Rebecca Walker, a senior associate in the Restructuring & Insolvency team at Stevens & Bolton has collaborated with Sebastian Mielke and Bertram Bombe at German law firm, Menold Bezler, on an article, which was first published in April 2018 in Zeitschrift für Wirtschaftsrecht (ZIP), one of the leading legal periodicals in Germany. The article was written and published in the German language - we set out a summary of the main points in English below.
A scheme of arrangement (“Scheme”) is a statutory procedure under English law which allows a company to make an arrangement or compromise with its shareholders or creditors, or any class of them. Provided that the necessary approvals are obtained, a Scheme can be used to agree or change any type of arrangement (including to amend any agreement) involving multiple parties who form a class.
Schemes have been used for some time now in restructurings where one or more minority shareholders or creditors are seeking to block the restructuring. Over the last few years, we have seen the practice emerge of using Schemes in respect of non-UK companies to amend syndicated loan agreements governed by English law, overriding the usual contractual “all Lender” amendment mechanisms.
However, at the end of 2016, the EU published a proposed directive (“Directive”), to ensure that all member states put in place a mechanism for a distressed company’s indebtedness to be restructured at an early stage in order to reduce the incidence of insolvencies. So what does this mean for Schemes?
What are the main differences between the Directive and a Scheme?
There is no doubt that the Directive has been largely modelled on the US’ Chapter 11 plan of reorganisation and the Scheme. The main differences can be summarised as follows:
- Likelihood of insolvency. The Directive applies only where there is a “likelihood” that the debtor company will become insolvent, whereas Schemes have been used for some time to effect capital reorganisations of solvent companies.
- Claims against third parties. The Directive does not currently permit the claims of affected creditors against third parties to be compromised, for example guarantors of the debtor’s indebtedness. Schemes, on the other hand, can be used to restrict creditors’ rights to proceed against third party guarantors, even though it is the primary debtor which is the proponent of the Scheme.
- Moratorium. Commendably, the Directive includes a mechanism for the court to impose a moratorium on creditor enforcement action while restructuring negotiations are ongoing. Currently, there is no ability in the UK to apply to court for a moratorium to assist in implementing a Scheme outside of a formal insolvency process; the debtor must instead rely upon a ‘Lock Up Agreement’, which is time-consuming to negotiate and only binds those creditors who sign it.
- Voting and cross-class cram down. Both the Directive and a Scheme require at least 75% in value of affected creditors in each class to vote in favour of the restructuring plan for it to be approved. However, under the Directive the court retains the ability in some cases to approve the restructuring plan where one or more classes have voted against it (similar to Chapter 11 ‘cram down’).
- Super-priority funding. In contrast to the position in the UK, the Directive makes it possible for finance to be provided to the debtor either pending or after confirmation of a restructuring plan, on the basis that the funder ranks ahead of other creditors in insolvency.
Will Schemes in respect of non-UK companies still be an attractive option?
Schemes will certainly remain an attractive option for the restructuring of foreign companies for the next few years. The Directive is currently just a proposal, with the approval and implementation process estimated to take three to four years in total.
Even when the Directive is fully implemented into national law, the Scheme will remain attractive, at least in the short term, because it is tried and tested and subject to established principles in the English Courts, providing certainty to all involved.
However, we expect that utilisation of the Scheme will reduce in the longer term due to the availability of the Directive and as case law surrounding the Directive in other member states develops. Further, for a Scheme to be approved, the English Court usually needs to be satisfied that there is not a suitable alternative restructuring procedure available in the debtor’s home jurisdiction which can achieve the same outcome. Once the Directive is implemented, this will be much harder to demonstrate.
How will Brexit affect this?
English Courts will only sanction Schemes for non-English debtors on the basis that the Scheme will be enforceable in the debtor’s home jurisdiction, currently in reliance on the principles set out in Rome I and the Judgments Regulation. However (assuming there is no Brexit deal) these will cease to have effect in the UK following Brexit.
The effect of Brexit is still unknown, but it seems likely that non-English debtors will then need to rely upon the principles of private international law: put simply, where the contract is expressed to be governed by English law and subject to the English Court’s jurisdiction, the home jurisdiction’s court would likely conclude that the creditors had agreed to be bound by any valid English law mechanic for amending those contractual rights (including the Scheme). It therefore ought to give effect to the parties’ choice of law for governing their contractual relations, including the effect of the Scheme upon those relations.
While the principles of private international law are unlikely to be affected by Brexit, the complexity and uncertainty that Brexit will impose may mean that non-UK companies favour the restructuring plan under the Directive over the Scheme.