English schemes of arrangement (Schemes) have become a useful and established procedure for restructuring the debts of foreign companies incurred under English law finance documents. For an overview of why they are useful and how they work, see our July 2011 article "Financial restructurings of foreign companies through English schemes of arrangement". But what, if anything, has changed since then? Rachel Anthony and Hayley Çapani explain the key recent developments.
Until the end of last year, in almost all Schemes involving foreign companies, the company was European. The use of Schemes by European companies is still going strong, but there has been a marked increase in the number of non-European companies using English Schemes. These include companies incorporated in Kuwait (Global Investment House KSC), Vietnam (Re Vietnam Shipbuilding Industry Group) and Delaware, USA (Re Icopal AS and others). The Global Investment House Scheme was also the first involving Islamic finance documents.
The jurisdiction/foreign recognition tests
Before sanctioning a Scheme for a foreign company, the court has always needed to be comfortable that:
- it has jurisdiction to sanction the Scheme; and
- the Scheme is likely to be effective and recognised in the foreign company's home jurisdiction.
Recent Schemes involving foreign companies have provided further clarity on an English court's (minimal) requirements for meeting these conditions. Courts have accepted jurisdiction where the only connection to England is that the relevant documents (i) are English law governed and (ii) include a jurisdiction clause (exclusive or non-exclusive) in favour of the English courts. In the Vietnam Shipbuilding Scheme, the court suggested that the choice of English law to govern the relevant documents would have been enough on its own. A company can usually satisfy a court on recognition if it can provide expert evidence that the relevant foreign jurisdiction(s) will recognise the Scheme.
Beyond balance sheet restructuring
A company can use a Scheme to put in place any "compromise or arrangement" with some or all of its creditors and members. Until recently most Schemes have involved at least an element of balance sheet restructuring, with the company already in default under the relevant finance documents. In contrast, the 2012 Schemes of Spanish and Luxembourg companies in the Cortefiel group involved no balance sheet restructuring, and no existing default. Instead, the companies used the Schemes to extend the maturity dates of their facilities, and amend certain other contractual terms, including the financial covenants, before any defaults occurred.
Cortefiel used Schemes to make these changes because it could not obtain consent from a sufficient percentage of its lenders using the amendment mechanics in the finance documents. Most English law syndicated facility agreements provide that extensions to a loan's maturity date, and changes to certain other important commercial terms, can only be made with all lender consent. (Some agreements, including Cortefiel's, contain "structural amendment" provisions, which allow these types of amendment with a lower approval threshold of, say, 85-90 per cent. But these provisions only apply to amendments that do not affect the rights of non-consenting lenders.)
This shows how a borrower can use a Scheme as a pre-emptive, turnaround measure. It is also a reminder that a Scheme can potentially cut across minority lenders' contractual protections. Schemes require the approval of only 75 per cent of the lenders in each class. However, this does not mean that companies can use Schemes routinely to override "all lender" consent requirements. A Scheme is a court-driven procedure. The court must consider it fair and reasonable to sanction the Scheme before it will do so. Often, companies persuade the court of this "reasonableness" by showing that they will face insolvency if the Scheme fails. Indeed, the court noted when sanctioning the Cortefiel Scheme that, though the company was not yet in default, there was the prospect of a "severe cashflow crisis" if the Scheme failed.
Classes and lock-up agreements
Determining creditor classes is often the single most important factor in whether a Scheme can succeed. The company will generally want the relevant creditors to be in a single class, or as few classes as possible. This makes it less likely that non-consenting creditors will hold 25 per cent or more of the debt in any class, and so be able to block the Scheme.
Companies considering a Scheme sometimes use "lock-up" agreements with creditors to try to ensure the Scheme will be approved. In these agreements, creditors usually agree to vote for the Scheme, and receive some kind of extra payment in return. Do these agreements mean creditors who have signed agreements need to be in a different class from those who haven't?
Companies have used lock-up agreements in a number of recent Schemes, including Primacom andSeat Pagine, without having to create a separate creditor class. In these cases the court held that, provided the company had offered the lock-up agreement to all creditors, and the overall Scheme was still fair, then no separate class was needed. The court also took into account that the additional payments promised under the lock-up agreements were fairly small. They had not materially affected the creditors' decisions on whether to vote for the Scheme. Rather, the agreements were designed to avoid undue delay in voting.
Schemes and stays
Companies do not benefit from an automatic moratorium while a Scheme is being progressed. This can be a major pitfall. A company will often try to get its creditors to sign up to a standstill agreement during this period. However, it may be particularly difficult to persuade those who disagree with the proposed Scheme to do so.
However, in the recent case of Bluecrest Mercantile NV v. Vietnam Shipbuilding Industry Group, the court granted a company a stay on proceedings launched by dissenting creditors for repayment of overdue amounts, while the company finalised its proposed Scheme. The court agreed to exercise its discretion to do so on the basis that the Scheme was well advanced and the stayed proceedings had not yet reached judgment.
The stay granted in the Vietnam Shipbuilding case is the first of its kind, and so it is difficult to predict how willing courts will be to grant stays in connection with Schemes where the circumstances are different. However, the decision does suggest that it may be possible in some circumstances for a company to obtain an effective moratorium in any ongoing litigation while it finalises its Scheme. This is yet another example of how Schemes are continuing to advance in sophistication, cementing their place as a powerful restructuring tool.
Law stated as at 5 December 2013.