Following a long line of cases preceding it, the English court in Re Van Gansewinkel Groep BV (‘VGG’) 1 has sanctioned a (solvent) English scheme of arrangement (‘Scheme’) under the Companies Act 2006 (the ‘Companies Act’) proposed by a group of foreign companies whose COMI2 and assets were located outside of England (‘foreign companies’). Whilst this latest judgment generally affirms the flexible approach of the current law, Snowden J’s declaration that the English court ‘does not act as a rubber stamp’ in sanctioning Schemes serves as a word of caution to those who might have been encouraged by the seemingly liberal approach recently set by the English courts3 to take a relaxed approach in such applications.
Snowden J’s lengthy and detailed judgment has made it clear that, in cases involving foreign companies in particular, even where overwhelming creditor support exists and whether or not the Scheme is opposed, the English court will not take shortcuts in determining whether it has jurisdiction, and if it does so determine, careful consideration will be given to whether it is appropriate to exercise it.
This Alert focuses on the technical guidance provided by Snowden J on the English court’s jurisdiction to sanction Schemes for foreign companies and other guidance that follows from the VGG decision that will have to be borne in mind for future Scheme applications in respect of foreign companies.
The Test for Jurisdiction to Hear an Application to Sanction a Scheme in Respect of Foreign Companies Scrutinised
The Jurisdiction Test Under the Companies Act
Under the Companies Act, the English court’s jurisdiction to sanction a Scheme exists in respect of a ‘company liable to be wound up under the Insolvency Act 1986’. 4 This test does not depend on transient considerations (such as where the company’s COMI is) and, therefore, includes cases where the English court would not, at that time, in fact exercise its jurisdiction to wind-up the company. 5 As a result, not only domestic English companies, but also foreign companies, with their COMI outside of the United Kingdom, can, in principle, meet this test.
However, for an English court to exercise jurisdiction over such a foreign company, a so-called ‘sufficient connection with the UK’ must be established. 6 In this context, Snowden J observed that a number of recent cases have determined a sufficient connection simply by reason of the Scheme creditors’ rights being governed by English law (with or without submission to the English courts by the Scheme creditors)7 . Though he did not expressly agree or disagree with this position, in VGG, he held that the governing law, together with the fact that the Scheme companies submitted to the jurisdiction of the English courts, was a ‘sufficient connection’ to warrant the exercise of Scheme jurisdiction under the Companies Act.
Snowden J also considered whether the last issue pertaining to jurisdiction under the Companies Act was established — whether there was a ‘good prospect’ that the Scheme would be recognised as having compromised creditor rights so as to prevent a dissenting creditor from seeking to attach assets of the Scheme companies in other countries on the basis of an assertion of their old rights.
This question bears out the principle that the English courts will not be of a mind to make an order which has no substantive effect or will not achieve its purposes. The English court does not need certainty as to the position under foreign law, but needs to have some credible evidence that it is not acting in vain8 in sanctioning an English Scheme. Snowden J was satisfied that this test was met either by the recognition granted under the Judgments Regulation (see below), 9 or under the domestic Dutch and Belgian rules of private international law — the Netherlands and Belgium being the location of substantial assets by the Scheme companies.
But is that all? No, it is not. In a case such as VGG, where foreign companies (without a COMI or establishment in the United Kingdom) are involved, international issues are also raised about the possible application of either the Insolvency Regulation10 or the Judgments Regulation and whether either of these examples of over-arching EU law11 limits the English court’s jurisdiction to consider the use of an English Scheme to restructure a foreign company.
The Jurisdiction Test Under the Insolvency Regulation
The potential relevance of the Insolvency Regulation to the question of Scheme jurisdiction lies in the fact that a court in a Member State is prevented from issuing a winding-up order against a company if the company in question does not have its COMI in that Member State. Snowden J affirmed existing case law on this question12 and quickly dismissed the Insolvency Regulation as being a limiting factor on the English court’s jurisdiction for Schemes in respect of foreign companies on the basis that the Insolvency Regulation was never intended to limit the Scheme jurisdiction of the English court (since Schemes are not collective insolvency proceedings of the type dealt with by the Insolvency Regulation and are not listed in its Annex A). Further, the Scheme provisions in the Companies Act make no reference to the Insolvency Regulation, ‘as might have been expected if a limitation to jurisdiction had been intended’.
The Jurisdiction Test Under the Judgments Regulation
The relevance of the Judgments Regulation lies in the fact that the proper forum for the adjudication of a commercial dispute (apart from bankruptcy and winding-up proceedings and judicial arrangements, compositions and analogous proceedings) 13 is, with certain exceptions, the forum of the domicile of the defendant. 14
Snowden proceeded by firstly considering whether Schemes fall altogether outside of the Judgments Regulation. Whilst ultimately he did not decide this question, he did say there was ‘force’ in the views expressed by certain judges that Schemes do indeed fall outside its scope. 15 He also observed it was ‘highly doubtful’ that the framers of the Judgments Regulation had Schemes in mind at all. However, the alternative argument is that since the Scheme is not within the Insolvency Regulation, it must fall within the Judgments Regulation because the Judgments Regulation and the Insolvency Regulation must be interpreted so as to dovetail into one another, with no overlap and no gap (or ‘legal vacuum’) between them.
Given this uncertainty, Snowden went on to consider the ‘alternative’ approach — which is to accept that the Judgments Regulation does apply, but to find jurisdiction to entertain a Scheme ‘within its provisions’. He canvassed the following two traditional bases for such a finding.
The ‘Choice of Forum’ Exception (Article 25)
In respect of the first such basis — that an exception to the general rule that a party can insist on being sued in its own Member State of domicile if it has submitted to the jurisdiction of the court of another Member State16 — Snowden J reasoned that since the persons being ‘sued’ 17 in this context were the non-voting minority creditors, it was their submission to jurisdiction of the English courts that was required to be established. The judge then held that the submission to jurisdiction clause being relied upon for this purpose as contained in the VGG finance documents (which were the subject of the Scheme) did not satisfy this requirement because it was made only by the Scheme companies, not by the lenders. Practitioners will therefore be well-advised to draft submission to jurisdiction provisions in accordance with the standard LMA18 ‘two-way’ submission.
The Exception That Allows One Locally Domiciled Defendant to Create Local Jurisdiction in Respect of Other Non-Locally Domiciled Defendants (Article 8)
Turning to the second such basis — that a person domiciled in a Member State may be sued, where he is one of a number of defendants, in the courts of the place where any one of a number of defendants is domiciled19 — Snowden J found that Article 8(1) would ‘potentially’ be engaged if at least one creditor is domiciled in England and if it is expedient for the English court to hear the claims against him. In this case, Snowden held that the number (15 out of 106) and value (EUR135 million out of EUR820 million) of Scheme creditors domiciled in England, was far from immaterial and was ‘sufficiently large’ that the test of expediency was satisfied. On this basis he held that all Scheme creditors came within the jurisdiction of the English court under Article 8(1) of the Judgments Regulation.
Having so held, he did not go on to consider the third traditional basis — whether to apply Scheme jurisdiction by analogy with Article 6 of the Judgments Regulation (as in Rodenstock, i.e. where a Member State applies its own private international law). The judge said he preferred not to express a view on this approach.
Greater Detail Required on ‘Possible Alternatives to the Scheme’
In support of the Scheme submissions, it was indicated in the Explanatory Statement to the proposed Scheme that the VGG group had considered various alternatives to the Scheme but concluded that the Scheme represented the only realistic means to achieve a restructuring of the financial indebtedness of the VGG group so as to enable the group to continue to trade. Snowden J made it clear he would expect that where, as in this case, companies are seeking the consent of their creditors and the sanction of the English court to a Scheme that is put forward as a more advantageous outcome for creditors than formal insolvency proceedings, greater detail must be provided in the Explanatory Statement that is issued to creditors and in evidence before the court. In the end, however, Snowden J was satisfied that the Scheme in this case provided creditors with better value than if VGG had been forced to go into insolvent liquidation in the Netherlands and Belgium (which the Scheme companies admitted would be the alternative if the Scheme had not been sanctioned).
In ultimately sanctioning the Scheme proposed by the Dutch and Belgian VGG group companies, Snowden J did not need to further extend the existing case law on the criteria required to sanction Schemes. He did so on tried and tested bases. That said, main take-aways of the VGG decision appear to be:
- In the context of establishing jurisdiction under the Companies Act, the so-called ‘sufficient connection with the UK’ test continues to be met by the existence of English law as the governing law of the relevant finance documents. Unlike in the context of reliance on Article 25 of the Judgments Regulation, there is no scrutiny as to whether the ‘choice of forum’ is drafted as a one-way or two-way submission.
- The uncertainty as to whether or not Schemes are covered by the Judgments Regulation continues to exist. This begs the question what an English court will do in a case where jurisdiction can only be found under the Companies Act and not under the Judgments Regulation.
- In future Scheme applications:
- If proponents of a Scheme intend, in addition to class issues, to raise a jurisdictional issue for determination at the convening stage (i.e. the first out of three stages of the Scheme process), they should indicate that and give proper details of argument in the Practice Statement letter notifying creditors of the convening hearing; and
- Sufficient detail must be provided in the Explanatory Statement that the proposed Scheme provides a more advantageous outcome for creditors than formal insolvency proceedings.