Restructuring

Contributed by Sally Willcock
European restructuring specialists have their eyes focused squarely on the recent judgment of Briggs J in the English High court case of Rodenstock Gmbh [2011] EWHC 1104.
In Rodenstock, Briggs J sanctioned an English Companies Act scheme of arrangement in respect of a well-known German spectacles business which was in financial difficulty.  The scheme of arrangement binds senior lenders to a variation of their rights under a senior facilities agreement subject to English law and an English exclusive jurisdiction clause.  Implementation of the scheme enabled the company to continue as a going concern and to avoid going into a German insolvency process.
The case is an important European precedent as the company’s registered office and center of main interests (COMI) were located in Germany and it had no branch office in the UK.  As a consequence, and applying the mandatory provisions of the EC Regulation on Insolvency Proceedings (No 1346/2000) (‘ECIR’), the English court would not have had jurisdiction to initiate an English insolvency proceeding under the Insolvency Act 1986 (‘IA 86’) including its winding up.  Schemes of arrangement, at least where they exist as ‘stand alone’ mechanisms are not covered by the ECIR.  However, S896 of the Companies Act 2006 gives the English court power to sanction a scheme proposed between a company and its creditors and members where the company either has been formed under the English Companies Act provisions or is one that is ‘liable to be wound up’ under the Insolvency Act 1986.  One of the key issues that the court in Rodenstock was, therefore, asked to decide was whether the ECIR has narrowed the English court’s jurisdiction in relation to schemes, by impacting restrictively on the circumstances when a company is ‘liable to be wound up.’
The court held that no such narrowing of the court’s jurisdiction was intended and that the phrase ‘liable to be wound up’ was designed simply to identify the types of companies and associations to which the jurisdiction of the English court applies.  Rodenstock was a company that was ‘liable to be wound up’ under the Insolvency Act 1986.
The court went on to characterize the Rodenstock scheme as a solvent scheme and noted that the majority of its creditors were based in England.  On the facts in Rodenstock, Briggs J considered that the English court had jurisdiction to sanction the foreign company scheme according to the established common law private international law principles, which had continued to be applied for foreign companies centered outside the European Union.  These principles require the court to be satisfied that there is a sufficient connection with England to justify the court applying English Companies Act provisions to a foreign company and leave to a judge’s discretion whether to sanction the scheme.  Briggs J held that:

1. the English law legal relationship including the choice of English choice of law and jurisdiction in the senior facilities agreement amounted to a sufficient connection to the English jurisdiction; and
2. he should exercise his discretion to sanction the scheme taking into account in particular the fact that the English court’s sanction would, in practice, be legally effective in Germany.

Since the start of the credit crisis, English Companies Act schemes of arrangement have regularly and increasingly been used as a restructuring mechanism for companies in financial difficulty.  In essence, schemes provide a procedure enabling the court in its discretion to sanction a compromise or arrangement reached between the company and its creditors (and where applicable its members) provided that a majority in number and at least 75% in value of each class of creditor (and member) exercising their voting rights has voted for the scheme.  Only creditors (and members) whose rights are affected by the scheme are entitled to vote.  Once approved by the statutory majorities, the scheme binds all of the company’s creditors included within the scheme.  A scheme will typically affect the rights of financial creditors, or some part of them, and trade and other ordinary creditors will usually continue to be paid in the ordinary course and existing management will remain in place.  No statutory moratorium comes into effect.
Schemes have proven to be very flexible restructuring tools, and in recent months, the English court has sanctioned schemes of arrangement in respect of German and Spanish companies (similar forms of procedure not being available in their local jurisdictions.)
The decision in Rodenstock is helpful to restructuring specialists because it means that it will not always be necessary to move a European overseas company’s COMI to England or be satisfied that the company has an English establishment where a UK scheme is proposed.  In appropriate cases, a sufficient connection can be established with the English jurisdiction through an English law governed senior facilities agreement incorporating an English exclusive jurisdiction clause.  The decision has left some other issues as yet unresolved so further case-law is expected in due course in this area including from the European Court of Justice.