The English insolvency courts have seen a busy start to the year with a number of new precedents that will impact debtors and creditors in a post-Brexit, post-Covid world, particularly those involved in new Part 26A restructuring plans. Continue reading for our EMEA Core Credit team's update on the English insolvency courts, and request a trial for access to our analysis and reporting on new legal precedents which will impact debtors and creditors.
The latter process had its pan-European effectiveness curtailed
by the judgment of Justice Zacaroli in Gategroup Guarantee Ltd. case,
however, judges have been more pragmatic in their approach to traditional schemes of arrangement so far this year. The Gategroup decision means that Part 26A plans will not fall under the remit of the Lugano or Hague Conventions, making automatic recognition in EU member states more difficult.
In the case of MAB Leasing Ltd. and Companies Act 2006, Justice Zacaroli held
that numerous different lease obligations could be placed in the same single creditor class. Further, at the sanction hearing, Justice Snowden held that where a scheme was fully consensual, it would not be an “insolvency-related event” for the purpose of the Cape Town Convention, CTC, on aircraft transactions.
The precedent set in the MAB Leasing scheme with respect to the composition of creditor classes will apply to future schemes and Part 26A plans alike. This means that a debtor could place a group of landlords, who all have the benefit of leases with differing terms, in a single class and that class could be forced into accepting an amendment to their leases by the cross-class cramdown power in the Part 26A plan.
This new strategy is a departure from previous deals where a scheme of arrangement was undertaken alongside a company voluntary arrangement, or CVA, as was recently seen in New Look
’s scheme. The scheme process was used to amend the group’s capital structure, while the CVA used to amend rental obligations.
This exact strategy may be being contemplated by Virgin Active, which is reported
to be using a Part 26A to address its capital structure as well as rent due on its premises in the U.K. If the Virgin Active restructuring
remains domestic in nature, the challenge of European-wide recognition will not need to be confronted.
Justice Trower in his judgment
in DeepOcean I UK Ltd. and Others case, provided guidance as to when cross class cramdown can be used in Part 26A plans and how the court will act in applying both the statutory and discretionary tests. The judgment also made clear that a judge will, as part of their decision, evaluate the level of support for the plan and the turnout of creditors, particularly in any dissenting classes.
The continued pragmatic approach by the English courts has been accompanied by careful judicial scrutiny of schemes, particularly where when ensuring that fees paid to advisors have a fair basis. Snowden J. adjourned the convening hearing in Port Finance Investment Ltd case twice before he allowed
the group to proceed to its creditor's meeting.
The judge requested additional information about the structure of a success fee being paid to the financial advisor of a group of creditors. He was further amenable to an application
made by Reorg for access to witness statements supporting the group’s scheme, in order to satisfy the principle of open justice.
A summary of each of the key schemes and Part 26A plans covered by Reorg so far in 2021 is below:
In the Gategroup judgment
, Zacaroli J. held that a Part 26A plan comes within the remit of Article 1(1) of the Recast Insolvency Regulation (RIR) meaning it does not fall under the Recast Brussels Regulation (RBR) and, by extension, under the Lugano Convention or Hague Convention.
The decision has made recognition of Part 26A Plan in the EU significantly more difficult following Brexit. On Dec. 31, 2020, the transition period between the U.K. and the EU ended and, because the U.K. is no longer a member state of the EU, it can no longer benefit from the automatic recognition that can be granted under the RIR or the RBR.
It was thought by English restructuring lawyers, prior to the Gategroup case, that both English law schemes of arrangement and Part 26A plans would still be able to gain automatic recognition in the EU following Brexit under either the Lugano or Hague Conventions, or alternatively the Rome I Regulation.
However, the provisions of the Lugano Convention (and the principles in the Hague Convention) mirror those of the RBR, meaning that if the RBR does not apply to Part 26A plan, neither do the latter conventions.
The U.K. is not yet a party to the Lugano Convention but it was expected that, with the EU’s permission, the U.K. would accede to the agreement, following its outstanding application made in April 2020.
This means that out of the three effective possible cross-border treaties that could have been relied on for EU recognition of the Part 26A plans, two are now not available. A debtor using the Part 26A plan will have to rely on Rome I, UNCITRAL Model Law, bilateral treaties or any domestic comity regimes in each individual member state for recognition.
The decision will remain law, unless the principle is overturned in a higher court, such as the Court of Appeal.
This added level of complexity is likely to add significant cost and time expenses for debtors using the Part 26A plan and requiring European-wide recognition. Law firm Kirkland & Ellis, expert in Part 26A plan implementation, commented in a letter
to the court, prior to Zacaroli J.’s decision, that:
“We consider it would be extremely unhelpful for the Court to conclude that a restructuring plan is an insolvency proceeding for the purposes of the Lugano Convention. (This would almost certainly apply equally for the purposes of the Hague Convention.) It removes a crucial potential basis for recognition of restructuring plans in Europe, within a matter of months of the enactment of Part 26A and Brexit implementation and just as the market is finding its way on questions of international recognition.”
With the effectiveness of the Part 26A plan in Europe compromised, the new Dutch scheme
, which came into effect this year, may be well placed to attract restructurings away from London. The Dutch scheme is broadly similar in its features to the Part 26A plan, however, given that the Netherlands remains a member of the EU, the Dutch scheme falls under the remit of the RIR and will be given automatic recognition across the EU.
African telecom provider Smile Telecoms
passed the convening stage of its Part 26A restructuring plan in mid-February. Trower J was satisfied that three separate creditor class meetings should be held. The three creditor classes consist of the shareholder in their capacity as super senior lender, senior lenders (including Industrial Development Corp of South Africa, or IDC, in its capacity as senior lender), and IDC as the subordinated creditor in respect of its redemption rights under a preference share subscription agreement.
IDC is the one creditor (both as a senior lender and in a separate class of its own as subordinated creditor) that is holding out against the plan. If IDC does not approve the plan at the creditors’ meeting on March 15, the court could exercise its cross-class cramdown power to sanction the plan.
Norwegian subsea services provider DeepOcean
was the first part 26A restructuring plan to feature a cross-class cramdown, or CCCD, when sanctioned by Trower J. in January. The judgment provides that there are both statutory and discretionary tests which must be passed for CCCD to be used and that:
- A plan company will have “a fair wind behind it” in seeking sanction provided the relevant statutory conditions are met;
- “Horizontal comparability,” will be considered by the court - does the plan treat creditors differently among themselves and are those differences justified?; and
- As well as considering the statutory tests, the court will also evaluate the level of support for the plan and the turnout of creditors, particularly in any dissenting classes.
The statutory tests include:
- Condition A (sections 901G(3) and 901G(4))
If the restructuring plan is sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the “relevant alternative” (i.e. “whatever the Court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned”).
- Condition B (section 901G(5))
The restructuring plan must have been approved by at least one class of creditors who would have a genuine economic interest in the company in the relevant alternative.
The discretionary test is applied once the statutory tests have been passed and provide that even if Condition A and Condition B have been met, the court still “will have an absolute discretion whether or not to sanction a restructuring plan, and may refuse sanction on the grounds that it would not be just and equitable to do so, even if the conditions [A and B] have been met.”
Malaysian Airways Berhad
Under the MAB scheme
, lessors were given four options
, which can be summarized as the option to terminate the lease or alternatively three variations based around a reduction of the monthly aircraft rent in line with prevailing market conditions.
The convening ruling set a precedent, which will also apply to English Part 26A restructuring plans, accommodating the variable treatment of creditors within classes, as analyzed HERE
. In theory this means that a group of landlords could be placed in a single class for the purpose of compromising their claims.
This ability could also be used alongside the possibility of the recently introduced cross-class cramdown by a separate consenting creditor class.
Snowden J. said, during the company’s sanction hearing, there was a “very strong reason to think that a scheme is not an insolvency-related event” for the purposes of the Cape Town Convention. The CTC and its Aircraft Protocol govern the rights of lessors and other persons holding international interests in aircraft. This follows Zacaroli J.’s earlier conclusion at the convening hearing that there was a “powerful case” to the same effect.
In this scheme
, Snowden J. provided detailed guidance on when the English court will allow “success fee” arrangements with financial advisors of ad hoc group of scheme creditors and when it will allow practical solutions to inadequate notice of a scheme to scheme creditors.
The precedent will apply equally to Part 26A restructuring plans and schemes of arrangement.
The judge allowed Global Ports Holding, or GPH, to convene a single class of its noteholder creditors to vote on its proposed scheme, despite evidence that showed 38% of the scheme creditors had an arrangement with financial advisor DC Advisory, which included a $200,000-a-month retainer and a $1 million success fee.
The arrangement was found to be acceptable and not to fracture the proposed single class of creditors because:
- Although it would only be the members of the ad hoc group who would receive the advice provided by the financial advisor, any additional financial or other information provided by the scheme company would be made available to all scheme creditors;
- Any improvements in GPH’s scheme proposal arising from discussions between the ad hoc group and its advisers would be offered to, and would benefit, all noteholders; and
- All noteholders were made aware of the financial arrangement, including the success fee, that the financial advisor had.
also provides that where a judge feels that inadequate notice has been given to scheme creditors before a scheme convening hearing, the judge may allow the scheme to proceed on its proposed timetable, provided that scheme creditors are later allowed to raise any issues at sanction hearing.
Snowden J. ordered that Reorg be granted access to witness statements filed by GPH as evidence during the convening hearing
of its scheme. The order was made following an application under CPR 5.4C and Part 23 Notice by Reorg to the High Court and could set a new precedent for access to documents in schemes and Part 26A plans. The application was opposed by company counsel.
Norwegian seismic exploration group PGS’ scheme of arrangement
was sanctioned by Justice Miles in the High Court in February.
The purpose of the scheme was to amend and extend
$872 million of scheme debt by extending the maturity of certain of the group’s facilities and introducing a common amortization payment schedule. In exchange for creditor backing, the group paid certain fees, partly in cash and partly in kind, and introduced certain other features such as an enhanced security package. Scheme creditors will not receive a haircut in respect of amounts outstanding under their loans.