companies Act 1862. This provision provided for an arrangement entered into between a company and its creditors, but only where the company was about to be, or was in the course of being, wound up voluntarily. Such an arrangement would be binding on the company if sanctioned by an extraordinary resolution (75% of all members), and on its creditors if acceded by 75% of their number and value.
compromise or arrangement will then be binding on all parties involved irrespective of whether they supported it or not. Consequently this makes schemes an extremely useful and valuable tool for a wide variety of internal reorganisations of debt and/or equity capital, so long as the requisite approvals have been obtained.
In the cases that shall be discussed, the companies in question were registered in other EU Member States and had neither their seats nor their centre of main interest (COMI) in the UK. Two issues arise which warrant serious consideration. First, does the English court have jurisdiction to sanction a scheme in respect of a foreign company and, secondly, will a scheme sanctioned by an English court in relation to a foreign company be legally effective in a relevant foreign jurisdiction?
These issues are complicated due to the existence of EU Regulations, namely the European Insolvency Regulation No. 1346/20004 (hereinafter the Insolvency Regulation) and Regulation No. 44/2001 on Jurisdiction, Recognition and Enforcement of Judgments in Civil and Commercial Matters5 (hereinafter the Judgment Regulation). Both Regulations are intended to provide a pan-EU conflicts of law framework in respect of jurisdiction, recognition and enforcement of judgments with the Insolvency Regulation being confined to “collective insolvency proceedings, which entail the partial or total divestment of a debtor and the appointment of a liquidator”6 and the Judgments Regulation more of a “catch-all” for
“civil and commercial matters”. 7 These Regulations should provide a conflict of laws framework as to how to treat schemes but neither Regulation offers an obvious answer. This makes it problematic.
In all of the cases where the courts have sanctioned schemes in respect of non-English companies, they have done so on foot of their own conflicts of law rules. However their reasoning in doing so and asserting that they will be given recognition in other EU Member States has been inconsistent to say the least.
4 Council Regulation (EC) No. 1346/2001 of 29 May on Insolvency proceedings. In the following it shall be referred to as the Insolvency Regulation.
5 Council Regulation (EC) No. 44/2001 on Jurisdiction, Recognition and Enforcement of Judgments in Civil and Commercial Matters. In the following it shall be referred to as the Judgments Regulation. 6 Ibid, Article 1.
Moreover, there is a deeper jurisprudential issue at the heart of these cases. The manner in which foreign companies have availed of English schemes undeniably amounted to forum shopping. In regard to insolvencies forum shopping often receives bad press as it is commonly associated with impropriety as a debtor may seek a forum that will further his interests to the detriment of creditors. This in turn diminishes the certainty of credit contracts. Such behaviour unquestionably takes place and therefore it is one of the objectives of the Insolvency Regulation “to avoid incentives for the parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position to the detriment of the general body of creditors”.8
However, in the cases which shall be discussed it is questionable whether there is any “wrong-doing” present as the companies in question have generally sought to make use of the English scheme because a similar pre-insolvency restructuring device was not available in the jurisdiction in which they were incorporated, and there was no equivalent means to restructure the debts in that jurisdiction.
Furthermore, the Amendments to the Insolvency Regulation that have been passed by the European Parliament and set to come into force in September 2016 adds another dimension to the mix. In recognition of the debt restructuring tools in EU Member States the Insolvency Regulation Recast broadens the scope of its predecessor to cover so-called “hybrid insolvency proceedings” but stops short of explicitly including schemes in its Annexes. As well as building on its predecessor’s objectives of “effective administration of cross-border insolvencies” and curbing forum shopping it also seeks to promote a corporate rescue culture through the EU.9 However, these are high-minded ideals and they may conflict as there be instances where it may be conducive to the effective and efficient administration of cross border insolvencies and the creation of a European corporate rescue culture to allow forum shopping to persist.
8 Insolvency Regulation, Recital 4.
1.2 Research Question
In light of the information given above this thesis seeks to present an argument that forum shopping is not always so problematic. More specifically this paper asserts, contrary to the views of the European Parliament, that forum shopping of in respect of schemes should be nurtured as it may lead to a positive outcome for the parties involved. Furthermore, this paper shall present market arguments that forum shopping in respect of schemes may lead to an improvement in the restructuring law standards in other EU Member States.
Therefore this thesis seeks to examine the operation of the scheme of arrangement and its attractiveness to financially distressed companies. This is to be evaluated against the backdrop of the prevailing insolvency law theories – the creditors bargain theory and theory of anticommons. Secondly, it seeks to explore conflicts of law issues
vis-à-vis the scheme of arrangement – both domestic and European. Thirdly, these issues
will be discussed with a view to examining whether or not it is beneficial for the Internal Market to foster the use of schemes by non-English companies or whether the EU should intervene and prevent such companies from forum shopping. As this paper requires an overview of the relevant case law and legislation, which is then to be evaluated within theoretical paradigms of insolvency law, descriptive and normative methods will be deployed.
Accordingly the thesis shall concrete on the following main research:
Should the Schemes of Arrangement be included in Annex A of the European Insolvency Regulation Recast?
This pertains to the following sub-questions:
1. Why is the English scheme of arrangement attractive to financially distressed companies?
2. What is the legal basis by which English courts adopt jurisdiction to grant schemes in respect of non-English companies?
3. What interaction does the scheme make with the respective Insolvency and Judgment Regulations?
4. Should forum shopping of this nature be prevented or is it more advantageous to European business culture to allow it?
These questions shall be analysed against the backdrop of the two policy goals which the European Commission seeks to balance – namely curbing the effect of forum shopping while at the same time promoting a recovery and rescue culture for financially distressed but economically viable companies.
1.3 Outline of Paper
This thesis shall break down to the following sections. The first section shall address the attractiveness of the scheme of arrangement as a debt-restructuring tool. This shall present the theoretical framework of what insolvency law tries to achieve and will critically analyse the operation of the scheme of arrangement. The second section will address the conflict of law issues. Namely the manner in which the English courts have been sanctioning schemes in respect of non-English companies, the interaction these judgments have had with EU legislation and the issues regarding recognition and enforcement in other Member States. The third section will evaluate the findings of sections of the previous two sections and access any potential benefits of allowing forum shopping of this nature to continue. The final section shall conclude the argument and provide an answer to the overarching question as to whether the scheme of arrangement should be included in Annex A of the Recast.
Chapter II - The attraction of Schemes of Arrangement
2.1 An overview of schemesThe essential feature of a scheme is that it may modify the rights of the creditors and members of a company. The key provisions of schemes are found in Part 26 of the Companies Act 2006. Section 895(1) defines a scheme of arrangement as “a compromise or arrangement between a company and its creditors, or any class of them, or its members, or any class of them”.10 The statutory provisions in the Companies Act abdicate defining the subject matter of a scheme. Therefore, in theory, a scheme could be a compromise or arrangement between a company and its creditors or members about anything that they can properly agree amongst themselves. Consequently a company can use schemes for a wide variety of internal reorganisations of debt and/or equity provided the necessary approvals have been obtained.
A scheme is a three-stage process.11 The first stage of the process is a proposal of a “compromise or arrangement” between the company and its creditors. The Board of Directors usually carries out the proposal on the company’s behalf. Following the proposal an application is then made to the court for an order that a meeting or meetings be summoned.12 The second stage is approval of the proposal by the
members and creditors. The members and creditors are divided into classes in order to vote and a court may not sanction the scheme unless all the majorities of the relevant classes approve. A majority of 75% per class is needed to approve the scheme.13 The traditional test for determining the class division is done with reference to those “whose rights are not so dissimilar as to make it possible for them to consult together with a view to their common interest.”14 Thirdly, the scheme must then be sanctioned
10 Companies Act 2006, s. 895(1).
11 Jennifer Payne, Cross-border Schemes of Arrangement and Forum Shopping, 14 European Business Organization Law Review 4 (2013) pp. 563-589, at p. 565.
12 Companies Act 2006, s. 896. 13 Ibid, s. 899(1)
by the court, and the court’s order will become effective once a copy of it is delivered to the Registrar of Companies.15
2.2 Insolvency Law Theory
Schemes have many advantages that help companies to manipulate their capital effectively and therefore are highly attractive and useful for financially distressed companies. In order to fully appreciate their utility and attractiveness we must first have a good understanding as to what insolvency law is trying to achieve. In this regard the influential Creditors Bargain Theory and Theory of Anticommons can provide some valuable insights.
2.2.1 Creditors’ Bargain Theory explaining insolvency law as overcoming common pool problems
The dominant theory regarding the nature of insolvency law and what it should accomplish is still the creditors’ bargain theory.16 This theory, in short, views insolvency as a common pool problem and, accordingly, insolvency law as asset of rules to overcome common pool problems. The creditors’ bargain theory therefore poses the hypothetical question what would creditors agree upon in the case insolvency laws did not exist. According to the theory, creditors would agree upon taking part in such collective proceedings.
In the event that insolvency law did not exist, common pool problems would raise an ugly-head as creditors would invariably act in a self-interested manner. This would inevitably lead to the free-for-all of asset grabbing where some creditors would unfairly end up in a better position than others. The problem is similar to other common pool problems such as fishing in a lake or grazing of lands. If all parties would act in a self-interested manner, they would try to catch as many fish as possible, or have their cattle graze as much as possible, even to the extent that all the
15 Companies Act 2006, s. 899(1).
16 This has been mainly developed by the American scholars Jackson and Baird. See T.H. Jackson, Bankruptcy, Non-bankruptcy Entitlements, and the Creditors’ Bargain, 91 Yale Law Review (1982), at pp. 862-863; D.G. Baird and T.H. Jackson, Corporate Reorganizations and the Treatment of Diverse
Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 University of Chicago Law Review (1984); and T.H. Jackson, The Logic and Limits of Bankruptcy Law
resources would be exhausted.17 The underlying problem in any common pool situation is recognised as a prisoners’ dilemma.18 Though parties know that if they
cooperate they may all be better off, they cannot rely on other parties not to act in an entirely self-interested manner. Therefore, parties tend to only act in their self-interest and thereby bring about a suboptimal result, also referred to as a tragedy of the commons.19 Contextualizing this to insolvencies, frenzied asset grabbing on a financially distressed but economically viable debtor on the eve of insolvency would lead to the dissipation of a potentially viable business.20 If all creditors were free to act in a self-interested manner and haphazardly enforce their claims the
going-concern value would be lost.21 Additionally the lack of clear and coherent insolvency rules would potentially lead to costly all-against-all litigation amongst competing creditors. Accordingly insolvency law seeks to prevent this through a coordinated procedure that maximizes the assets to be dispersed amongst the creditors.
17 R.J. de Wiejs, Harmonisation of European Insolvency Law and the Need to Tackle To Common
Problems: Common Pool Problems, 21 International Insolvency Review 2 (2012), pp. 67-83, at p. 70.
18 The basic prisoners’ dilemma concerns two prisoners, prisoners 1 and 2, who are suspected of having committed a crime together. If neither of the prisoners confesses, the public prosecutor can only prove the less severe crime. If one of the prisoners confesses, the prosecutor can also prove the crime. In the dilemma, the prosecutor offers each prisoner the following deal: if you confess and are the only one to do so, I will drop all charges against you; if you both confess, I will see to it that each of you is sentenced for 3 years; if neither of you confesses, each of you will be sentenced for unlawful possession for 1 year; if you do not confess, but your criminal partner, does, I will use that testimony to sentence you for 5 years. The prisoners cannot communicate with each other. The best strategy for the prisoners together is to both not confess (i.e. ‘to cooperate’ with each other) in which case they each face a total jail time of 1 year. If they both confess (i.e. ‘defect’), they will both face jail time of 3 years. Regardless of the choice made by prisoner 1, prisoner 2 can always maximise his individual outcome by confessing. If prisoner 1 confesses, this will mean a 5-year jail sentence for prisoner 2 if he does not confess, compared to a 3-year jail sentence if he also confesses. If prisoner 1 does not confess, this will mean a 1-year jail sentence for prisoner 2 if he does not confess, compared to no jail sentence at all if he confesses. The lesson from the prisoners’ dilemma is that although the best strategy for the parties would be to cooperate with each other and not confess, the dominant strategy for each individual prisoner is to defect and confess. See Jackson, The Logic and Limits of Bankruptcy Law,
supra n. 16, at p. 10.
19 R. de Weijs, Too Big to Fail as a Game of Chicken with the State: What insolvency law theory has to
say about TBTF and vice-versa, 14 European Business Organization Law Review 2 (2013) pp.
201-225, at p. 209.
R.J. de Weijs & M.S. Breeman, COMI-Migration: Use or Abuse of European Insolvency Law, 11 European Company Financial Law Review 4 (2015), pp. 495-530, at p. 508.
21 As Jackson put it, supra n. 16 The Logic and Limits of Bankruptcy Law, at p. 14: “To the extent that a non-piecemeal collective process (whether in the form of a liquidation or reorganization) is likely to increase the aggregate value of the pool of assets, its substitution for individual remedies would be advantageous to the creditors as a group. This is derived from the commonplace notion: that a collection of assets is sometimes more valuable than the same assets would be if spread to the winds. It is often referred to as the surplus of a going-concern value over a liquidation value.”
2.2.2 Theory of Anticommons
However, the creditors’ bargain theory, as insightful as it may be, only paints the picture of one side of the coin as it overlooks what happens once parties are locked into collective procedure. At this stage the tragedy of the commons is successfully overcome. Once parties are locked into collective procedure their behavior mutates. Instead of trying to opt out of the procedure, they might try advance their own interest by frustrating or threating to frustrate the collective procedure by holding out. Such behavior can be best understood not by applying the theory of common pool problems, but by using the theory of anticommons.22
The concept of anticommons can be best explained by contrasting it to a common pool problem such as fishing in a lake. In the case of a common pool problem, none of the parties has it within its powers to prevent others from fishing or even overfishing in the lake. In an anticommons situation, the opposite is the case. In such a situation all parties may make use of the lake but here the legal structure is such that
none of the parties can fish in the lake unless all the parties agree. Essentially each of
other parties has a veto right. The likely consequence is that quarrels will result in a situation where nobody goes fishing until the voting problem is overcome by some form of procedure. The problem of anticommons essentially mirrors that of common pool problems. Where the typical effect of a common pool is overuse, the existence of anticommons is likely to be underuse, because all of the parties can veto the use by the other parties. This paradigm is vital for understanding the attractiveness of schemes.
2.3 Scheme advantages
2.3.1 Minority Cramdowns
In the context of insolvencies this anticommons problems commonly manifests itself in respect of composition plans or more complex reorganisation plans. In crude terms a composition plan offers creditors a certain percentage to be paid on their claim against which the creditor relinquishes the debtor for the remainder of the debt which
22 For further discussion see L.A. Fennel, “Commons, Anticommons, Semicommons”, n K. Ayotte and H.E. Smith, eds., Research Handbook on the Economics of Property Law, Cheltenham, Edward Elgar Publishing, 2011.
is higher than what the creditors could reasonably expect upon liquidation. Such plans provide an alternative route to straightforward liquidation and are often made prior to formal insolvency with the aim of preventing formal insolvency proceedings. In debt reorganisations it is generally the case that creditors’ rights cannot be varied without the creditors’ consent. Where all creditors are required to agree, a single creditor could, and most likely would, frustrate the collective process.
The key advantage of schemes is that they prevent such behaviour from happening by allowing the majority of the creditors and/or members bind the minority. If a “majority in number representing 75% in value”23 of the creditors and/or members (or class of them) vote in favour of the scheme, and is subsequently sanctioned by the court, then it will bind all the company’s members or creditors in the relevant classes and the company itself. Accordingly any potential hold-out by the minority is circumvented by the use of a scheme.
The ability of the majority to bind the minority in a scheme is referred to as a
cramdown. As approval of schemes is classed based, the form of majority
decision-making is different from its contemporaries available in other jurisdictions. For instances in Chapter II reorganisations in the US it is possible for a whole class of creditors to be crammed down, i.e. to have their rights adjusted without their consent.24 A similar form of cramdown is also present under the German insolvency
plan25 and in Irish examinership proceedings.26 By contrast, the English scheme allows only minority creditors and members within a class to have their rights varied without their consent. This class division is particularly useful for overcoming anticommons issues.
One of the core principles of insolvency law is the pari passu treatment of creditors, i.e. they are all treated equally. However in the case of debt restructuring if all creditors were treated equally it would make little sense for small creditors to consent to a composition plan.27 For instance if Creditor A has a claim of €1,000,000 and
23 Companies Act 2006, s. 899(1).
24 Chapter 11 of the US Bankruptcy Code, s. 1129.
25 German Insolvency Statute (Insolvenzordnung), § 217-69
26 Irish Companies (Amendment) Act 1990 as amended by Irish Companies (Amendment)(No. 2) Act 1999, Part II.
27R. de Wiejs, Harmonisation of European Insolvency Law and the Need to Tackle To Common
Creditor B has a claim for € 100,000 and both are presented a proposal for the diminution of their claim to 15%, it is unlikely that such a proposal would be accepted by Creditor B. A solution is to create classes of creditors in which small creditors receive a higher percentage. Therefore increasing Creditor B’s claim to 40% would make the composition plan a lot more persuasive and help overcome any hold out problems that may present themselves.
Moreover, in spite of this friction with pari passu, the class division nevertheless ensures there is some degree of equality amongst the creditors as each class carry equal voting power. A class of big creditors are more likely to consent to a composition plan given they are likely to sustain a hit to the balance sheets whereas a class of small creditors might be more susceptible. The class division ensures that there is a degree of fairness as classes will only approve a scheme if the majority of that class find it feasible.
2.3.2 Court discretion
The nature of schemes inevitably gives rise to issues of minority protection. In order to prevent abuse of a minority there is close court oversight of the scheme process. Two court hearings are involved. The first sets up the requisite meetings of creditors or members (or classes thereof), and the meetings themselves are conducted in accordance with directions given by the court.28 The second meeting considers whether the scheme should be sanctioned.29 It must be borne to mind that this is not a mere rubberstamping process. The court enjoys discretion whether to sanction a scheme or not - there is no obligation to sanction.30 For instance the court may refuse
to sanction schemes where they believe that the majority has not voted in the interests of the class as a whole or where there is a degree of fraud present. In this regard properly balancing the interests of the majority and the minority is perhaps the central task of the court. The fact that the courts are so heavily involved in the process
28 Companies Act 2006, s. 896(1). 29 Ibid, s. 899(1).
30 Scottish Lion Insurance Co Ltd v.(First) Goodrich Corp [2009] CSIH 6;[2010] BCC 650 at [36] per Lord Hamilton, the Lord President.
provides schemes a dual nature: they are at once agreements between the parties (the company and its members and/or creditors) and court-sanctioned arrangements.31
2.3.3 Flexibility & Informal Nature
The ability to cramdown minority creditors within a class is one of the defining features of schemes. However there are many characteristics of schemes that make them attractive to debtors, particularly in comparison to foreign restructuring models.
The central idea of a scheme is that it can be used by companies, creditors and members to agree to a wide variety of reorganisations or alterations of a company’s capital. Therefore schemes are extremely flexible. This enables schemes to be used either as an alternative to, or alongside, more traditional mechanisms for reorganising a companies capital. Consequently schemes have been used to give effect to debt write-downs, pre-pack sale of companies and distribution of companies’ assets to creditors. Furthermore as creditors and debtors can initiate a scheme at any time, there is no need to for the company to be insolvent before utilising the procedure. The positive effects of this are threefold.
First, it allows companies to tackle their debts at an earlier stage than might otherwise be possible. In their Action Plan on a new approach to business failure and insolvency, the European Commission recongised this as being imperative for enabling a financially distressed companies to stablise their balance sheets.32 By
doing so, companies are afforded a greater chance of preventing insolvency from taking place, thereby maximising the total value creditors, employees and the economy as a whole. Moreover, the later a business initiates restructuring proceedings, the higher the restructurings costs are and the more likely it is that the company will fail.33 Continental debt-restructuring models allow companies to tackle their debts at an early stage but, unlike schemes, they only facilitate cramdowns after formal insolvency proceedings have been opened.
31 Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation, p. 5.
32 See Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: A new European approach to business failure and insolvency, COM (2012) 742 final. This document also dates from 12 December 2012
33 See Commission Impact Assessment on the new Approach to Business Failure, SWD (2014) Final, at p. 8.
Secondly, as it is not an insolvency proceeding, and is used to prevent any such insolvency proceeding from taking place, a scheme can be used to avoid any stigma that may be attached to insolvency and preserve the goodwill and reputation of the company. This is of vital importance as the adverse publicity that would often follow the commencement of formal insolvency proceedings can have a significant impact on the company’s ability to survive and on the realisable value of the assets.34
Thirdly, schemes constitute debtor-in-possession proceedings. This means that the directors largely stay in control of the destiny of the company which is contrast to many other restructuring proceedings which involve a third party coming in to take control. It could be argued that there is a disadvantage to allow the people who lead the company into distress remaining in control but the flipside is that it puts on onus on debtors to engage in early restructuring. Furthermore it ensures a minimum disruption to the day-to-day running of the company and the debtor can pursue his/her business. Taken together these aspects of schemes are in place to maximise the value of the company and therefore fall under the paradigm of the creditors’ bargain theory.
Another aspect of there attractiveness is their accessibility - particularly in relation to non-English companies. As previously stated the use of schemes by non-English companies has proliferated in recent years as companies from around the world have flocked to England to make use of their schemes. A number of first-instance decisions have had to tackle this controversial issue. In most cases companies have flocked to England simply because their domestic legislation was ill-equipped to cater their needs. The case of Re Rodenstock illustrates this quite well.35
Rodenstock GmbH was a German registered company on the brink of insolvency and sought to make use of the flexibility and practicality of schemes to rework their debt. At the time of Rodenstock’s contemplated restructuring (before 2012), there was no German equivalent of a scheme that would allow them to put in place an effective pre-insolvency restructuring. The company sought to inject some fresh liquidity, but lenders were only willing to do so if the company could properly secure their claims
34 See Finch, Corporate Insolvency Law: Perspectives and Principles, Cambridge University Press 2002, p. 208; Brown, Corporate Rescue: Insolvency Law in Practice, Chichester, 1996, pp. 11-13; and N. Segal, Rehabilitation and Approaches other than Formal Insolvency Procedures, Oxford University Press, 1992, p. 133.
over other creditors. This required an amendment of the terms of the senior facilities agreement and the inter creditor deed, in order to enable €40 million of new money to be raised, ranking on a super senior basis. At the time German law required the unanimous consent of all the creditors and it was highly unlikely that would be achieved. The first option was to flock to England to make use of a scheme. The second option was a restructuring within a formal court-supervised insolvency proceeding, with all of the stigma of insolvency and other difficulties that this brings with it in practice. The same situation arose in Le Seda in respect to Spanish law.36 Given these unappealing choices, it is unsurprising that these companies regarded the English scheme as a more flexible and valuable option for carrying out their restructuring. The accessibility of the English scheme shall now be considered.
36 Alastair Goldrein, Ready, Willing and Able, But Perhaps Not Always Acceptable: UK Schemes of
Chapter III – Schemes of Arrangement & Conflicts of Law
Rodenstock and Le Seda have not been alone. As stated from the outset the use of schemes by companies by companies facing complex financial restructurings has surged in recent years. Much of this can be attributed to their flexibility and the court’s willingness to sanction their use by overseas companies as in many instances they have done so in respect of companies registered in Member States other than the UK, with their COMI and establishments off the isle’s shores.37 This in turn poses pressing questions about jurisdiction and recognition of schemes that shall now be addressed.
3.1 Schemes of Arrangement & Jurisdiction 3.1.1 Domestic Jurisdiction to Sanction Schemes
3.1.1.1 The meaning of “a company” for scheme purposes
The English court’s jurisdiction to sanction a scheme in respect of foreign company hinges on their jurisdiction to wind up the company in question. The starting point is to show that the foreign company can be considered as “a company” for scheme purposes as prescribed in s. 895 of the Companies Act 2006. Under this provision schemes may be sanctioned in respect of “any company liable to be wound up under the Insolvency Act 1986.”38 Under the Insolvency Act 1986 the court may wind up solvent and insolvent companies, as well as registered and unregistered companies.39 Furthermore, it is well established that “unregistered companies” includes companies located outside of the UK.40 The circumstances in which an unregistered company may be wound up are set out in s. 221(5) IA 1986 and covers the comprise of dissolution, cessation of business, carrying on business to effect a winding up of the company’s affair, inability of the company to pay its debts, or winding up on just and equitable grounds. Therefore, in theory, overseas companies may be wound up under the Insolvency Act on the basis that they are unregistered. Accordingly, schemes may also be granted in respect of foreign companies.
37 See supra n. 2. 38 CA 2006, s .895(2)(b). 39 IA 1896, s. 221(1).
3.1.1.2 Sufficient Connection
Although this criterion seems broad and far reaching, the English courts have not regarded them as offering a carte blanch to wind up/reorganise foreign companies without any further requirements. In order to restrict the otherwise very broad jurisdiction granted to them by the Insolvency Act, the courts have imposed a number of judge-made conditions for the making of a winding up order in respect of a foreign company.41 As Lawrence Collins J put it:
That companies fall within the definition of companies for the purpose of s. 425 [of the Companies Act 1985, now s. 899 of the Companies Act 2006] does not, of course, mean that there are no limitations to the exercise of jurisdiction under s. 425. The court should not, and will not, exercise its jurisdiction unless a sufficient connection with England is shown.42
Consequently, before exercising jurisdiction to wind up a foreign company, the court has to be satisfied the following three core matters exist43:
1. There must be a sufficient connection with England and Wales which may, but does not necessarily have to, consist of assets within the jurisdiction.
2. There must be a reasonable possibility, if a winding up order is made, of benefit to those applying for the winding up order.
3. One or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise a jurisdiction.44
As explained by Lawrence Collins J in Re Drax Holding Ltd, these conditions do not necessarily constitute preconditions to the existence of jurisdiction but rather go to the discretion of the court. 45 The first of these conditions is arguably the most important and has been the most widely used to establish jurisdiction. The purpose of this requirement is ensure that the English court declines to exercise “a prima facie exorbitant jurisdiction save where it [is] appropriate to do so.”46 What is considered to
41 Jennifer Payne, Cross-border Schemes of Arrangement and Forum Shopping, p. 571. 42 Re Drax Holdings [2004] 1 WLR 1049 at 29.
43 Stocznia Gdanska v Latreefers Inc (No. 2) [2001] 2 BCLC 116. 44 Re Real Estate Development Co [1991] BCLC 210 at 217.
45 Re Drax Holdings [2004] 1 WLR 1049, Re Rodenstock GmbH [2011] EWHC 1104. 46 Re Rodenstock GmbH [2011] EWHC 1104 at [21].
be a sufficient connection with England for this purpose has become settled over time, although, of course, it is a fact sensitive issue. Generally, two methods are used to establish sufficient connection:
1. Governing Law and Jurisdiction clauses in the contracts with creditors are either in favour, or have been amended to be in favour, of English law and English courts; or
2. Centre of Main Interests (COMI) has been shifted to the UK under the Insolvency Regulation, typically through a financial holding company, and a COMI within the jurisdiction has ben held to amount to a sufficient connection.
3.1.1.3 Reliance on Financing Arrangements
The traditional route by which foreign companies have satisfied the “sufficient connection” test is by having their financial arrangements governed by English law. Following Rodenstock it was established that even when the company is not based in England, and has no assets in England, the courts will readily accept jurisdiction where the relevant financing documents are English law governed and/or include a jurisdiction clause (exclusive or non-exclusive) in favour of English courts.47 This was confirmed in Re PrimaCom where a financially distressed German company (with neither its seat, COMI, an establishment nor creditors in the UK) successfully concluded an English scheme on the basis that their financing agreements were governed by English law.48
Furthermore it is also established that in the event that there choice of law/jurisdiction clauses the financing documents in favour of another governing law/forum, the courts will again adopt jurisdiction provided these amended to favour England. This was done in the case in Re Apcoa Parking Holdings GmbH where a German company with no previous connection to England whatsoever successfully availed of an English scheme.49 Apcoa did not hold any assets in the UK and the terms of all of their financing arrangements were all subject to German Law and the exclusive
47 Re Rodenstock [2012] BCC 459; Re PrimaCom (No. 2) [2013] BCC 219; and Re Nef Telecom BV [2012] EWHC2944 (Ch)).
48 Primacom Holding GmbH and others v Credit Agricole and others [2012] EWHC 164 (Ch). 49 Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch)
jurisdiction of the courts of Frankfurt/Main. Nevertheless, after a majority creditor approval in accordance with the provisions of the Facilities Agreement the governing law and jurisdiction clauses were amended to English law. This was carried out for the sole purpose of establishing jurisdiction of the Court to proceed with an English scheme. This in turn has established a relatively simple route for foreign companies to establish jurisdiction even where it has no connection to the UK whatsoever and, consequently, has expanded the sphere of schemes significantly.
3.1.1.4 Reliance on COMI
Pursuant to the governing law of the contracts, it is also “sufficient” to establish jurisdiction under the Insolvency Regulation if a company has carried out business in England (be it based in England or carries business through a branch) or has assets in England. The Insolvency Regulation will be later elaborated on in this paper but for present purposes it is sufficient to know that under the Regulation there is a rebuttable presumption that main insolvency proceedings will be opened in the Member State in which the debtor’s centre of main interests is located (COMI).50 This was the case in
Re Drax Holdings.51 Here Collins J held that the sufficient connection was the fact that the key finance documents created English law-governed obligations, and the companies had other characteristics which connected them to England, such as the fact that there significant operations and assets in England. COMI is relatively vague concept. The test where a debtor’s COMI resides is highly factual and has been subject to much debate – both in the courts and in literature. The leading European jurisprudence in this area provide that factors that may rebut the presumption are those which are objective and ascertainable to third parties to enable it to be established that debtor’s COMI lies elsewhere than the location of its registered office.52 The steps taken to migrate COMI will depend on the nature of debtor’s
business. Suffice to say, a company with only participations in subsidiaries such as a financial holding company will have a much easier time to move its COMI than a company having offices or factories with many employees.
50 Insolvency Regulation, Article 3(1). 51 Re Drax Holdings [2004] 1 WLR 1049.
52 For guidance from the European Court on ‘COMI’, see Case C-341/04 Re Eurofood IFSC Ltd [2006]
ECR 1-03813 and the more recent Interedil Case C-396/09; [2011] BPIR 1639, and Mediasucre Case
The tactic was used in the recent cases of Re Magyar Telecom B.V.53 and Re Zlomrex International Finance S.A.54 as each case involved the migration of a financial
holding company. Magyar is a Dutch holding company for one of the leading telecommunications service providers in Hungary. The traditional scheme route was not an option as the financial documents in question were bonds that were governed by New York law and contained a non-exclusive jurisdiction clause in favour of New York courts. In order to avail of scheme jurisdiction but continuing to respect the governing law of the bonds the company simply moved COMI by: (i) opening a new office in England; (ii) sending correspondence of such to creditors; (iii) holding negotiations with creditors in London; and (iv) appointing Directors based in England. Zlomrex International Finance S.A. (ZIF) is the financing vehicle for one of the largest suppliers of scrap metal and the second largest seller of semi-finished products in Poland. They were equally constrained as Magyar as the documentation in question were New-York governed high yield bonds. In order to fall under English scheme jurisdiction they migrated their COMI in a similar manner to Magyar. It must be acknowledged that in both cases the schemes received high creditor approval as they were almost unanimously supported by the companies’ creditors.
All the cases discussed so far involved European companies availing of the scheme. However it must be acknowledged that non-European companies have also sought to avail of the flexibility and practicality of English schemes too. Examples include companies from Kuwait,55 Vietnam56 and Delaware, USA.57 For these companies the
process is quite clear-cut as they simply could simply satisfy the “sufficient connection” test on foot of choice of law clauses. However the position of European companies is potentially more complicated due to the existence of EU Regulations.
53 Re Magyar Telecom B.V. [2013] EWHC 3800 (Ch).
54 Re Zlomrex International Finance S.A [2013] EWHC 4605 (Ch). 55 Global Investment House KSC [2012] EWHC 3792 (Ch). 56 Shipbuilding Industry Group [2013] EWHC 2476 (Ch). 57 Re Icopal AS and others [2013] EWHC 3469 (Ch).
The following table lists non-UK companies located in other EU Member States that have availed of the scheme of arrangement.58
Company Base of Company Pre-restructured Debt Post-restructured Debt Percentage de-leverage British Vita Group
22 April 2009 Luxembourg €673.70M €100M 76% La Seda 26 May 2010 Spanish €600M €446M 24% Gallery Media 26 May 2010 Russia €342M €100M 71% Wind Hellas Telecommunications 16 December 2010 Greece €1.867B Nil 100% European Directories 23 December 2010 The Netherlands €1.6B €1.375B 14% Tele Columbus 18 January 2011 Germany €1B €903M 30% Rodenstock 21 April 2011 Germany €305M €305M - Metrovacesa 21 June 2011 Spain €5.75B €4.76B 17% PrimaCom 10 January 2012 Germany €285M €285 N/A-Documents Amended Vivacom/Bulgarian Telecom 6 September 2012 Bulgaria €1.7B €588M 65%
SEAT Pagine Gialle 7 September 2012 Italy €2.7B €686M 75% Cortefiel 19 October 2012 Spanish €1.385B €1.385B N/A – maturities extended Global Investment House
3 December 2012
Kuwait €1.7B €1.7B N/A –
maturities extended German Residential Asset
Note Distributor (GRAND) – DAIG 23 December 2012 Germany €4.3B €3.8B 12% - maturities extended Orizonia 14 January 2013 Spain €619M €81M 87%
58 Table taken from C. Pilkington, Mount & Prior, London Calling – Schemes of
3.1.2 Impact of European Regulation
In the sphere of European conflicts of law there are two Regulations that warrant serious consideration - namely the Insolvency Regulation59 and the Judgments Regulation.60 There is other specialist legislation that deals with insurance companies and credit institutions but are not relevant for our purposes.61 The effect of these EU Regulations on the English court’s scheme jurisdiction has only been discussed in a properly contested hearing once and even at that the comments made were obiter.62 Moreover in many cases of foreign companies seeking to use the English scheme these issues were not discussed in any great detail.63 For all intents and purposes the outcome the courts have consistently found jurisdiction to sanction the scheme provided a “sufficient connection” to England was established. However, their reasoning in reaching such a conclusion has not always been consistent and has consequently made this a grey area of law. Therefore these cases have been controversial in some quarters.
3.1.2.1 Overview of Insolvency Regulation & Judgments Regulation
The Insolvency Regulation was enacted on the 31 May 2002 and the Judgments Regulation on the 10 January 2015. Both are directly applicable in all Member States (with the exception of Denmark) and regulate jurisdiction in intra EU proceedings, and the mutual recognition and enforcement of judgments of the courts of the Member States. It has been judicially affirmed that the two Regulations were intended to provide mutually exclusive codes in relation to jurisdiction: the Insolvency Regulation is confined to insolvency and analogous proceedings, and the Judgments Regulation applied to other civil and commercial proceedings.64 The differentiation of
the two is essentially the demarcation between insolvency and solvency with the Insolvency Regulation dealing with the former and the Judgments Regulation dealing
59 European Insolvency Regulation - Council Regulation (EC) No. 1346/2000.
60 Judgments Regulation – Council Regulation (EC) No. 1215/2012 (formerly the Judgments Regulation – Council Regulation (EC) No. 44/2001: Amendments to the Regulation are not relevant for our purposes).
61 See Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings and Directive 2001/24/EC on the winding up
62 Re Sovereign Marine & General Insurance Co Ltd [2006] EWHC 1335 (Ch).
63 A notable exception is Re Rodenstock GmbH [2011] EWHC 1104 (Ch), in which these issues were discussed in considerable detail.
with the latter.65 The two regulations are meant to dovetail into one another meaning that anything which is not caught by the Insolvency Regulation will be done by the Judgments Regulation and that there be no regulatory loopholes between the two.66
The Insolvency Regulation provides a detailed framework for the management of cross border insolvency cases within Europe and attempts a partial harmonization of conflict of law rules but neglects to deal with substantive insolvency law.67 The Regulation is built upon two key objectives. The first is to achieve greater efficiencies and effectiveness in the administration of cross border insolvency cases.68 The second is to prevent forum shopping, i.e. the movement of assets or judicial proceedings from one Member State to another so as to take advantage of a more favourable legal position.69 The cornerstone of the Regulation is the rebuttable presumption contained in Article 3 which has already been discussed in 3.1.1.4 of this paper.70 Furthermore under Article 16 IR, the proceedings opened by this court will be given immediate, full and unqualified recognition in all other Member States as soon as the judgment has legal effect in the Member State where the proceedings were opened. Consequently once main proceedings are opened in a given Member State they shall be automatically given pan-EU recognition.
The current Regulation applies to “collective proceedings against an insolvent debtor that entail partial or total divestment of the debtor and appointment of a liquidator.”71
Article 2(a) provides that for the purposes of the Regulation “insolvency proceedings” shall mean the collective proceedings referred to in Article 1(1), which are contained in Annex A. The ECJ held in Bank Handlowy72 that once proceedings are listed in
Annex A of the Regulation, they must be regarded as coming within the scope of the Regulation. “Inclusion in the list has the direct, binding effect attaching to the
65 Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation, p. 292.
66 Case 113/78 Gourdain [1979] ECR 733; F-Tex (Judicial cooperation in civil matters) [2012] EUECJ C-213/10 B. Hess, T. Pfeiffer and P. Schlosser, The Brussels Regulation 44/2001: Application
and Enforcement in the EU (Munich: Verschlag C.H. Beck, 2008) at [53]
67 G McCormack, Reforming the European Insolvency Regulation: A legal and policy perspective, 10 Journal of Private International Law 1 (2014), pp. 41 – 67, p. 42.
68 Insolvency Regulation, Recitals 2 and 3. 69 Ibid, Recital 4.
70 Insolvency Regulation, Article 3(1). 71 Insolvency Regulation, Article 1(1).
72 Case C 116-11 Bank Handlowy w Warszawie SA v Christianapol sp z oo, paras 33–35. See also para 49 of the opinion of Advocate General Kokott.
provisions of a regulation.” Furthermore, in Ulf Kazimierz Radziejewski73 the ECJ suggested that the Regulation applied only to the proceedings listed in Annex A. In relation to the UK only a court ordered winding up, creditors’ voluntary winding up, administration, voluntary arrangements and bankruptcy are included in Annex A but schemes of arrangement are not. The European Parliament has recently passed proposals to amend the scope of the Insolvency Regulation. This shall be discussed later in this thesis.
The Judgments Regulation assigns jurisdiction in cross-border disputes concerning “civil and commercial matters”.74 Its objective is to achieve the simplification of formalities of formalities that govern the reciprocal recognition and enforcement of judgments and to strengthen the legal protection of persons. The preamble makes clear the need, in the interests of the harmonious administration of justice, to ensure that two EU states will not give irreconcilable judgments.75 Its general rule is that a defendant should be sued in the courts of the place where he is domiciled.76 Excluded from it scope are “bankruptcy, proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings.”77
Article 24(2) of the Regulation denotes that exclusive jurisdiction over proceedings which have as their object the “dissolution of companies” shall fall under the courts of the Member State which the company has its seat. This would suggest that the English court will have jurisdiction to wind up a solvent company only where that company has its seat in the UK. Although it is not free from doubt, the preferable view is that solvent liquidation falls within this definition.78 Taken in tandem, the combined effect of both regulations is therefore to restrict the ability of the English courts to wind up companies with their COMI in another EU Member State. The question now here
73 Case C-461/11, judgment of 8 November 2012. Therefore a form of Swedish debt relief procedure considered in the case did not fall within the Regulation as it was not included in the Annex. The court, however, also pointed out that the procedure did not entail the divestment of the debtor and therefore could not be classified as an insolvency procedure within the meaning of Art 1.
74 Judgments Regulation Recast (EC) 1215/2015, Article 1. 75 Ibid, Recital 15.
76 Ibid, Article 2. 77 Ibid, Article 1(2)(b)
78 See Re Drax Holding Ltd [2003] EWHC 2743 (Ch); [2004] 1 WLR 1049 at [28]; Re Rodenstock
turns as to whether this affects the English court’s jurisdiction to convene scheme meetings and sanction schemes.
3.1.2.2 Interaction between Schemes and Insolvency Regulation
In order to fall within the scope of the Insolvency Regulation the company must be insolvent and have its COMI located within any of the EU Member States (with the exception of Denmark). Schemes of Arrangement do not prima facie fall within the ambit of the Regulation, as they are not listed in Annex A. As previously established, when the courts are considering scheme jurisdiction in respect of a foreign company, they do so on the basis of domestic law and ask whether the company subject to the scheme are “liable to be wound up under the Insolvency Act 1986”. Consequently the question now here turns as to whether the Insolvency Regulation plays a possible, unintended, consequence on the English court’s scheme jurisdiction. As articulated by Warren J in the High Court:
The further complication, since the coming into force of the Insolvency Regulation… is whether the concept of being “liable to be wound up” in s. 425 CA 1985 [now s. 899 CA 2006] is purely in reference to domestic law jurisdiction or whether it includes a reference to the rules of international jurisdiction in the [Insolvency] Regulation. In other words, as well as considering the usual core requirements, does not the English court need to be satisfied that the company proposing a scheme is one in respect of which there is international jurisdiction to make a winding-up order pursuant to the Insolvency regulation? 79
A strict interpretation of the Insolvency Regulation would imply that it takes direct effect in English Law and any interpretation of “liable to be wound up” under the IA 1986 should be superseded by the interpretation of the Regulation. If a foreign company cannot, as a matter of law derived from the Insolvency Regulation, be wound up by an English court as neither its COMI nor any of its establishments are located in the UK, then it should follow under the doctrine of direct effect the company is not liable to be wound up under English domestic provisions. However, the English courts have not adopted such an approach and have consistently neglected
to comment on the possible direct effect of the Regulation. Instead, they have persistently held that the Insolvency Regulation has no impact on their domestic jurisdiction to wind up foreign companies, however, their reasoning in doing so has varied. In DAP Holdings N.V. the court sanctioned a scheme in respect of Dutch company and held that the absence of COMI or establishment in the United Kingdom would not detract from the court’s scheme jurisdiction. The court reasoned as follows:
It is clear from the words of the Insolvency Act itself and the approach taken by Lawrence Collins J. in the Drax Holdings case that some circumstances such as the existence of insolvency itself must be ignored for the purpose of considering whether a corporation is liable to be wound up under the Act in the context of a sanction under [ss.895 & 896 of the Companies Act 2006]. It follows, therefore, logically that circumstances which may or may not exist and are transient in the sense of the company’s financial position must be ignored in considering whether the company is liable to be wound up. The location of a debtor’s centre of main interests or the location of a debtor’s establishments are matters which may change from time to time because the debtor may perfectly properly choose to relocate his business or open an establishment in the territory of another Member State. There is logically no warrant for distinguishing between transient matters of that kind and transient matters such as the day-today financial position of the corporation. Consequently, there is nothing in the Insolvency Regulation which precludes the court from concluding that a foreign corporation like DAP Holding NV, with neither its COMI in this Member State nor an establishment in this Member State is liable to be wound up.80
Here the court fashioned that there ought to be no distinction between, on one hand the company’s financial position, and on the other its COMI or establishments as they both are transient and subject to change. Thus if the company’s financial situation would not prejudice the court’s winding up jurisdiction, by equal measure so should the company’s COMI or establishments not prejudice the court’s winding up jurisdiction. This approach has been subject to much criticism from commentators
