Debt for equity transactions under English and German Insolvency law

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European Private Law LL.M course 2014-2015

THESIS

Debt for equity transactions under English and German Insolvency law

Iraklis Kalogeropoulos UvA ID: 10865152

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European Private Law LL.M course 2014-2015

THESIS

Debt for equity transactions under English and German Insolvency law

Iraklis Kalogeropoulos

UvA ID: 10865152

Supervisor: Dr. Titia Bos

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1. Introduction

1.1. Background

In times of financial distress1_{, a company has two options: liquidation and dissolution or}

reorganization. Since liquidation destroys unduly the going concern value of the company, reorganization is increasingly preferable on a worldwide scale both by creditors and society. In this context the debt-to-equity conversion constitutes a smart mode of corporate reorganization that contributes to the reduction of ongoing costs of the distressed company and to the conversion of debt finance to equity finance, achieving in this way to deleverage the balance sheet of the distressed company.

During the last decade forum shopping from Germany to England grew rapidly. In the context of European Union forum shopping is considered the “transfer of assets or judicial proceedings from one Member State to another, seeking to obtain more favorable position”.2

The last decade major German companies (e.g. Rodenstock GmbH, Schefenacker etc.) chose to move to England and be reorganized there. This “restructuring migration” took place either by the movement of the company’s Centre of Main Interests (COMI)3 or just by establishing “sufficient connection” with England.4

This increased forum shopping was a result of competition of law between the two countries. The German law was considered to provide big obstacles to implementing a debt-equity conversion between the debtor and its creditors. Particularly, it provided no possibility of restructuring outside or separate from the formal insolvency proceedings and no rules which would allow the majority of the participants in a debt-equity conversion to bind the 1_{“Financial distress” refers to a situation}_{where a firm has difficulty in serving its current debt obligations.} This condition is related either to the inability of the company to serve its debts as they fall due (“cash flow insolvency”) or to the condition that the company’s assets represent less book value than its liabilities (“balance sheet insolvency”).

2_{Recital 4, EC 1346/2000.}

3_{According to Art. 3§1 of European Insolvency Regulation (1346/2000) the courts of the Member State} where the debtor’s COMI is situated have jurisdiction to open insolvency proceedings The place where a company or legal person has its COMI is by rebuttable presumption the place of its registered office. The concept of COMI has undergone thorough interpretation by the Court of Justice of European Union and this has influenced the new concept of COMI under the recent Proposal for a Regulation of EIR.

4_{This is made possible by the (sometimes messy) interpretation of Insolvency Act 1986, s. 221(4) that} provides for the application of domestic (English) law by English courts to foreign companies in case that there is “sufficient connection” with England. Quite often such a connection is considered the –by all creditors- agreed use of English law. See for more, Payne, Cross-border Schemes of Arrangement, EBOR 14, 2013, p. 563.

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minority (Obstruktionsverbot). On the contrary, England has become the “Promised Land” for distressed companies because of its “restructuring-friendly” and flexible legal system.

Responding to the voices for modernization of its law and concerned about the competiveness of its jurisdiction5_{, in 2012 Germany reformed its rules on Insolvency Plan}

Proceedings, and specifically debt for equity swap was provided for the first time in Art. 225a InsO. Moreover, German law now provides for a cram-down rule (Art. 245 (3), 246).

1.2 Research Question

Prompted by this background, one may observe the following:

The desire of distressed companies and their creditors to seek the most effective set of rules for the implementation of a debt-to-equity transaction and the response of German law to this request makes English and German rules comparable in terms of effectiveness and efficiency.6

As Schafer & Frischemeier7 stated: “What is demanded (by the recent reform in German law) is nothing less than a new “insolvency culture” directing attention from the liquidation

of an enterprise towards rescue, restructuring and continuation”. Does the recent reform

accomplish this goal?

These observations result in the following research question:

“Is the English legal system still more effective for creditors in implementing a debt for

equity swap than the German legal system?”

1.3 Explaining the Research Question

a. Debt-equity swap: The term “debt-equity swap” does not entail a particular

procedure, but covers different measures that all aim at the exchange of debt with equity. Furthermore, it doesn’t need to be in the context of corporate rescue8_{; however, in this thesis}

it is considered simply as a restructuring instrument in or before the insolvency proceedings.

5_{Schafer & Frischemeier, “Corporate finance by way of debt equity swaps in light of new amendments to}

the German insolvency statute”, Journal of International Banking Law and Regulation 2012, *195, 197.

6_{Wolf-Georg Ringe, “Forum Shopping under the EU Insolvency Regulation”, EBOR/Volume 9/ 2008, p.} 601, analyses the efficiency of insolvency law in the context of the forum shopping problem.

7_{Schafer & Frischemeier, “Corporate finance by way of debt equity swaps in light of new amendments to}

the German insolvency statute”, Journal of International Banking Law and Regulation 2012, *195

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b. Creditors: Creditors are the holders of a company’s debt to be exchanged with equity.

In the modern financial environment large companies borrow via many different instruments (issue of bonds, banking loans, subordinated debt etc.) and from many different sources (distress debt investors, suppliers, employees, secured creditors etc.). This debt structure results in a large and heterogeneous amount of creditors, which have different interests and assumptions. This environment leads to enormous difficulties in terms of consent.

c. Legal system: Both legal systems are characterized by the basic distinction of formal

and informal procedures. The informal procedure is a private restructuring agreement with no court involvement and on fully a consensual basis between the creditors and the debtor. On the contrary, the formal procedure necessitates publicity and some involvement of the court, which is the supervisory authority both in England and Germany. Declaring insolvency is not a required feature of formal procedure. Finally, the amount of formalities inherent to the procedure may significantly differ in England and Germany.

d. Effective: From a creditors’ point of view the main goal of insolvency law is the

maximization of their returns. 9 Due to the fact that debt-equity swap captures the going concern value of the distressed company, its implementation is consistent with this goal. Thus, a more effective legal system for a debt-equity conversion is the one that better facilitates its implementation. The “better” implementation depends on the efficiency of the relevant rules (so that the conversion is achieved with the best possible returns and the least possible costs, which increases the total amount of returns) and on the protection of creditors’ rights (so that it is ensured that the generated returns are distributed to as many creditors as possible).10

e. Regulatory convergence: The research question can also contribute to assess whether there is some convergence of the two legal systems as a result of the regulatory competition and to what extent. Is it possible that a harmonization effect at MS level is gradually created?

9_{See T. Jackson, The Logic and Limits of Bankruptcy Law, p.14. The justification of the collective} procedure is based on the hypothesis that creditors would agree on it in order to avoid the common pool problems in relation to the insolvency estate.

10_{See Finch, Corporate Insolvency Law, p. 426 for the interrelation of unfairness in the debt-equity swap} process and the deterrence of unsecured creditors to provide credit in the future. This focus on protection of receivables may be explained by the fact that debtor’s insolvency destroys the legal certainty based on the creditors’ rights, i.e. the full repayment according to the fundamental principle “pacta sunt servanda”. Thus, it makes sense to avoid unfairness which leads to the extreme concentration of returns to a few “in the money creditors”.

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1.4 Method and Structure

The thesis is a comparative study of English and German insolvency legal rules in relation to debt-equity swap.11 The method followed in the comparison is so called functional

- institutional method 12, which means that the study will focus on the function of

“debt-equity swap” as reorganizational tool in the context of the analyzed problems in chapter 2. The sources used in this thesis include the use of English and German literature, mostly in the English language, the consideration of the legal rules in each country and the selective study of a few cases.

In the next chapter, chapter two, debt-to-equity restructuring process will be analyzed with focus on the topics/headlines of the comparison of English and German law in terms of effectiveness. Chapters three and four analyze English and German law respectively. Chapter five concludes the comparison and evaluates the compared procedures. Chapter six concludes by answering the research question and assessing to what extent the regulatory competition in this context may result in harmonization at a Member State level.

11_{Mainly these are: for English law, Insolvency Act 1986 and part 26 of Companies Act 2006 and for} German law, sections 217 – 269 InsO.

12_{The term was suggested by Esin Orucu in 1988 (Orucu, Theories and Presumption of Comparability).} See in A.E. Oderkerk, The need for a Methological Framework for Comparative Legal Research: Sense and

Nonsense of “Methological Pluralism” in Comparative Law, CS ECLM working paper series, No. 2014-04,

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2. General features of debt-equity swap from the creditors’ point of

view.

The debt-to-equity conversion as a mode of debt restructuring aims at the exchange of the creditors’ receivables with shares of the distressed debtor. In this chapter we will analyze the function and the general topics of the debt-to-equity conversion, which are common in English and German law, analyzed in both informal and formal procedure. This analysis will end in the basic elements of an effective debt-to-equity conversion from the perspective of the creditors.

2.1 The function of debt-to-equity swap. 2.1.1 The legal structure

A debt-equity conversion is in its core nothing more than an agreement between the debtor and his creditors to exchange their claims for shares of the firm. The legal structure of the implementation of this agreement may differ in each legal system. A usual legal structure is by way of a capital decrease (nominal reduction of shares or capital write-down), followed by a capital increase, which reflects the “non-cash” contribution of creditors’ claims against the company.13 Finally the debt is cancelled and the former creditors acquire the newly issued shares.14_{Thus, it is quite often that the conversion includes company law measures that}

involve fundamental changes in the ownership status of the debtor company. This may result in serious conflicts of interests and practical problems that will be analyzed infra.

One illustrative example of debt for equity conversion is the Conergy case; Conergy is a large German solar company which faced increasing debt problems in 2010. At the end of that year the firm conducted a debt for equity conversion which allowed the reduction of its debt from 323 million to 135 million Euros. This was achieved by a capital decrease amounting to 88% of the capital stock and then by a capital increase of 188 million, largely consisting of the subscription of the creditor’s claim who became a new shareholder of Conergy.15

13_{See Schafer Ph. & Frischemeier A., Corporate finance by way of debt equity swaps in light of new}

amendments to the German insolvency statute, *195, 196.

14_{The legal characterization of this cancellation varies; it can be considered as a novatio or a “confusion of} rights”, i.e. the situation that the debtor becomes also the creditor by the transmission of the claims.

15_{See Schwarz H. And Rosiak H., Debt-equity swaps in Germany: recent cases and the future of this legal}

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2.1.2 Benefits and shortcomings out of debt-equity conversion.

On the one hand, the creditors may be attracted to participate in a conversion because it offers the prospect to gain much greater future returns than they would a under liquidation scenario. In other words, if the conversion manages to deleverage the company’s balance sheet (through the cancellation of debt and the increase of equity capital), this will result in lower interest burden and improvement of the credit rating which allows the company to borrow new capital on better conditions.16_{The new money generated will benefit the}

converted creditors either in their capacity as shareholders (i.e. increase of price of their acquired shares) or in their capacity as creditors (i.e. new funds can be used to repay any non-converted claims).

On the other hand, the conversion may have significant shortcomings, particularly for the junior creditors. Firstly, the fact that the debt-equity conversion is a company law measure applied for insolvency purposes, implies the achievement of consent on a large scale for both shareholders and creditors. This quite often results in a time-consuming and costly procedure which the small creditors cannot afford.17 Secondly, the transition to a shareholder position entails a radically different economic rationale (voting and control rights and commitment to the firm) and different risks from those of a creditor.18 Thirdly, when debt-equity conversion is forced in formal insolvency proceedings, issues of distributional justice may arise.19 Particularly, it has been observed that the conversion tends to advance the major, well informed creditors at the expense of the junior creditors.20

2.2 The informal and formal procedure of the debt-equity swap implementation in the light of creditors’ interests.

2.2.1 Informal procedure.

The informal procedure is considered to be a better option for all stakeholders compared to the formal procedure, because it is cheap, quick, flexible and includes no adverse publicity, which may harm the going concern value of the company and the receivables (insolvency

16_{See Schafer Ph. & Frischemeier A.,2012, *196, see also Finch, 2009, p. 322. The conversion indirectly} affects the cash flows of the company by replacing short and long-term liabilities with fresh equity.

17_{Finch, Corporate Insolvency Law, 2009, p.323.}

18_{See infra in 2.2.2.3 for the description of these risks. If the company is listed, such a transition may be} easier for creditors, since the greater transferability of shares and the disperse model of ownership are more compatible with the creditor’s position.

19_{See about these problems supra in 2.2.2.2. in the context of minority protection.}

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stigma)21. In such a case the company continues to operate normally which is more than desirable for its survival.

However, there are three basic disadvantages: firstly, it is more liable to prejudice the less-well-placed creditor’s rights than the formal proceeding due to the absence of court protection. Secondly, the required unanimous agreement is difficult to reach due to inherent problems consent in the debt-equity conversions.22_{Thirdly, the lack of an automatic stay of}

any enforcement procedure (moratorium) may undermine the implementation of the conversion. Mainly for these reasons the parties often choose to resort to formal proceedings in search of a cram-down rule and a moratorium.

2.2.2 Formal procedure

The three most important stages in the formal proceedings both in Germany and in England are: the commencement of the procedure, the approval and confirmation of the reorganization plan that incorporates the debt-equity conversion and finally, its effect on the participants.23

As mentioned in chapter 1, the most effective legal system for a debt-equity conversion is the one that better facilitates its implementation from the creditors’ point of view. In order to assess this, I think it is more comprehensible to distinguish the most important features of the procedure at each stage in relation to the pursuits of the creditors. This will enable the comparison of the two legal systems on a common ground (chapter 5.1) and finally the assessment of their effectiveness (chapter 6).

2.2.2.1 Commencement

The commencement of the procedure concerns the following questions: Who can initiate the procedure? When and under which circumstances? At this stage the main pursuit of creditors is flexibility. Creditors should be entitled to commence such a formal procedure even on their own. Time is also extremely relevant: the sooner the better, and this means that at this stage the courts should not get involved with fairness issues or stipulate demanding requirements for filing. Moreover, it should be possible for the rescue procedure to commence whether the company is insolvent or not. In this way the financial distress can be

21_{Insolvency stigma is the negative effect of the announcement of insolvency on the company’s goodwill} and reputation by the market. This leads in principle to decrease of the going concern value.

22_{See in detail supra in 2.2.2.2.}

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tackled early enough and elaborate formalities and costly adverse publicity are avoided. The provision of a moratorium is also desirable for the success of the implementation, since it deters the creditors.

The directors’ and the creditors’ interests align at this stage. A timely conversion is a manager-friendly restructuring tool as it prevents the insolvency stigma and the risk of the directors losing their position on the board. It also confronts the risk of liability for “wrongful trading” or for postponement of the disclosure of insolvency. This is the case when the company has continued to operate while its directors knew or could have plausibly known that it was insolvent and so they may be liable for damages against contracted creditors during that time. 24

Consequently, the basic pursuits for creditors at this stage are the flexibility of the entry requirements (prima facie control of the court, amount of persons qualified to apply for rescue etc.) and the separation of the procedure from the declaration of insolvency.

2.2.2.2 Approval and confirmation.

In both Germany and England the stage of approval and confirmation is divided into a two-step procedure. Firstly, the stakeholders (creditors, shareholders and the debtor represented by its directors) need to consent to the conversion. Secondly, the reorganization plan incorporating needs to be approved by the court.25

1. Securing the consent

Conflict of interests: The task to secure the required consent is a complex game of

strategy. Firstly, in companies with dispersed ownership status, small creditors may be rationally apathetic to vote. This problem can be solved by calculating the required majority only among the votes of the people that actually voted or by creating classes in which the small creditors will get a higher percentage of their claims. This constitutes an acceptable deviation of the pari passu principle so that creditors will be tempted to participate in the arrangement. However, this flexibility is often the backdoor for out problems. The hold-out problems are related to the division of the available funds: some creditors may block the

24_{In England such a personal liability is provided under s214 of the Insolvency Act 1986. Under s.172(3) of}

the Companies Act 2006 it is also recognized the fiduciary duty of the directors to consider the interests of

creditors when the company is in distress. In Germany even criminal liability may arise if the company continued working being balance sheet or cash flow insolvent. See also Clowry, 2010, p. 51, 54.

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entire procedure in order to bargain higher returns for themselves. The hold out problems belong to the type of “anticommon problems” in insolvency.26

In the context of debt-equity swap both creditors and shareholders may create hold-out problems, which reflect their conflict of interest that are liable to undermine the entire agreement. Firstly, secured creditors have in principle no incentives to get involved with a rescue mode and all the relative risks, when their claims can be met out of the secured assets.27 _{On the contrary, unsecured creditors (such as many bondholders or bank with}

facilities with large enterprises) prefer debt for equity swap rather than liquidation procedure, since they face in principle total or significant loss of their investment. Secondly, for shareholders a debt-equity conversion implies the dilution of their shares’ value. Shareholders are reluctant to participate in attempts for rescue when the signs of insolvency are not clear yet, since their inclusion in an insolvency procedure means that they will be subordinated and probably lose everything.

This conflict of interests largely depends on the method of valuation of the receivables and debtor’s assets. It has been already noted that in a debt-to-equity conversion the claims of the creditors that are exchanged with shares constitute “contribution in kind” and as such, need to be evaluated.28 The valuation determines how much debt the assets can support and, most important, the “break point” of the debtor’s value.29 In others words, it establishes which class of creditors or shareholders will suffer partial or full loss of their claims if there was liquidation. These stakeholders are considered “out of the money” (OTM), i.e. their claims are worthless,30 and they will be excluded from voting. This may entail either that their consent is deemed granted or that the class is excluded from the conversion.31 In principle shareholders and subordinated or junior creditors are valued as “out of the money”.

Voting rules in the formal procedure: The abovementioned conflicts of interest,

existing both in informal and formal procedure, may undermine the approval of the

26_{Anticommon problems describe a situation that there are many beneficiaries in one joint good or resource} (here the debtor’s assets) where no one has an exclusive privilege of use but all have the legal right to block the others from the use. See R.J De Weijs., Harmonisation of European Insolvency Law and the need to tackle two

common problems: common pool and anticommons, IIR 2012/21, p. 72, 75.

27_{See above what are the shareholders’ risks. See also Finch, Corporate Insolvency Law, p. 321.}

28_{Any time that “no cash” contributions are made in a firm’s equity, specialized auditors need to assess} their economic value which is going to be depicted in the balance sheet.

29_{See T. McKay, Debt-for-equity swaps: striking the balance, 2009, p. 2 and K. Clowry, Debt-to-Equity}

Conversion in the UK and Europe, 2010, p. 56.

30_{This doesn’t mean that OTM claims have no value generally, but that they are currently worthless.} 31_{These are the two different results in German and English law respectively.}

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conversion. This is why the big advantage of the formal procedure is the cram-down rule: the majority can bind the dissenting minority within a group and sometimes among groups.

An important basic voting rule is the possibility for separate voting by creditors or shareholders to groups or classes according to their rights. Hence, the required majority for approval can be easier reached. The majority can be in value and in number, or just in value. It is obvious that the second option benefits major creditors to the detriment of junior creditors. Only the persons affected by the debt-equity swap are entitled to vote. For instance, some creditors may be excluded from the plan (e.g. “out of the money creditors”).

2. Confirmation by the court.

In both compared legal systems the main involvement of the court is linked to the confirmation of the debt-equity conversion. The frequency of court’s supervision spans from being continuous to being limited. Regardless of this, the denial of the confirmation by the court may be decided on specified, enumerated grounds (Germany) or on plausible grounds decided by the court in wide discretion (England).

The refusal grounds concern the violation of material requirements and the fairness of the plan. In this context the protection of dissenting creditors is assessed, which is important for the effectiveness of the procedure. On the one hand, it should not stimulate hold-out behavior at the expense of the timely facilitation of the conversion. On the other hand, it should ensure a fair distribution keeping the agreement viable. Finally, it is consistent with the creditors’ interests that the court’s discretion is not welcome to the extent it provides dominant guidance regarding the fundamental business orientation underpinning the agreement.

Consequently, at this stage the ideal legal system pursues to facilitate an easy consent by reconciliation of the conflicts of interests, while the court ensures the protection of the minorities to the extent it does not undermine the facilitation of the conversion.

2.2.2.3 Effect of the debt-equity conversion.

If confirmed by the court, the plan takes on a binding effect. At this stage the interests of creditors focus on legal certainty, in terms that limited possibility to revoke the plan is provided and that no affected party can dispute its effect. In the context of legal certainty, the facilitation of the swap is better served if all participants are bound by the plan than in the case that there are exceptions (e.g. secured creditors or shareholders).

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The second major issue at this stage are the risks for converted creditors under their new capacity as shareholders. Each legal system differs in this aspect, since it depends on the way it treats shareholders in general and in the case of a subsequent insolvency. Moreover, it is important to mention that the creditors prefer the rules that allow them to ensure their priority in the reorganization surplus, to the detriment of older shareholders. The rationale behind this is that the legal owners of the company have to carry the cost of its underperformance. However, shareholders may need to have some economic perspective in order the moral hazard concerning the future prosperity of the company to be avoided.

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3. The treatment of debt-to-equity conversion under English law

3.1 Introduction

In England, debt for equity conversion is a standard mode of corporate restructuring. From the times of Cork Report32_{English law has become familiar with the “rescue culture”,}

instead of the traditional end in the case of insolvency (liquidation of the company).33 For a successful rescue the effectiveness of the relevant debt restructuring mechanisms is of crucial importance. A debt-equity swap can be implemented either informally (3.2) or in a formal procedure (3.3). There are two basic debt restructuring mechanisms that can contain a debt-to-equity conversion in formal proceedings: a scheme of arrangement (3.3.1) and a company voluntary arrangement (3.3.2).

In this chapter the three abovementioned mechanisms are analyzed with emphasis on the Scheme of Arrangement, which is the more often used mechanism in practice. Finally, the two basic formal mechanisms are compared (3.5).

3.2 The workout

Τhe simplest and fastest way of restructuring is realized with a mere contractual arrangement. The advantages of an informal process include the avoidance of adverse publicity and of the formalities of Scheme of Arrangement (“SoA”) and (“CVA”). Simultaneously it can be cheap and quick, since there is no court involvement. However, there are two important obstacles: firstly, it requires unanimous consent of all creditors. Since there is no court involvement, no possibility of cram-down is provided and thus, all creditors need to agree voluntarily with the curtailing of their rights which comes with the agreement.34

Thus, the achievement of a unanimous agreement is a real challenge for the directors of the distressed company. Secondly, there is no automatic statutory stay of the enforcement against the debtor, unless all creditors agree on a standstill agreement.35 Lack of consent in an informal procedure of creditors leads to recourse to formal proceedings.

32_{Report of the Review Committee on Insolvency Law and Practice, Her Majesty’s Stationary Office,} 1982.

33_{See Finch, Corporate Insolvency Law, 2009, p.246. This change reflects primarily the efficient} achievement of social goals which are served by the crucial role of commercial enterprises in economic life.

34_{As mentioned in Chapter 2, a cram down enables the insolvency court to impose the debt-to-equity swap} (or any other restructuring instrument) on dissenting creditors in an attempt for a better result for all parties. In the context of English law see Payne, Debt Restructuring in English Law, p. 3 [online].

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3.3 The Scheme of Arrangement

The Scheme of Arrangement (“SoA” or just “schemes”) has existed for over a century36 and, despite that, it is used more often than CVA or administration for debt to equity conversions.37 Although a SoA can be used for many purposes,38 it is mostly attractive where the debtor company is financially distressed because of a series of advantages, most important of which is the ability to bind any kind of dissenting creditors, even secured or preferential creditors, once approved. The Schemes are governed by Part 26 of the Companies Act 2006 (s. 895-901). As we saw in Chapter 2, the creditors’ interest is focused on three stages of the implementation of a debt-to-equity swap: the commencement of the process, the consent of the stakeholders and the involvement of the court. To a great extent the same stages formulate the process under Part 26 according to the criteria developed in three famous judgments of Chadwick L.J.39

3.3.1 Commencement of the process

3.3.1.1 The Scope of the Scheme

According to section 895 a Scheme involves a compromise or arrangement between the company and its creditors or shareholders or any of their class. These legal terms have been interpreted by English courts in a broad way. “Compromise or arrangement” includes any “give and take” transaction and “creditors” include anyone with pecuniary claim whether they are actual or prospective or contingent creditors.40 Moreover, “company” eligible to participate in a Scheme is any company that is liable to be wound up under the Insolvency Act 1986.41 This also includes foreign companies which have a “sufficient connection” with

36_{The SoA originally is found in the Victorian Legislation (Joint Stock Companies Act 1870), see Finch,}

Corporate Insolvency Law, 2009, p.479, Goode, The Principles of Corporate Insolvency Law, 12-12, where he

mentions that the Schemes were originally used only in the course of being wound-up, while today they have a wide range of purposes going well beyond insolvency.

37_{See Tschentscher, Schemes of Arrangements in Cross-Border Restructuring Cases, p. 14. In recent years} many well-known companies have used Schemes to implement a debt-equity swap and restructure their balance sheet: La Seda Barcelona, Bluerock (or Imo Car Wash), Rodenstock, Countrywide Plc and others.

38_{For instance as an alternative to a takeover or contributing to a merger. See Gullifer and Payne,}

Corporate Finance Law, 2011, p. 619.

39_{See Re BTR Plc [2000] 1 BCLC 740, Re Hawk Insurance [2002] 2 BCLC 675 and Re MyTravel Group}

Plc [2004] EWHC 2741 (Ch). The three stages are the application to the court and its order for the summoning

of the meetings, the meetings and the voting procedure and, finally, the court’s sanction according to s.899. See also Goode, The Principles of Corporate Insolvency Law, 12-15.

40_{See Re Savoy Hotel Ltd [1981] Ch.351, for the interpretation of “compromise or arrangement”. A type of} “compromise or arrangement” is, of course, the debt-equity swap. See also Re T&N Ltd [2005] EWCH 2870 (Ch), for the interpretation of “creditors”. See also Goode, The Principles of Corporate Insolvency Law, 12-18.

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England and gives a broad jurisdiction to English courts facilitating the forum shopping regarding debt-equity swap implementation.42

A Scheme is not used exclusively as an insolvency procedure. It can be used for many different purposes. On the one hand, the company does not have to be insolvent in order to use a scheme. 43 On the other hand, it can be used in combination with formal insolvency proceedings (liquidation or administration). For instance, practitioners recently have twinned the Scheme with the administration process44_{, a mixed form that will be discussed later.}

Finally, it must be noted that there is no provision for a moratorium during the scheme process, which creates huge problems in its implementation, since from the time of proposal to the time sanction of the scheme any dissenting creditor can initiate a winding-up procedure or activate its security rights, depriving the company of valuable assets. The combination of the scheme with administration may provide solutions for this problem as well.

3.3.1.2 Application

The procedure starts with an application that includes a claim form addressed to the court in conjunction with a supporting witness statement of a director and with written evidence that contain the required statutory information on the terms of the agreement and all the facts regarding the Scheme (e.g. the financial status of the company).45 The initiative for a scheme usually comes from the directors of the company after consultation with the company’s major creditors. Of course, according to s. 896(2), an application may also be made by any creditor or shareholder of the company or by a liquidator, in the case when the company is being wound up, or by an administrator, in the case of administration order.

By this claim form the applicant addresses the court for the first time, seeking the convening of meetings and, in case of approval of the proposed Scheme, its sanction by the court.46 Then the first hearing follows; at this stage, the court determines only whether to convene the relevant meetings or not. For this reason it will prima facie assess the prospect of success of the Scheme and the proposed division of the classes. This prima facie test takes

42_{Payne, Cross-border Schemes of Arrangement and Forum Shopping, EBOR 14/04, 2013, p. 567.}

43_{The scheme can be used in mergers, takeovers and their substitutes, in internal reorganizations and in any} “compromise or arrangement” outside formal insolvency proceedings.

44_{Re MyTravel Group Plc [2004] EWHC 2741 (Ch) and Re Bluerock Ltd [2009] EWHC 2114 (Ch); see} also Payne, Debt Restructuring in English Law, p. 17 [online].

45_{CPR Part 49 and Practice Direction (PD) 49A para. 15.}

46_{In detail the application must seek, according to PD 49A para. 15, the following: 1. Directions for the} convening of the meetings of creditors and/or shareholders, 2. the sanction of the proposed Scheme, if approved by the meeting(s) and 3. a direction that the claimant files a copy of the report by each chairman of the court meeting or each meeting.

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place only for the purpose of summoning the meeting(s) according to s. 896. The fairness of the Scheme is not considered in this first hearing.

3.3.2 Approval and confirmation of the scheme.

3.3.2.1 The division in classes and the meeting(s).

After the court has ordered the holding of a meeting under s. 896, the applicant (usually the company) sends a notice to its shareholders and creditors together with the statement under s. 897. This statement explains the effect of the scheme, so that the creditors or members are fully informed before the voting.47

The number of meetings depends on how many separate classes there are. The division of creditors or shareholders into classes is initially proposed by the applicant and then assessed by the court at the first hearing.48 The definition of the “class” has been an equivocal issue for English courts. Generally, a class of creditors consists of persons “whose rights are not so

dissimilar as to make it impossible for them to consult them together with a view to their common interest.”49 The statutory requirement for separation of class meetings aims to ensure that the rights of the creditors aren’t overridden by a mere majority that ignores the fundamental differences among the creditors’ rights. The focus of the test is on the rights and not on the interests of the creditors.50 It must be noted that the shareholders usually form one class, while it is not necessary to hold a separate meeting as well.51 The court considers the division of the classes at the first stage, in order to decide the number of the meetings to be convened and again at the third stage, in order to sanction the scheme.52

A scheme must be approved by all classes of creditors or members affected by the scheme.53 Within each class, a majority in number representing at least 75% in value of the creditors (or the members) that are present and voting at the scheme meeting in person or by proxy, is required for the approval of the Scheme.54 As a result a cram-down is possible only for 25% of the class, while a class cannot be “crammed- down” by the rest.

47_{s. 897(2).}

48_{s. 896(1). See Tschentscher, Schemes of Arrangements in Cross-Border Restructuring Cases, p. 17.} 49_{Sovereign Life Assurance Company v. Dunn [1892] 2 QB 573.}

50_{Re Telewest Communications Plc [2004] EWHC 924}

51_{However, this is not the case for a CVA. Goode, The Principles of Corporate Insolvency Law, 12-22.} 52_{For the criteria of approval of the scheme by the court, see below in Ch. 3.3.}

53_{See Clowry, Debt-to-equity conversion in UK and Europe, European Company Law 7/2010, p. 53.} 54_{s. 899(1).}

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3.3.2.2 The lack of economic interest.

The fact that an entire class cannot be “crammed-down” can become problematic when there is one class which is “out of the money”.55 Here a clash between the legal and economic perspective of the rights takes place: despite the fact that an entire class of creditors (e.g. the junior creditors) or shareholders have no economic interest, they cannot be crammed-down either on a consensual basis (since they are holders of a statutory right) or by the use of a scheme standalone.

At this point it needs to be mentioned that the English case law treats the creditors or shareholders that have no economic interest in the context of the scheme in a different way.56

This affects them in three ways: 1. they do not need to be summoned in meetings, 2. A class that consists of “out of the money” stakeholders can be crammed-down with the permission of the court and 3. they have no ground to challenge the scheme as unfair;57 as long as they have no remaining economic interest, they are considered not to be affected by the sanction of the scheme.58

In recent history practitioners have used the scheme twinned with administration in order to cram-down a whole class of creditors.59 This practice was first proposed in MyTravel Group Plc restructuring where the court considered the matter on an obiter basis.60 The most illustrative English case in this context is the Re Bluebrook Ltd restructuring (also called and IMO Carwash), which implemented a debt-equity swap.61 Bluebrook Ltd and its subsidiaries were balance sheet insolvent. The restructuring took place by the pre-pack sale of group’s assets to a new company (via administration) and then the conversion of senior debt into share of the new company (via schemes). The junior creditors that remained with no assets challenged this reorganization but the court found they had no economic interest, and sanctioned the scheme.62

A crucial issue in this context is the valuation of the company’s assets. In the MyTravel Group case, the creditors (bondholders) refused to participate in the proposed scheme, trying

55_{As noted in Chapter 2, as “out of the money” can be characterized creditors or shareholders that cannot} be satisfied by the company’s assets under any insolvency scenario (mainly under liquidation scenario), since the value of the company’s assets is insufficient for that.

56_{Re Tea Corporation Ltd. [1904] 1 Ch.12.}

57_{See Goode, The Principles of Corporate Insolvency Law, 12-22, 12-23.} 58_{See Payne, Debt Restructuring in English Law, p. 17 [online].}

59_{Ibid, p. 16.}

60_{See Re MyTravel Group Plc [2004] EWCA Civ 1734.} 61_{Re Bluebrook Ltd [2009] EWHC 2114 (Ch).}

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to bargain a better deal for themselves. Then, the senior creditors proposed a scheme combined with pre-pack sale of the assets to a new company owned by them. The bondholders challenged this proposal. The court considered what would have happened if the scheme had not been sanctioned, and valued the company’s assets as if in liquidation.63 Since the creditors remained “out of the money” even in that case, they wouldn’t have any economic interest remaining in the company.

On the contrary, in the Bluebrook case the court valued the company’s assets on a going concern basis.64_{The going concern value is, in principle, bigger than liquidation value and it}

benefits the junior creditors; however, even in this case they were deemed to be “out of the money”. A final issue was whether the going concern value was based on a present value or on a future value (by taking into consideration the extra value after a possible future recovery), which would, of course, be more beneficial for the junior creditors. The court finally decided in favor of the present value approach.

3.3.2.3. The involvement of the court: Sanctioning the scheme.

If the scheme is approved at the meetings, a second court hearing follows where the applicant asks the court to sanction the approved scheme.65 The relevant criteria of approval have been developed by the case law.66 Thus, the court needs to be satisfied that:

 All statutory requirements under s. 895-901 have been fulfilled, and particularly the proper convening of the meetings (disclosure of the necessary information67_,

delivery of the statement and timely notices68_{), the correct division of the classes}

and that the approval by the required majorities has been granted.

 The proposed scheme is reasonable69_{and it makes “business sense”,}

 The scheme is fair and equitable, where the main concern is whether the creditors are put in a worse position with the scheme rather than in a liquidation scenario (“no worse off test”).70

63_{Ibid, p.18.}

64_{Re Bluebrook Ltd [2009] EWHC 2114 (Ch).} 65_{s. 899}

66_{See Re British Aviation Insurance Co Ltd [2006] B.C.C 14, Re BTR Plc [1999] 2 B.C.L.C. 675, Re}

Dorman Long & Co Ltd [1934] 1 Ch 635, Re T&N Ltd [2004] EWHC 2361 (Ch). See also Goode, The Principles of Corporate Insolvency Law, 12-23 and Tschentscher, Schemes of Arrangements in Cross-Border Restructuring Cases, p. 18.

67_{s. 898.} 68_{s. 897.}

69_{Re Dorman Long & Co Ltd [1934] 1 Ch 635: that points out that “the proposal is such that an intelligent}

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Despite all these criteria, in the end the court still retains the discretion to consider the effect and fairness of the scheme for the participants.71 In the context of fairness, the assessment of economic interest of the participants is quite relevant.72

3.3.3 The effect of the SoA.

3.3.3.1 Binding effect

Once the scheme has been sanctioned, and after a copy has been delivered to the registrar73_{, it is binding for all stakeholders affected, even those who did not receive notice of}

the meeting or the contingent creditors.74_{Of course, the scheme concerns only the claims that}

were included in it.75_{A great advantage of the scheme is that it binds the secured creditors as}

well, since the law does not distinguish the bound creditors76 ; however, it is clear in practice that this does not entail reduction of securities’ value. The purpose is the realistic valuation of secured claims, so that they can be exchanged for shares in the context of the debt-equity conversion. The principle of preservation of value of secured claims is thus respected and in fact, it constitutes a crucial criterion for the consideration of the scheme’s fairness by the English courts.77

3.3.3.2 Risks of conversion in the capacity of shareholder.

Contrary to German law, English law does not entail considerable risks for the new shareholders under any restructuring mechanism. English law knows no risk of equitable subordination or differential liability.78 In theory, the converted creditors may face the risk of transaction avoidance of the conversion under section 239 IA 1986 (preference law) in case of subsequent insolvency. However, English case law requires so highly subjective prerequisites that they make the application of the provision practically impossible.79

70_{See Re MyTravel Group Plc [2004] EWCA Civ 1734.}

71_{See Goode, The Principles of Corporate Insolvency Law, 12-23 and Tschentscher, Schemes of}

Arrangements in Cross-Border Restructuring Cases, p. 18.

72_{See ch. 3.2.} 73_{s. 899(4).}

74_{s. 899(3). See also Re T&N Ltd (Number 3) [2007] 1 All E.R. 851.} 75_{See Goode, The Principles of Corporate Insolvency Law, 12-24.}

76_{s. 899(3). However, the dissenting creditors whose claims are governed by foreign law cannot be bound,} see Goode, The Principles of Corporate Insolvency Law, 12-24.

77_{See Bork, Rescuing Companies in England and Germany, p. 216.}

78_{See for the description and treatment of these risk under German law in chapter 4.3.4.2.}

79_{The section 240 (4) requires that the debtor must have been influenced in deciding to give the preference} by a desire to make better off the position of the creditor. After Re McBacon Ltd English courts decided that “desire” is interpreted as free will, so if any pressure was brought to the debtor, the provision must not apply.

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One risk for the new shareholders comes from capital market law; in case of acquisition of more than 30% shares by one converted creditor, a mandatory offer must be made to the other shareholders.

3.3.3.3 Recognition of the SoA abroad.

The recognition of SoAs abroad constitutes an ambiguous issue. Recently the Appeal court of Celle held that SoAs are not to be recognized in Germany with respect to the case of Equitable Life SoA.80_{Firstly, schemes do not qualify as insolvency proceedings under}

European Insolvency Regulation (EIR),81_{which, on the one hand, is positive because the}

jurisdiction of English courts is not defined by COMI (center of main interests – art. 3 (1) of EIR (recast)) but by the broad criterion of “sufficient connection”. On the other hand, it entails that SoAs do not enjoy automatic recognition throughout the EU, which undermines their effectiveness. Secondly, the court of Celle argued that SoAs are not even a “judgement” with the meaning of (former) art. 32 of Brussels I.

However, it has been argued that German courts have a duty to recognize the SoAs under Brussel I.82 Under the recast of Brussels I the sanction of SoAs could qualify as a “judgement” according to art. 2 (a).

3.4 The Company Voluntary Arrangement

The Company Voluntary Arrangement (“CVA”) is governed under Part I of the Insolvency Act 1986. The following description of CVA is less extensive than the one of SoA for two reasons. Firstly, most CVAs focus on the sale of business as a going concern, rather than to reorganization by a debt-equity conversion, contrary to the schemes that have become very attractive in Europe.83 Secondly, the use of CVAs remains low despite the original high expectations.84

80_{OLG Celle 8 U 46/09, 8 September of 2009 (in re Equitable Life case).}

81_{See Wessels, Council’s text at first reading of Insolvency Regulation (recast) released, [online], see also} Annex I of the 1340/2000 (recast).

82_{Swierczok, Recognition of English Schemes of Arrangement in Germany, 5 King's Student L. Rev. 78} 2014, p. 78.

83_{See however the recent CVA of Schefenacker Plc (2007).} 84_{See Payne, Debt Restructuring in English Law, p. 9 [online].}

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According to s .1(1), the CVA starts with a proposal of the directors of the company for a “composition in satisfaction of its debts or a scheme of arrangement of its affairs”.85_The

interpretation of “creditors” is quite the same as under scheme of arrangement,86 but the same doesn’t happen for the interpretation of “company”. Contrary to scheme, CVA is a recognized insolvency procedure under European Insolvency Regulation 1346/2000 and thus, affected by it.87_{Moreover, a CVA does not serve only insolvency purposes and its}

commencement does not require former declaration of insolvency, although it can be combined with liquidation or administration.88 However, the persons qualified to propose a CVA are restricted in comparison to the scheme’s, since creditors and members do not have this power. Finally, in CVA there is a restricted possibility of an automatic moratorium only for small companies.89

An important feature of the CVAs is the existence of the nominee.90 The nominee is appointed by the company by sending him a copy of the proposal and a statement about the company’s affairs.91_{Within 28 days the nominee must submit a report that assesses the}

prospect of the proposal and whether there is manifest unfairness and, following that, he convenes the necessary meetings.92 As a result, the nominee plays at this stage a similar role as the court does in the scheme by controlling prima facie the CVA proposal.93

3.4.2 Approval and confirmation of the CVA.

3.4.2.1 Meetings.

The meetings are held according to the nominee’s report and are chaired by him/her. For the approval of the proposal the rules are slightly different from those in SoA: firstly, there is no division of classes for creditors, and a shareholders’ meeting is always necessary. However, given that the shareholders would be in principle “out of the money” in a

85_{The meaning of the “scheme of arrangement” in this context is different from the one under s. 895} Companies Act 2006. See Goode, The Principles of Corporate Insolvency Law, 12-28.

86_{See. supra in chapter 3.2.} 87_{s.1 (4), (5).}

88_{s. 1(3).}

89_{S. 1A. “Eligible” companies according to the Schedule A1 of the Insolvency Act are those who had at} least two out of the three following characteristics the year before filing for the moratorium: 1. A turnover less than 6.5 million pounds per annum, 2. Less than 50 employees, 3. A balance sheet that did not exceed 3.26 million pounds.

90_{s. 1(2).} 91_{s. 2(3).} 92_{s. 2(2).}

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reorganization under a CVA, in case of conflict with the decision of creditors’ meeting, the latter prevails.94 Of course, this approval can be challenged by any shareholder of the company.95 Secondly, the proposal needs to be approved by 75% in value in creditors’ meeting and 50% in value in shareholders’ meeting. In the CVA there is no need for numerical majority. After the conclusion of either meeting, in accordance with the rules the nominee shall report the result of the meeting to the court.96

3.4.2.2 The involvement of the court

In the case of a CVA the involvement of the court is not as intense as in a scheme, since the relationship between the participants in a CVA is characterized as “essentially

contractual in nature” by the English courts.97 The terms of the arrangement are those that determine the effect of the CVA and not the court’s order. This means that the court cannot give directions and amend an approved CVA.98 In fact the court usually intervenes only after an application of a participant or the nominee.99 Furthermore, it also means that it is for the opponents of the CVA to prove that it is unfair for them. On the contrary, the onus for the sanction of the scheme is on its proponents who must convince the court of its fairness and usefulness.100

Despite of its limited involvement, the court deals with some important issues in CVA: It is competent to hear the objections about the decision of approval of the CVA101. There are specific grounds for objection under s. 6: the court considers whether the CVA “unfairly prejudices” the interests of the participants and whether there has been “some material irregularity” at or in relation to the meetings.102_{If the court is satisfied by one of these}

grounds, it can either revoke or suspend the decision taken or give a direction for consideration of a revised proposal or both.103_{The court cannot change the decision on its}

own because of the contractual nature of the CVA.

94_{s. 4A(2).}

95_{s. 4A(3).} 96_{s. 4(6).}

97_{See Goode, The Principles of Corporate Insolvency Law, 12-26, where he presents the relevant case law.} 98_{See Re Alpa Lighting Ltd [1997] B.P.I.R 341.}

99_{For instance: s. 2(4), s. 4A(6), s. 6.}

100_{See Re T. & N. Ltd [2006] W.L.R. 1728 at [81], pointing out the difference. See also Goode, The}

Principles of Corporate Insolvency Law, 12-28.

101_{s. 4A (3), s. 6.} 102_{s. 6 (1).} 103_{s. 6 (4).}

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Apart from this important competency, the court has a discreet role in giving solution to some problems of the process: it has the power to replace the nominee104 and to hear any objections under s. 4A (3). Furthermore, once the CVA has taken effect, the court may appoint a supervisor of the voluntary agreement (usually the nominee becomes the supervisor), if it considers this appointment expedient.105_{The court is also competent to hear}

any objection to the supervisor’s actions, omissions or decisions. Then it has the power to reverse or modify the decision, to give directions or make any other order it thinks fit.106

Thus, in this case the court has more extensive powers than under section 6. 3.4.3 The effect of the CVA.

The CVA binds all creditors that are entitled to vote, irrespective of whether they were informed or not.107 Thus, the entitlement to vote is of crucial importance in this context, since it determines not only who can participate in meetings but who are bound by the CVA as well.108 It is also important that a CVA does not bind the unsecured and preferential creditors without their consent.109 This element, in combination with the lack of an automatic moratorium for medium and large companies, deprives much of the attractiveness of a CVA in relation to debt-equity conversion. However, CVAs are recognized insolvency proceeding covered by EIR, which facilitates their enforcement abroad, contrary to SoAs.110

3.5 Comparison of SoAs and CVAs in the light of effectiveness of debt-equity conversion.

3.5.1 Similarities

Starting the comparison of the SoA and CVA, we identify some advantageous similarities: Firstly, their basic characteristic and the reason that they are preferred from a workout is that they provide for a “cram-down” rule on the dissenting creditors or members facilitating an arrangement. Secondly, both of them may be formulated without the requirement of the insolvency of the debtor. This contributes to a timely and flexible implementation of a conversion. Thirdly, they are “debtor in possession” procedure, i.e. the board of directors of the debtor remains in control, unless the company has already entered

104_{s. 2(4).}

105_{s. 7(5).} 106_{s. 7(3).} 107_{s. 5(2).}

108_{See Goode, The Principles of Corporate Insolvency Law, 12-41, 12-45.} 109_{s. 4(3), (4).}

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administration or liquidation. As a result, the directors are not deterred from implementing the swap. Fourthly, both mechanisms bind the affected stakeholders, whether they were notified or not.111 This also contributes to the efficiency of the procedure.

On the contrary, there is a common disadvantage: both mechanisms do not provide for a satisfactory standstill; a CVA unreasonably restricts their automatic moratorium only to small companies and a scheme provides none.112_{The lack of an automatic stay may deprive those}

mechanisms of their basic advantage (ability to cram-down the dissenters), since it leaves the company unprotected from creditor enforcement procedures.

3.5.2 Differences a. Binding effect

SoAs are preferred by practitioners because they can bind secured and preferential creditors, which is not possible in CVA. Furthermore, it is very important to point out that the scheme’s effect is based on the court’s order to sanction it. As a result, the onus is on the proponents of the scheme to prove why the approved scheme is in compliance with the statutory requirements and fair. On the contrary, the CVA’s effect is based on the composition or arrangement between the company and its creditors, and this entails that anyone who objects to the proposal has the onus to challenge and prove the unfairness before the court. 113 This major difference reflects the different nature of those mechanisms: the schemes vary or discharge the liabilities of the company as a matter of law, while the CVAs as a matter of consent.114 Their different nature results also in a very different role of the court and of the statutory requirements that concern each mechanism.

b. Statutory requirements

Different rationales: In schemes there is more intensive involvement of the court in

comparison to the CVA. This is related to their different nature: the applicants in the scheme endeavor to obtain a court order and sanction the scheme, while the applicant (company) in CVA to achieve an arrangement with their creditors under the supervision of the nominee. The basic difference between the aim of the statutory requirements of the scheme and of the

111_{For scheme: see s. 899(2) Companies act 2006 and for CVA: see s. 5(2) Insolvency Act 1986} 112_{See Payne, Debt Restructuring in English Law, p. 8 [online].}

113_{See Goode, The Principles of Corporate Insolvency Law, 12-28.} 114_{See Goode, The Principles of Corporate Insolvency Law, 12-50.}

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CVA derives from the fact that the scheme’s rules are designed with a view to regulate an area of conflict, while the CVA’s rules with a view to facilitate a rescue.

A number of features tend to suggest this difference: Firstly, any participant in the scheme can apply for a sanction, while in the CVA the company is viewed united against its creditors. Secondly, the division in classes is a result of the divergence of interests among the participants in a scheme, and this fact also calls for provisions that ensure the protection of the dissenting minorities.115_{The same happens in relation to the required majority: in the}

scheme, majority in number (not only in value) is required. In contrast, in a CVA procedure the company is perceived united, not as ground of conflicts, and that’s why the supervision of the court is limited there. Thirdly, the requirement for information is emphasized in the case of the scheme.116 These extra provisions in the scheme regime reflect the additional need for minority protection of creditors and shareholders, since any participant can theoretically achieve a sanction under s. 1 of Companies Act 2006, while in the case of CVA only the company or an insolvency practitioner can initiate the procedure.

The result regarding the effectiveness: As the statutory regime of SoA is more

complicated and includes greater involvement of the court, it leads to higher costs and this is, of course, unpleasant for the creditors who want to participate in conversion. However, SoA is still preferable due to its extensive binding effect and ability to disqualify even a whole class, when it consists of creditors or members with no economic interest in the company. 117 Since the senior creditors (banks usually) are the first to be informed by the financial distress of the debtor, they usually promote the implementation of a debt-equity swap in order to wipe-out the out-of-money junior claims easily and achieve a better economic result for themselves.118

115_{See Payne, Debt Restructuring in English Law, p.12 [online], that she points out that the requirement of} the classes operates as a counter-balance to the fact that majority can bind the minority. However, this is the case also in CVA but there is no provision for classes.

116_{Relevant are the requirement for issue of statement (s. 897 Companies Act 2006) and the imposition of} duty for directors (s.899 Companies Act 2006).

117_{See Clowry, Debt-to-equity conversion in UK and Europe, European Company Law 7/2010, p. 53, 56.} 118_{Ibid, p. 56.}

Debt for equity transactions under English and German Insolvency law

European Private Law LL.M course 2014-2015

Debt for equity transactions under English and German Insolvency law

European Private Law LL.M course 2014-2015

Debt for equity transactions under English and German Insolvency law

Table of contents

1. Introduction

2. General features of debt-equity swap from the creditors’ point of

view.

3. The treatment of debt-to-equity conversion under English law