Lending to a foreign company? If you choose English law to govern your facility documents and provide for the English court to have exclusive jurisdiction, an English scheme may be a viable means of restructuring the debt later, if the need arises.
The restructuring tools in many foreign jurisdictions are less flexible than those available in the UK. Recently, there has been an increasing use of English schemes for restructuring the secured debts of foreign companies. For example, English schemes were used in the Spanish and German cases of La Seda, Tele Columbus, Metrovacesa and the recent Rodenstock case. Here, the home jurisdictions didn't have tools akin to English schemes, meaning that a successful restructuring would require all creditors to consent. So, where there have been minor dissenting creditors, an English scheme has been used to effect a cram down.
Establishing jurisdiction to use a scheme to restructure a foreign company is much easier than establishing jurisdiction for formal insolvency proceedings to start here. Using an insolvency process such as a company voluntary arrangement (CVA) to restructure the debt of a foreign company requires a company to have its centre of main interests (COMI) or an “establishment” here. This may be a difficult proposition depending on the circumstances and whether, for example, there's a possibility of COMI migration.
By contrast, promoting a scheme is not dependent on COMI. The issue of whether there is jurisdiction to sanction a scheme turns on whether there is jurisdiction to wind the company up under the Insolvency Act 1986 (the Insolvency Act). Essentially, any company which is liable to be wound up under the Insolvency Act can propose a scheme. Obviously the EC Regulation on Insolvency Proceedings (the European Regulation) contains its own test for whether the court of a Member State has jurisdiction to wind up a company. This test is based on whether it has its COMI or an establishment in the relevant jurisdiction. But, for schemes, the European Regulation test is not binding and the pre-European Regulation test for winding up applies, which opens the door pretty widely.
The Insolvency Act provides that the court has jurisdiction to wind up unregistered (including foreign) companies which are unable to pay their debts. It has a discretion to exercise this jurisdiction and must be satisfied that:
- there is a sufficient connection with England and Wales;
- there is a reasonable possibility that any winding-up order will be of benefit to those applying for it (or in this context if the scheme is sanctioned); and
- one or more persons interested in a distribution of the company’s assets are persons over whom the court can exercise jurisdiction.
The recent Tele Columbus case shows this test can be fairly easily satisfied. Here, the German company wanted to restructure but could not get necessary consents, and so proposed a scheme which provided for a partial debt-for-equity swap, raising new finance and amendment of its facilities agreements. It had no connection with the UK except that English law governed the finance documents and they were subject to the exclusive jurisdiction of the English court. This fairly tenuous connection was enough to satisfy the “sufficient connection” test. The extent of the connection was the same in the Rodenstock case, whereby a large (German) spectacle manufacturer was restructured through an English scheme.
At the convening stage in Tele Columbus, the court raised a jurisdictional issue. It was concerned about a lack of UK-based operations and questioned whether the scheme would have a useful and substantive effect as it concerned a German company. At the sanction stage, a professor of German insolvency law gave evidence that the scheme would have a substantive and useful effect. This was because, under German private international law, the German court would recognize the compromise of the claims by amendments to the finance documents because English law governed those finance documents. Contrast the decision of the German court when it refused to recognize the Equitable Life scheme. There, the scheme concerned the rights of German holders of insurance policies governed by German law, and so the position was different.
Obviously, in any given case, the effectiveness of the scheme in terms of recognition in the home and other important jurisdictions will be a key factor.
Schemes at a glance:
Jurisdiction to promote for foreign company: Depends on “sufficient connection”. English law facility documents which also provide for the English court to have exclusive jurisdiction may well be sufficient. Lenders may wish to bear this in mind when lending to foreign companies, particularly in jurisdictions without flexible restructuring regimes. Lenders may even want to amend the relevant clauses if a restructuring looms.
What debt can be restructured: Any class or classes of creditors, including secured creditors (in contrast to a CVA, which cannot restructure the debts of secured creditors without their consent).
Process: Court driven. Usually, there is a convening hearing at which the court gives directions for calling creditors' meeting(s), the holding of the creditors’ meeting(s) and then a further hearing to have the scheme sanctioned.
Voting majorities: Each class of creditors affected needs to vote separately and each class must vote in favor. Both a majority in number and 75 per cent by value of those voting must vote in favor.
Cram down: Once sanctioned by the court, a scheme binds all creditors who are the subject of the scheme, whether they were notified or they voted (in favor or at all).
Recognition: Because the European Regulation does not apply to schemes, an English scheme will not automatically be recognized in Europe. However, it might be recognized by other means, whether in Europe or elsewhere. Local advice will be needed on a case-by-case basis. Schemes are regularly recognized in the United States under Chapter 15 of the US Bankruptcy Code.
Moratorium: A standalone scheme does not have the benefit of a prior moratorium. However, this may change in the future given the Insolvency Service's consultation on a restructuring moratorium.