With APCOA Parking, the English High Court sets out the latest line of authority in the increasing use of schemes of arrangement by foreign companies.

This case, APCOA Parking (UK) Limited & Ors [2014] EWHC 997 (Ch), presents two novel aspects:

  • First, the acceptance by the court that a change of the governing law and jurisdiction clause in the financing documentation from German to English law, in contemplation of a foreign company pursuing a scheme in the English courts, can still provide sufficient connection to enable the Court to invoke its jurisdiction and
  • Second, that creditors with different priority rankings could vote together in the same class.

FACTS

APCOA is a leading European parking manager, which operates in 12 countries and has 39 subsidiaries. The group is centrally managed by a holding company based in Germany. Nine of its subsidiaries were involved in the scheme, comprising a German- incorporated holding company, two English-incorporated companies and five other subsidiaries incorporated variously in Austria, Belgium, Denmark, Germany and Norway (the ‘Scheme Companies’).

Each Scheme Company is a borrower and guarantor under a facilities agreement consisting of a first tranche A facility of €595 million and £33.83 million, and a subordinated term loan facility of €65 million (the second lien) (together, the ‘Facilities Agreement’). These facilities, together with liabilities under some additional facilities, were due to mature on 25 April 2014. The Scheme Companies considered that they would be unable to repay the indebtedness in full on the maturity date.

The Scheme Companies had been in discussions with its lenders with a view to negotiating a restructuring. However, near the end of March, they arrived at the conclusion that negotiations were unlikely to be finalised prior to the termination date. The Facilities Agreement required unanimous consent to secure an extension of the termination date, but this could not be achieved. In the absence of an extension, there was a high likelihood that the directors of the German parent company would be obliged to commence insolvency proceedings, thereby causing a cascade effect throughout the entire group.

A scheme of arrangement under Part 26 of the Companies Act 2006 was therefore proposed as a means of achieving an extension of the termination date under the Facilities Agreement without the need for unanimous approval by all of the lenders. The purpose of the schemes was very limited: simply to provide more time for the companies to attempt to agree a restructuring with its lenders without a potentially value-destructive insolvency process that the directors may otherwise have had to pursue.

SCHEME OF ARRANGEMENT

A scheme of arrangement requires the support of 75 percent in value of the scheme creditors’ claims (or any class of them) and a majority in number of the creditors present and voting in person or by proxy at the meeting. If the requisite majorities are obtained, the scheme will bind all the relevant company’s creditors (or relevant class or classes of them) whether they were notified of the scheme and/or whether or not they voted in favour of the scheme. It therefore provides a useful mechanism to cram down minority creditors who either oppose a scheme or do not participate in the voting.

In summary, a scheme of arrangement involves the following stages:

  1. A court order convening meetings for the purpose of allowing creditors to vote on the scheme
  2. Meeting(s) of members and/or creditors to consider and vote on the proposed scheme and
  3. If the scheme is approved, a further hearing in which the company asks the court to sanction the proposed scheme.
  4. At the initial court hearing for the purposes of convening the meeting(s), the court has to be satisfied that the proposed voting classes are correctly constituted and that the proposed scheme has a chance of being approved.

HOW ARE CREDITOR CLASSES CONSTITUTED?

A class of creditors must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

The APCOA scheme proposed that the priority senior lenders and the second lien lenders should vote together in a single meeting. Notwithstanding their differing priorities and the general presumption that creditors who rank differently should vote in separate classes, the justification for them voting in a single class was as follows:

  • The maturity date for all facilities was the same
  • The maturity date for all facilities would be extended in the same way
  • Each lender would be entitled to the same pro-rata consent fee if the scheme was approved and
  • The differences in the lenders’ respective rights as against the company in relation to fees and margins payable were considered by the court to be not so dissimilar as to make it impossible for them to consult together.

SUFFICIENT CONNECTION

As most of the Scheme Companies are neither English- incorporated nor have their centre of main interest (COMI) in England, the Court had to be satisfied that there was otherwise sufficient connection to English jurisdiction to warrant the Court’s intervention.

In the case of Mobile-8 Telecom Finance Company BV, a company registered under the laws of the Netherlands with its main business operations in Indonesia, the English court approved a scheme involving the company changing both its COMI from the Netherlands to England and the governing law of its indenture from New York law to English law, in part, to gain access to the scheme process. Despite Mobile-8 openly acknowledging that it was engaged in forum shopping, the English court ultimately approved Mobile-8’s scheme.

In APCOA Parking, however, the Court followed the analysis in Re Drax Holdings Ltd [2004] 1 WLR 1049 as adopted in Re Rodenstock GmBH [2011] EWHC 1104 and in a variety of cases which have followed in quick succession since. These lines of authorities provide that foreign companies (such as the non- English incorporated scheme companies) will have a sufficient connection with the jurisdiction where the facilities agreement is to be restructured by way of a scheme of arrangement if it is governed by English law and is subject to the jurisdiction of the English court without the need for an English COMI to also be established.

COURT CONSIDERATIONS

The court had to consider whether the change of the governing law and jurisdiction clause was either ineffectual under the law governing the Facilities Agreement or such as to preclude the intervention of the English court because of the subsequent change. Changes to such clauses in the Facilities Agreement could be made with the approval of not less than 662/3% of lenders, representing a lower voting threshold than that required to approve a scheme and much less than the unanimous approval required to amend a maturity date.

Expert opinions were admitted in respect of each of the relevant jurisdictions, confirming that the changes were valid. The court was also provided with reassurance that the creditors were made aware the purpose of altering the governing law and jurisdiction clauses which included the ability to enable the implementation of a scheme of arrangement under English law.

INTERNATIONAL RECOGNITION

Lastly, the court had to be satisfied that its sanction of the proposed scheme would be recognised and enforced in the countries where the Scheme Companies are resident.

Expert opinions dealing with each jurisdiction were produced for the court, which affirmed that the courts in those jurisdictions would give effect to a scheme formally sanctioned by the English court.

CONCLUSION

The change of the governing law and jurisdiction clause in the Facilities Agreement provided a convenient gateway to the implementation of an English law scheme of arrangement for a number of the foreign companies within the APCOA group. While aspects of this case will no doubt be of relevance and interest to other companies, a note of caution should be raised:

  • The scheme implemented in APCOA was basic providing merely for an extension of the maturity date to enable further discussions with its creditors to take place
  • No opposition was presented by any creditor at the first hearing, in fact the scheme was broadly supported by lenders holding more than 50 percent of the outstanding senior debt The Court was concerned that creditors were fully informed as to the reasons for the alteration to the Facilities Agreement. Parties in the future seeking to make similar amendments to the finance documents, without the purpose being made clear to relevant counterparties, may find a Court is less willing to grant jurisdiction than it did here
  • As the European Commission has published a proposal for the amendment of the Council Regulation (EC) 1346/2000 on Insolvency Proceedings (as covered by David Ampaw in his article Proposed Amendments to the EC Insolvency Regulation’, in the Q1 2014 issue of Restructuring Global Insight), depending upon how the amendments are eventually agreed, this may require a company to establish its COMI in the UK in order to avail itself of a scheme, thereby raising the threshold from the simple ‘sufficient connection’ test which currently applies.