Mr Justice Hildyard has handed down his first instance decision on the second set of schemes of arrangement proposed by the Apcoa group.
The decision, handed down in mid-November 2014, contains a careful consideration of several important scheme issues, including confirming the position established in the first set of schemes − that changing the governing law and jurisdiction clauses of debt documents to English law and jurisdiction can create a sufficient connection with England to allow sanction of a scheme (to skip to an issue, please click the relevant box):
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The Apcoa group, a pan-European cark park operator, ran into financial difficulties which led to nine companies in the group (incorporated in various jurisdictions: two in each of Germany, England and Wales and Norway, and one in each of Austria, Belgium and Denmark) seeking sanction of schemes of arrangement with their creditors.
The companies received sanction from the English courts in April 2014 for schemes whose sole purpose, at that stage, was to obtain a short extension of the imminent maturities of their debt obligations to allow restructuring negotiations to be completed. The sanction of this first set of schemes was controversial. The governing law and jurisdiction provisions of the group’s facility agreement had been changed from German to English law to establish a sufficient connection with England so that the English courts would be prepared to consider sanctioning the schemes. The change was effected by using the majority-lender voting provisions in the facility agreement, thus avoiding the need for unanimous consent and further pushing the boundaries of the arrangements which an English court might accept give rise to a sufficient connection.
The restructuring negotiations did not result in a consensual solution so the scheme companies again came before the English courts, this time seeking sanction of schemes to implement a full restructuring.
The protagonists in this story are:
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The tension between Centerbridge and FMS in this case was, as the court noted, not an unfamiliar one. According to Centerbridge, FMS was a holdout creditor, unhappy with the proposed deal, particularly a hive-up of the majority of the pre-restructuring debt out of the operating companies, withholding its consent as leverage to put the other parties under pressure to agree a deal more to FMS’s liking. FMS, on the other hand, depicted Centerbridge as a loan-to-own lender seeking to use its larger holding to impose the proposed deal against FMS’s reasonable objections. FMS objected in particular to the schemes allowing the new money facility to be repaid in full while the pre-restructuring debt would not be.
The schemes were preceded by the following progression of relevant documentation:
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The pre-restructuring debt consisted of the “existing SFA” which comprised:
- a bank guarantee facility
- a tranche A and RCF facility (the “non-guarantee facilities”) and
- a subordinated second lien term facility.
The super senior facility was entered into to provide funding while restructuring negotiations continued. It was super senior in name, but was in fact unsecured and so subordinated to the secured existing SFA debt. This was because amendments to the intercreditor agreement, which required unanimous consent, would have been needed to allow the super senior lenders to take priority over the existing SFA debt. FMS and Litespeed did not consent.
The first turnover agreement was entered into as an alternative way to give the super senior lenders a satisfactory priority position. Under that agreement, the consenting lenders agreed to turn over all amounts received under the existing SFA to the super senior lenders until the super senior facility had been repaid in full.
The basic test for identifying voting classes for schemes is well established: a class “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 interpretation of that test, however, has been much debated.
Mr Justice Hildyard described the current approach to class identification as a two-part test:
First, the court should consider whether there is any difference between the creditors’ strict legal rights (as opposed to interests, which are not relevant at this stage).
If there is, the court can proceed to the second stage and consider whether, by reference to the alternative to the scheme (which in many cases, including this, would be insolvency) there is more to unite the members of the proposed class than divide them (ignoring any personal interest or subjective motivation).
Despite this focus on strict legal rights when constituting classes, there remains a place for consideration of interests. First, interests deriving directly from rights may still be relevant to class constitution. Second, the differing interests of a creditor, or a group of creditors, may be relevant to the consideration of fairness at the sanction stage.
FMS and Litespeed argued that they should be put into a separate voting class because, unlike the consenting lenders, they had preserved their priority over the super senior lenders (by not entering into either of the turnover agreements or the lockup agreement). This, it was argued, resulted in a difference in rights.
FMS’s argument failed on the basis that the first turnover agreement did not alter the rights of the consenting lenders against the scheme companies. Mr Justice Hildyard found that, while the scheme companies were party to the agreement, their involvement was nominal. The arrangements were substantively between the lenders and did not alter the rights of the consenting lenders as against the scheme companies.
He was more persuaded by the argument that the lockup agreement, under which, in the usual way, the consenting lenders had agreed to vote in favour of the schemes and not to enforce in the interim, may have created different rights opening the door to a consideration of interests. This might allow for different classes on the basis that, while not creating different rights, the turnover arrangements did give rise to different interests. Ultimately however, this argument also failed as the judge decided that while the lockup affected the enjoyment of rights, it did not affect the rights themselves. Lockup agreements are therefore likely to continue to be a part of scheme preparation.
Having found that there was no difference in rights, it was not necessary to consider the second part of the test: whether by reference to the alternative there was more to unite than divide the creditors in the proposed class. Nevertheless, Mr Justice Hildyard went on to do so. Despite FMS’s objections, insolvency was found to be the appropriate comparator. FMS’s advantage on insolvency, if it were to retain its priority over the super senior facility, was calculated as being a maximum of €2.7million. In the court’s view, that advantage would be far outweighed by the advantage in having a share in an increased overall recovery, which it was assumed would be available if the schemes proceeded. Insolvency would therefore unite the existing SFA lenders in a common cause such that they could consult together in one class. In reaching this conclusion, comfort was taken in that several consenting lenders, who had not provided any of the super senior facility and so had nothing to gain by it taking priority, had voted in favour of the schemes.
This decision illustrates the struggle which dissenting creditors now have to show that they should fall within a different class, particularly in the face of an insolvency comparator.
Class manipulation and unrepresentative vote
FMS’s arguments on class manipulation and unrepresentative vote were defeated by the same conclusions as disposed of its arguments on class constitution.
FMS argued that the termination of the first turnover agreement was an attempt to manipulate the classes. Some of the scheme companies were a party to the first agreement which, it was argued, affected creditors’ rights against those companies in a manner which would justify a separate class for the creditors not party to the agreement. Consequently, the primary purpose of the replacement of the first turnover agreement with an agreement to which no scheme companies were a party, was to remove that risk and thus ensure that FMS was in a class where its dissenting vote would not be sufficient to block the proposed scheme. The court accepted that the first agreement was terminated to prevent an argument that separate classes had been created. However, given the conclusions that the original turnover arrangements did not give rise to separate classes, this did not amount to objectionable manipulation of the classes.
FMS also argued that the turnover provisions meant that the majority of the existing SFA lender class was indifferent to the true interests of the class as a whole and therefore the creditors within that class were not fairly represented at its meeting. This argument failed on the basis that the court found there to be much more to unite the members of the class than to divide them. While there may have been a divergence of interests when it came to the subordination of claims to the super senior facility, the class was united by the greater interest in facilitating a restructuring to avoid the insolvency of the group and thus obtain a greater overall return.
IMPOSITION OF A NEW OBLIGATION
The proposed schemes sought to impose a new obligation for creditors to indemnify the issuing banks in relation to a new guarantee facility. FMS argued that schemes cannot be used to impose new obligations and that these should not therefore be sanctioned. This point found greater favour with the judge who expressed his reservations about the relevant provisions (including a concern that the new facility was to be issued by a different group of banks) resulting in them being deleted from the schemes. As a result, it was not necessary for him to determine the issue although he did say he was not persuaded that new obligations could be imposed by a scheme. However, he did not think that an extension or rolling over of an existing facility would constitute the imposition of a new obligation. Amend and extend schemes therefore appear to remain within scope.
For an English court to sanction a scheme proposed by a foreign company with its creditors there must be (i) a sufficient connection with England and (ii) evidence that the schemes will be recognised in the relevant foreign jurisdictions. A sufficient connection is often established on the basis that the debt which will be altered by the scheme is governed by English law and that scheme companies and their lenders have included a submission to English jurisdiction in their debt documents.
The sufficient connection question (which was established to the court’s satisfaction for the first schemes by the changes to governing law and jurisdiction made using the majority-lender provisions) was revisited in relation to the second set of schemes. Mr Justice Hildyard was of the view that the court should approach matters very cautiously where there has been a change in law which appears entirely alien to the parties’ prior arrangements or with which the parties had no previous connection or which has no purpose other than to disadvantage dissenters or in fact, more generally, where the court considers that the extent of alteration of the rights between the parties would be a step too far.
However, this case was not considered to be a step too far. First, the scheme was a means of enabling a restructuring that would benefit all creditors. Second, the change of governing law was not an alien choice for various reasons, including that English law had been selected to govern limited provisions from the outset.
A sufficient connection therefore existed.
RECOGNITION AND EFFECTIVENESS OF THE SCHEMES IN GERMANY
There was no dispute that the schemes would be recognised in the jurisdictions of incorporation of the scheme companies. However, a question arose as to whether the intercreditor agreement, which remained governed by German law (to change the governing law of that document would have required unanimous consent) would be breached by implementation of the schemes such that they should not be sanctioned.
While accepting that it was not his role to determine matters of German law, Mr Justice Hildyard considered that he needed to be satisfied that there was no plain and obvious risk of a breach of German law before sanctioning the schemes. Expert evidence on the German law issues was given by DLA Partner Dr Dietmar Schulz and Professor Christoph Paulus. The judge concluded that a German court would need to accept every argument raised by FMS’s expert and reject every argument raised by the scheme companies’ expert and, as their evidence demonstrated that German law provides scant guidance or unanimity on any of the issues, this appeared to him to be unlikely. He therefore felt able to exercise his discretion and sanction the schemes.
The schemes, as originally proposed, contained a provision which sought to prevent scheme creditors from taking action to challenge them. FMS objected to this as it wished to preserve its ability to put the arguments relating to the intercreditor agreement before the German courts. When Mr Justice Hildyard expressed reservations about the provision, a late amendment was made to remove it and there was no further debate on the issue. This left the door open for FMS to take its challenge to the German courts.
WHERE TO FROM HERE?
This decision illustrates:
From a domestic perspective, the English courts’ inclination to support the rescue of debtors in distress and not to give a veto to minority creditors without very good reason and, from a cross-border perspective, the continued desire to allow foreign debtors access to the scheme of arrangement procedure.
While FMS had intended to appeal this decision, we understand it has since settled and therefore the proposed appeal will not go ahead. We will therefore have to wait for the next foreign scheme to see how these themes develop.