Re Christophorus 3 Limited  EWHC 1162 (Ch)
The German automotive group, ATU, has achieved a restructuring of its finances via a UK administration and pre-pack sale. The case is notable for the fact that the group had almost no connections with the UK – the majority of its debts were governed by New York law and the companies in its corporate structure were either incorporated in Germany or Luxembourg. Nevertheless, by incorporating an English company to purchase the assets of the group, it put itself into a position where it could obtain an administration order in the UK and sell its assets to a new group structure free of its existing liabilities. Carrying out the to a new group structure restructuring in this way meant that the group avoided the onerous task of transferring the headquarters functions of the group to the UK in order to change its centre of main interests (“COMI”).
The directors of Christophorus 3 Limited (“C3”) applied to the High Court for an administration order and for approval of a pre-pack sale of its assets designed to restructure the debts of ATU.
The main operating company was a German company, ATU Handels GmbH (“Handels”). Handels held the shares of the individual operating entities. Handels was ultimately owned by a Luxembourg company via two intermediate holding companies incorporated in Germany (“Holding” and “Investment”).
Investment had issued junior notes and was the borrower of a revolving bridging facility and Handels was the issuer of senior notes and a revolving credit facility. The notes were governed by New York law and the facilities by English law. The priority of the lenders and noteholders were determined by an English law Intercreditor Agreement (the “ICA”).
The group had got into financial difficulties and had obtained valuations showing that the only alternative to the proposed restructuring was a liquidation in which the junior notes would be worthless. In order to avoid insolvent liquidation, ATU proposed a pre-pack administration as the only means of restructuring and refinancing the group. To achieve this, the Security Agent needed to be satisfied that under the terms of the ICA, it could release the group from the security granted over its existing liabilities. The ICA provided that such releases could be authorised if the shares of any “Obligor” (which included a subsidiary of an Obligor) were sold, provided that such sale was implemented under a “court approved process”. To comply with the terms of the ICA, C3 was therefore incorporated in England as a subsidiary of Handels. C3 then purchased the shares of Holding and rose up the group hierarchy, becoming an intermediate holding company above Holding. This paved the way not only to allow the Security Agent to release the security, but also for C3 to be placed into administration and for the sale of C3’s assets to a new company (ATU Luxembourg) owned indirectly by the senior noteholders. The plan would leave the junior noteholders with nothing and with the senior noteholders having replaced much of their debt with equity.
In applying for an administration order, the company asked the High Court to decide two questions:
1) Did C3 retain the required status of an Obligor after it ceased to be a subsidiary of Handels? Henderson J answered this in the affirmative. He said that “although pre-planned and in some senses artificial, these steps serve the very real commercial purpose of maximising recovery for the group”. He therefore took a purposive approach to the interpretation of the ICA.
2) Was the pre-pack sale of C3’s shares in Holding a “court approved process”? The Judge agreed that it was because the administrators were appointed by the Court and were officers of the Court. He felt he did not need to grant express permission to proceed with the sale, but said that this was a case where he would have been justified in giving such permission.
This decision is significant for the following reasons.
First, unlike previous cases such as Re Hellas Telecommunications (Luxembourg),  EWHC 3199 (Ch), the restructuring did not require the onerous task of moving the headquarters functions of the group to the UK in order to demonstrate that the COMI had been transferred from Germany to the UK. As C3 was an English holding company, it was clear that its COMI was in the UK.
Second, unlike recent cases (such as Re Magyar Telecom BV  EWHC 3800 (Ch) and Re Alcoa Parking (UK) Ltd  EWHC 997 (Ch)) in which foreign companies had been restructured by means of a Scheme of Arrangement under the Companies Act 2006, there was no need in this case to demonstrate a sufficient connection with the UK.
Overall, this represents another example of the wide variety of restructuring procedures available in the UK and the purposive approach applied to such restructurings by the English Courts. However, it should be noticed that there was no opposition in this case since it was impossible for junior bondholders to argue that their notes were anything other than worthless. In situations where there is more controversy over the valuation of a company’s debts, there is likely to be more scope for argument before the Courts.