Re Codere demonstrates the willingness of the court to sanction a scheme of arrangement where English law jurisdiction was purposefully sought. Unusually, the company was acquired by a foreign group and voluntarily assumed the group’s financial liabilities, solely for the purpose of invoking the jurisdiction of the English courts in relation to the scheme. In the light of this decision and the changing Brexit landscape this article considers the effect on the ability of foreign companies to forum-shop.
The Codere group carried out business in Latin America, Spain and Italy in the gaming sector. The group reached a position where it was unable to meet its debts and sought to engage in a restructuring process. It had two series of notes issued which were governed by New York law and subject to an English law intercreditor agreement. The group engaged in negotiation with its creditors and it was concluded that restructuring in all jurisdictions other than England would involve insolvency proceedings. Such proceedings would jeopardise gaming licences on which the group depended, severely diminishing its value and reducing potential creditor recovery to zero. In contrast, the proposed scheme of arrangement would aim to achieve a 47% recovery for creditors.
- The group had a series of loan notes governed by New York law
- An English company and SPV, Codere (UK) Finance Limited, was acquired for the sole purpose of voluntarily assuming joint and several liability for the group’s liabilities in respect of loan notes and accessing England’s scheme of arrangement jurisdiction
- The scheme was unopposed by the group’s creditors
- A condition to the proposed scheme was an order recognising its effect under Chapter 15 of the US Bankruptcy Code
Schemes of arrangement – brief criteria
In order to successfully implement a scheme of arrangement in England under Part 26 of the Companies Act 2006, the court will order a creditors’ meeting to vote on the scheme and, in considering whether to exercise its discretion and sanction the scheme, the following criteria must be satisfied:
- The arrangement is such that an intelligent and honest man might reasonably approve it;
- There is fair representation of each class of creditors/members and the majority are acting bona fide; and
- Compliance with the statutory provisions.
However, in order to fall within the court’s jurisdiction and proceed to even apply to have its scheme of arrangement sanctioned, the company in question must show ‘sufficient connection’ with England. Further, assuming that the Recast Brussels Regulation is applicable, the company must also show that there are sufficient scheme members domiciled in England, although this requirement may fall away in a post-Brexit landscape. The courts will also consider the effectiveness of the scheme in any other relevant jurisdictions where scheme recognition is essential to ensure its success.
As the SPV was an English incorporated entity, its Centre of Main Interests (COMI) was clearly in England for the purposes of falling within the court’s jurisdiction. As a result, the court was not required to apply the ‘sufficient connection’ test. However, the court still evaluated the connection and jurisdictional elements set out above. It considered that there was a significant percentage of the noteholders domiciled in England, and that, by entering into a lock-up agreement, 97% of the creditors had contractually submitted to the jurisdiction. Further, the scheme was conditional on an order recognising the scheme and its effect under Chapter 15 of the US Bankruptcy Code, thereby satisfying the court as to the effectiveness of the scheme in other relevant jurisdictions.
The court was, however, initially uneasy with the artificiality of the claim to the English court’s jurisdiction and the blatant forum shopping. Nugee J noted, in the first stage of the court application, that this case was “quite an extreme form of forum shopping”. This concern was examined as part of the wider analysis of the scheme and whether this should be a factor in the exercise of the court’s discretion to sanction the scheme.
Whilst Newey J recognised this as a clear case of forum shopping, significantly he noted that forum shopping in itself is not necessarily undesirable. Previously, forum shopping has seen as a means of a debtor seeking to move its COMI to a jurisdiction more favourable for debtors – the purpose being to evade debts and disadvantage the creditors. At paragraph 18 of his judgment, Newey J noted that this was an attempt “to achieve a position where resort can be had to the law of a particular jurisdiction, not in order to evade debts but rather with a view to achieving the best possible outcome for creditors”. Crucially, it was noted that the entire scheme was devised following close consultation with creditors, with an overwhelming level of support and clearly in the interests of the group’s creditors.
Codere is a commercial and practical judgment with positive implications for foreign companies looking to take advantage of the flexible English regime and the schemes of arrangement jurisdiction. It shows a willingness of the court to assist companies in obtaining commercially viable and practical solutions, where such solutions are in the best interests of creditors. In this case there were no objections from creditors and the court were presented with clear evidence of the benefits of the scheme.
However, the case is far from a free pass for using the UK courts’ scheme jurisdiction. It is clear that the test for the scheme must be met, and that the court will continue to exercise its broad discretion, consider the wider circumstances, and ultimately the potential benefit to creditors.
The impact of the UK leaving the EU may further widen access to the scheme jurisdiction. Whilst the ‘sufficient connection’ test will remain, the requirement of jurisdiction over scheme creditors may fall away. However, the court will continue to separately consider the effectiveness of the scheme in other jurisdictions. Further, despite the apparent ‘short cut’ of incorporating an English entity through which to funnel the scheme application, it is clear from Codere that the courts will still consider wider criteria when deciding whether or not to assume jurisdiction.
The decision is interesting from the point of view of any Lender financing a foreign company or multinational group. On the one hand, it could be considered as a potential threat to the certainty of a borrower’s COMI and the procedure in the event of an EOD and borrower insolvency.
However, the ability to use the English regime is clearly limited to schemes for the benefit of creditors. The decision therefore opens up opportunities for lender flexibility, and the negotiation of a commercial solution in the event of insolvency.