Editor’s Note: This two-part article discusses how the U.K. and U.S. have become the two main jurisdictions where debtors outside of such jurisdictions (foreign debtors) have been able to successfully restructure their businesses. Due to the flexibility of both legal systems and their shared focus on reorganization as opposed to liquidation, which often would be the outcome of the debtors’ domestic insolvency process, foreign debtors have used the U.K. or the U.S. legal systems to successfully restructure. Thus, both jurisdictions have attracted a large portion of foreign debtors’ cross-border restructurings. Part I describes how foreign debtors have successfully restructured in the U.K., while the second part, to be published shortly after, will focus on the U.S.
The U.K. has become the bankruptcy destination of choice for many struggling companies located outside of the U.K. that wish to avail themselves of two particular statutory restructuring procedures: the administration/prepack and the scheme of arrangement. The U.K. comprises England, Wales, Northern Ireland and Scotland. Northern Ireland has very similar laws to England and Wales while Scotland's is a bit different, but in practice, it is in England where the foreign companies come to appear before the companies' court in London. The laws of England provide such flexibility that the U.K. is becoming the venue of choice for companies from all over the world, including France, the Netherlands, Germany, Greece and Vietnam.
Administration is a relatively quick and straightforward procedure that can be initiated by a secured creditor, which can be done through a court hearing or an out-of-court procedure that merely requires papers to be filed with the court. Alternatively, the directors of the debtor can initiate the process themselves. Once an administrator has been appointed, it is possible for the directors to buy the debt-free business from the administrator through a prepack sale, thereby giving the business a second chance. Administration is an insolvency process and is only available for a company that is, or is likely to become, unable to pay its debts as they become due. Administration cases are a matter of public record.
Primarily small companies use the company voluntary arrangement procedure under English insolvency law. Larger restructurings are done using a scheme of arrangement under English company law. The Companies Act 2006 provides that a “company,” for the purposes of the schemes of arrangement legislation, means any company liable to be wound up under the Insolvency Act 1986. This includes any unregistered company, such as a foreign company.
Although a company must be capable of being wound up by the courts of England and Wales before it can enter into a scheme of arrangement, there is no requirement that it must be insolvent to do so. Schemes are often used for solvent restructurings, including internal reorganizations and mergers. There is no central register of companies who have entered into schemes of arrangement; it is a confidential process with details only available to the court and the creditors.
Under a scheme of arrangement, a company may make a compromise or arrangement with its shareholders or creditors (or any class of creditors). Since the process requires court approval, the scheme must be fair and reasonable, as well as represent a genuine attempt to reach an agreement among a company and its creditors or shareholders. Schemes of arrangements are ideal for financial restructurings and can be used to cram down secured lenders or impose new terms to undersecured creditors. A scheme of arrangement is less likely to be used for an operational restructuring, wherein the statutory moratorium arising in an administration and the powers of an administrator would be necessary to achieve a successful turnaround.
A scheme of arrangement is initiated through a hearing in which a company requests a court order empowering it to call separate meetings of each class of creditors and shareholders to consider the company’s proposals. If those attending each meeting vote in favor of the scheme of arrangement by a majority of three-quarters in value, the court is asked to sanction the scheme of arrangement at a second hearing.
This procedure is being used increasingly by non-U.K. companies if they can either manage to move or “shift” their center of main interest (COMI) to England or show sufficient connection with the English courts. For example, if their loan documents are governed by English law,and the scheme of arrangement would achieve its purpose by being recognized in the country where the company is based. In Apcoa Parking (UK) Ltd.,[1] the law applicable to the debtor’s loan documents was simply changed by a majority vote of the lenders from German to English law and the U.K. court ruled that the debtor had sufficient connection with the U.K.
In Re Magyar Telecom BV,[2] the debtor was incorporated and registered in the Netherlands, and its main business was the operation of telecommunications services in Hungary. The company’s principal creditors were noteholders under an indenture governed by New York law and subject to the nonexclusive jurisdiction of the New York courts. The company’s COMI was moved to England before the first hearing requesting the court to convene meetings of creditors to vote on the scheme. The company was unable to service its obligations under the notes, having defaulted on the payment of interest. The company’s directors believed that if the restructuring was not implemented, the business would likely be forced to enter formal insolvency proceedings. Such a step would have resulted in a significant destruction of value for the company and significantly reduced recoveries for the noteholders.
The U.K. court considered the requirement that the company should have a sufficient connection with the English jurisdiction and that the scheme of arrangement looked likely to achieve this purpose. The court heard expert evidence that the scheme of arrangement would be given effect in the U.S., the Netherlands and Hungary. Thus, the English court approved the scheme of arrangement, and an application was made in the U.S. Bankruptcy Court for the Southern District of New York for recognition of the scheme under chapter 15 of the Bankruptcy Code.
Another example is the financial restructuring of Zlomrex International Finance SA,[3] a French financing vehicle for Cognor, a large Polish scrap metal and steel products group. In February, Zlomrex completed the restructuring of 118 million euro of senior secured high-yield notes, governed by New York law, due in 2014. This was after Zlomrex moved its COMI from France to England to establish a sufficient connection with the U.K. In addition, at least one of the noteholders was within the English jurisdiction.
The scheme of arrangement documents proposed to waive the need for a chapter 15 application in the U.S. At the first hearing, the U.K. judge made it clear that he was uncomfortable with that suggestion. He did not want to allow a creditors’ meeting to consider approving a scheme of arrangement, which would not be enforceable in the U.S. and would not bind the New York noteholders. Thus, a better way of ensuring that a scheme is going to be effective is to seek and obtain chapter 15 recognition in the U.S. Making an English scheme of arrangement involving significant U.S. interests conditioned on chapter 15 recognition that was deemed to be an appropriate mechanism to reconcile the interests of the two jurisdictions.
The U.K. judge did not want to give any U.S. counterpart “the impression of blithely overriding New York law rights and any legitimate interests of the New York court.”[4] After the creditors’ meeting and sanction hearing, Zlomrex’s advisers applied for and obtained chapter 15 recognition for the scheme, presumably influenced by the U.K. judge’s remarks.
These cases involved a sophisticated use of English legislation that is available to achieve nonconsensual financial reorganizations to preserve value, and allowed the companies to reorganize and maximize recoveries for all stakeholders. Other European countries such as Spain, Germany and France also have restructuring procedures, but these are not currently seen as being as flexible and successful as the English scheme of arrangement. This is evidenced by the fact that German, French, Italian and Greek companies have successfully used the English restructuring process.
At the European level, the European commission has made a recommendation asking the 28 member states of the European Union to harmonize certain aspects of their insolvency laws to promote rescue mechanisms instead of formal insolvency processes aimed at reducing risks and improving recoveries for creditors. There is also a proposal to deal with the insolvency of members of a Pan-European group of companies by placing stronger obligations on insolvency practitioners and the courts in each member state to cooperate and communicate effectively with their counterparts in other member states. In addition to individual proceedings for each company in the group, a group process led by an independent court-appointed coordinator has also been proposed. However, any amendments are unlikely to come into force until 2016. It will be interesting to analyze whether these changes will affect the current popularity of the English scheme of arrangement and make it a less attractive mechanism to restructure a business.
[1] [2014] EWHC 997.
[2] [2013] EWHC 3800.
[3] [2013] EWHC 4605.
[4] [2013] EWHC 4605 para 22