A recent judgment of the High Court will serve to remind minority, overseas creditors of any company having a substantial connection with England that their debtor’s liabilities could be compromised, restructured or reduced through a scheme of arrangement in England: Van Gansewinkel Groep BV  EWHC 2151 (Ch).
That may be the case even in circumstances where the English courts could not wind up the debtor and would not have jurisdiction to hear any claim by that particular creditor against the debtor (or vice versa). A scheme of arrangement can be sanctioned by the English courts where it has been approved by (broadly) 75% of the company’s creditors.
Gary Milner-Moore and Andrew Cooke, a partner and associate respectively in our dispute resolution team, consider the judgment below, and look at what minority creditors can do to protect their position when faced with a scheme of arrangement in these circumstances.
The facts, briefly, were as follows:
- A company and five of its subsidiaries in the waste management business (together, the “Group”) were incorporated in the Netherlands, Belgium and Luxembourg.
- The Group had liabilities under finance agreements in the approximate sum of €800 million and under hedging agreements in the approximate sum of €600 million.
- The creditors of the Group had entered into an intercreditor agreement under which the finance and hedging liabilities ranked pari passu.
- Each of the finance, hedging and intercreditor agreements was governed by English law.
- The Group became unable to meet its obligations under the finance and hedging agreements and was also unable to refinance in full those obligations. Despite none of the Group’s companies being incorporated in England, they secured the forbearance of a significant majority of creditors pursuant to waiver requests for an English scheme of arrangement (the “Scheme”).
- Under the Scheme:
- part of the liabilities owed to creditors would be refinanced by the creditors pro rata to their original participation but with the benefit of an enhanced guarantee and security package;
- the unsustainable part of the liabilities owed to creditors would be novated to a new, indirect holding company in which the existing creditors would participate pro rata to their original participations. That new company’s liabilities were not secured or guaranteed; and
- the creditors would be allocated shares in a new, ultimate holding company.
- The Group applied to the English court for approval of the Scheme under the Companies Act 2006 (“CA 2006″). The Scheme was not opposed by the creditors of the Group at the hearing but the court nevertheless had discretion to refuse to sanction the Scheme. Having heard submissions from counsel for the Group, the court handed down a written judgment dealing with (amongst other things) the jurisdictional issues that regularly arise in these contexts.
The Scheme was considered by Mr Justice Snowden, who in a judgment following approval of the Scheme emphasised that the English courts’ jurisdiction to sanction schemes of arrangement was not curtailed by the Insolvency Regulation No 1346/2000 (regulating jurisdiction within the EU for winding up and other insolvency regimes) and left open whether it was curtailed by the recast Brussels Regulation No 1215/2015 (the “recast Regulation”) (regulating jurisdiction within the EU in civil and commercial matters) on the grounds that in this case, jurisdiction under the recast Regulation could be established in any event.
Snowden J noted that the English courts’ jurisdiction to sanction schemes of arrangement is being engaged increasingly in relation to companies that do not have their centre of main interests (“COMI”) in England, nor any establishment or significant assets in England. The English scheme is a flexible tool without direct parallel in many other jurisdictions – its use can help to save a company from formal insolvency proceedings which would be destructive of value for creditors, particularly where operations of the company are divided across many EU states so that co-ordination of insolvency or rescue proceedings would prove very difficult or expensive.
Under section 895 of the CA 2006, any company that is liable to be wound up under the Insolvency Act 1986 (“IA 1986″) can also be the subject of a scheme of arrangement. Under the IA 1986, the English courts have jurisdiction to wind up not only companies incorporated in England but also so-called “unregistered companies”, being any association or any company that is not incorporated in England provided that (broadly) it has a sufficient connection with England. Thus, any foreign company with a sufficient connection with England can be the subject of an English scheme of arrangement.
For winding up proceedings under the IA 1986, the English courts’ jurisdiction is curtailed by the Insolvency Regulation. Winding up proceedings can only be commenced in England where the company has its COMI or an establishment in England. Snowden J accepted that the Group did not have their COMI or any establishment in England. As a result, the Group could not in fact have been wound up in England under the IA 1986.
However, consistent with previous authority, Snowden J held even though the English courts’ jurisdiction in respect of schemes of arrangement is defined by reference to companies that are liable to be wound up, the fact that the Group could not have been wound up as a result of the Insolvency Regulation did not curtail the English courts’ jurisdiction to approve the Scheme. First, such transient factors as a company’s COMI were not intended to impact the English courts’ scheme jurisdiction which was established by statute before the Insolvency Regulation was brought into effect. Second, the Insolvency Regulation lists at its Annex A the types of insolvency proceedings that it regulates. Schemes of arrangement are not included. The Insolvency Regulation and the English courts’ scheme jurisdiction are therefore independent – the scheme jurisdiction could not be curtailed simply because it is defined by reference to the winding up jurisdiction, which is curtailed under EU rules.
Recast Brussels Regulation
The recast Regulation sets out jurisdictional rules in respect of “civil and commercial matters”. However, it specifically excludes “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”. A scheme of arrangement might be described as a judicial arrangement or a composition and could therefore fall outside the scope of the recast Regulation. If that is right, schemes could fall into a lacuna between the Insolvency Regulation and the recast Regulation, though the courts have so far avoided reaching that conclusion.
Instead, English judges have asked whether, assuming that the recast Regulation were to apply, the English courts would have jurisdiction. This was the approach adopted by Snowden J. The question of whether or not the recast Regulation could curtail the English courts’ scheme of arrangement jurisdiction has been left for another day, most likely in a case where the English courts would not have jurisdiction under the recast Regulation but the company is nevertheless within the scope of section 895 of the CA 2006.
Generally, the applicable basis has been the creditor’s agreement to the jurisdiction of the English courts (the debtor having voluntarily submitted to the jurisdiction by applying for approval of the scheme in many cases). However, that basis was not available in Van Gansewinkel upon the construction of the dispute resolution provisions in the relevant documents.
Other bases of jurisdiction therefore fell to be considered. Of the Group’s 106 creditors, 15 were domiciled in England so could be joined to proceedings in England as of right. The balance of the creditors could then be joined under article 8(1) of the recast Regulation, permitting the English courts to hear ‘claims’ (ie approval of the Scheme sought by the debtor under which each creditor’s rights were declared to be varied) against non-English domiciled defendants where there is at least one English domiciled defendant and it is expedient to hear the claims together.
With jurisdiction established, Snowden J held that the Group had a sufficient connection with England because its finance and hedging liabilities were governed by English law. Each class of creditors had, by a significant majority in each case higher than 75%, voted in favour of the Scheme. The Court therefore exercised its jurisdiction to sanction the Scheme.
The judgment in Van Gansewinkel is not surprising – it pulls together and confirms a number of principles that were already established in the cases. The key point for creditors is that liabilities owed to them could be compromised, restructured or reduced in England upon application supported by (broadly) 75% of a debtor’s creditors, even if the debtor could not be the subject of an English insolvency proceeding. The minimum threshold, at least in the case of the jurisdictional basis identified in Van Gansewinkel, seems to be one creditor who is domiciled in England so as to engage article 8(1) of the recast Regulation (unless another basis for jurisdiction under the recast Regulation can be established), provided that the debtor’s most significant liabilities are governed by English law (or another substantial connection to England can be established).
What can minority creditors do when faced with a scheme of arrangement in these circumstances? There are two protections available to minority creditors.
First, a scheme of arrangement must be approved not only by a 75% majority of the creditors but also a 75% majority of each class of creditors. There is no statutory prescription of how classes of creditors should be defined. Classes are defined by reference to rights of creditors, not their interests, in the particular circumstances of each case. Where the majority of creditors are taking equity in consideration for restructuring of their debt, as was the case in Van Gansewinkel, it is likely that the other creditors will be treated as a separate class requiring separate 75% approval.
Second, there are procedural requirements as to the information that must be provided to creditors in advance of their vote on a scheme and the preliminary hearing of a scheme (known as the ‘convening hearing’). Any failure to comply with these requirements could lead to the invalidity of the creditors’ votes in favour of a scheme. Snowden J in Van Gansewinkel expressed some concern as to the completeness of the information supplied to creditors before the meetings at which they voted on the Scheme, including in particular as to the availability of other possible rescue procedures in other jurisdictions and their predicted outcome for creditors. However, the judge was satisfied that the evidence supplied was sufficient in the absence of any formal challenge to the scheme in this case.