After a somewhat leisurely start, case law regarding the new restructuring plan in Part 26A of the Companies Act 2006 now seems to be picking up pace. Hot on the heels of the DeepOcean decision, where cross-class cram down was tested for the first time (see our recent article here), comes an equally significant decision in the gategroup convening hearing.
In his judgment handed down on 17 February 2021, Mr Justice Zacaroli found that a Part 26A plan was an “insolvency proceeding” and therefore did not fall within the scope of the Lugano Convention 2007, in contrast to a scheme of arrangement. This emphasises the significance of the "financial difficulties" threshold in Part 26A, and potentially sets schemes of arrangement and restructuring plans on different paths with regards to jurisdiction and recognition.
As recognition for both schemes and restructuring plans in EU member states is subject to some uncertainty post-Brexit, this decision is of particular interest – and may well impact choice of restructuring procedure going forward.
Background: EU framework on jurisdiction and recognition
By way of background, in deciding whether it has jurisdiction to sanction a Part 26 scheme of arrangement or a Part 26A restructuring plan, the English court must consider factors including whether the company has “sufficient connection” to the UK, and the likelihood of the scheme or plan being recognised in other relevant jurisdictions and therefore binding local creditors.
In relation to proceedings commenced prior to 31 December 2020, the English court has also had to consider whether its jurisdiction would be restricted by the application of EU law. The relevant European framework includes:
- The Recast Regulation on Insolvency (Regulation (EU) 2015/848) (the “Insolvency Regulation”)
- The Recast Brussels Regulation on jurisdiction and the recognition and enforcement of judgments (Regulation (EU) 1215/2012) (the “Brussels Regulation”)
- The Lugano Convention of 21 December 2007 (the “Lugano Convention”) which substantially extends the principles of the Brussels Regulation to certain other EFTA states – Norway, Iceland and Switzerland.
English courts have in recent years proceeded on the basis that Part 26 schemes of arrangement constitute a civil or commercial matter and therefore fall within the scope of the Brussels Regulation (and, by extension, the Lugano Convention), which provides for EU-wide automatic recognition of civil and commercial judgments.
The flipside of this has meant that English courts have had to grapple with the jurisdictional framework of the Brussels Regulation in determining whether they have jurisdiction to sanction a scheme of arrangement.
The UK is no longer a party to the above framework in relation to proceedings commenced after the end of the transition period (31 December 2020). However, the UK has taken steps to accede in its own right to the Lugano Convention. If the UK’s application for accession is accepted by all parties, the Lugano Convention will effectively replicate the pre-Brexit position under the Brussels Regulation regarding jurisdiction and recognition of civil judgments, including schemes of arrangement. EU approval of the UK’s accession has not yet been granted.
Until the gategroup judgment, it had been widely assumed that Part 26A restructuring plans would fall to be treated as civil judgments under the Brussels Regulation and Lugano Convention, in the same manner as schemes of arrangement.
The gategroup restructuring
The restructuring plan in this case was proposed by gategroup Guarantee Limited (the "Plan Company"), a UK incorporated subsidiary of gategroup Holding AG (the "Parent"). The group is the world’s largest provider of airline catering services, and has suffered severe financial difficulties as a result of the dramatic decline in airline traffic caused by the Covid-19 pandemic. The Part 26A plan proposed by the Plan Company (the “Plan”) involved an amendment and extension of a senior facilities agreement ("SFA") and bonds (the "Bonds"), as part of a wider group restructuring exercise with the overall aim of enabling the group to survive the pandemic and continue as a going concern.
The issuer of the Bonds was not itself able to propose a restructuring plan as this would constitute an event of default under the Bonds and trigger cross-defaults across the group. The Plan Company was therefore incorporated and executed a deed poll by which it agreed as primary obligor to indemnify the lenders under the SFA, and the bondholders, in respect of all sums payable under the SFA and the Bonds. The Plan Company did not have any assets of its own, but would be put in funds to make any such payments by the obligors under the SFA and the Bonds, through a separate contribution payment agreement.
There was no practical possibility of amending the Bonds themselves by securing the approval of 66% of bondholders in a quorate bondholder meeting, due to the significant number of bondholders, believed to be largely retail investors, holding small amounts.
The Bonds were governed by Swiss law and contained an exclusive jurisdiction clause in favour of the courts of Zurich. It was accepted by the Plan Company that, if the Lugano Convention applied to Part 26A restructurings, the UK court would have to give effect to the exclusive jurisdiction clause in the bonds and would therefore not have jurisdiction to sanction the Plan. Article 23 of the Lugano Convention (mirroring Article 25 of the Brussels Regulation) provides that where one or more parties to an instrument, domiciled in a convention state, have agreed that the courts of a convention state have jurisdiction to settle any disputes in relation to a particular legal relationship, such courts shall have exclusive jurisdiction unless the parties agree otherwise.
The claim form in the case was issued prior to the end of the Brexit transition period and therefore the Lugano Convention was still applicable.
The bankruptcy exception
As a matter of jurisdiction therefore, it fell to be decided whether a Part 26A restructuring plan came within the scope of the Lugano Convention. Article 1(2)(b) of the Lugano Convention states that it shall not apply to “bankruptcy, proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings.”
This mirrors the bankruptcy exception in the Brussels Regulation, which is intended to “dovetail” with the Insolvency Regulation, so that there is no overlap or lacuna between the two. Therefore an insolvency proceeding under the Insolvency Regulation automatically falls outside the scope of the Brussels Regulation – and, by extension, the Lugano Convention.
Although it is well-established that Part 26 schemes of arrangement are not insolvency proceedings, the position in relation to Part 26A plans was less clear. One of the distinctions between Part 26 and Part 26A is the ‘financial difficulties’ threshold condition in the latter, which must be satisfied before a company may enter into a restructuring plan:
- The company must have encountered, or be likely to encounter, financial difficulties that affect its ability to carry on business as a going concern.
- The purpose of the proposed compromise or arrangement must be to eliminate, reduce or prevent, or mitigate the effect of the financial difficulties.
Is a restructuring plan an insolvency proceeding?
The "financial difficulties" threshold therefore raised the question of whether a Part 26A plan would fall within the bankruptcy exception (and so outside the scope of the Lugano Convention).
Zacaroli J gave a comprehensive judgment on this issue, finding that Part 26A plans both fall within the overall rationale for the bankruptcy exception and satisfy the requirements of an insolvency proceeding in Article 1(1) of the Insolvency Regulation. The judge took into account a number of factors including:
- A Part 26A plan possesses the same "peculiarities" as a bankruptcy or winding up, in particular the competition between creditors for the remaining assets of the debtor, requiring a collective solution which is fair to all.
- A restructuring plan aimed at rescuing a debtor constitutes a collective proceeding, notwithstanding that it may be made between a debtor and only some of its creditors.
- Despite being contained within the Companies Act 2006, Part 26A itself is a “law relating to insolvency”. The meaning of insolvency proceedings in the Insolvency Regulation includes proceedings which enable companies to restructure their debt prior to actual insolvency.
- The “financial difficulties” threshold condition contained in Part 26A differentiates it from Part 26. Part 26 is not designed exclusively for insolvency situations, while Part 26A is.
- The nature of the court’s involvement in a Part 26A plan is sufficient to satisfy the broad requirement in Article 1(1)(b) for “control or supervision” of the assets and affairs of the debtor.
Having found that a Part 26A restructuring plan is an "insolvency proceeding", it followed that it comes within the bankruptcy exception and therefore falls outside the scope of the Lugano Convention.
The wider repercussions of this case will depend substantially on whether the UK’s application to accede to the Lugano Convention is successful. If it is not, Part 26 schemes and Part 26A plans will remain on the same footing both as regards the UK court’s jurisdiction, and as regards recognition overseas (subject to potential interaction with other international rules of allocation, such as the 2005 Hague Convention on Choice of Court Agreements and the Rome 1 Regulation (Regulation (EC) 593/2008), which are beyond the scope of this article).
If the UK does become a party to the Lugano Convention, the gategroup decision has the wider impact of effectively closing off this potential route for recognition of Part 26A plans going forward in all convention states, including EU member states. Whilst schemes of arrangement should benefit from automatic recognition under the Lugano Convention, the position regarding recognition of restructuring plans will be somewhat less straightforward, relying on the domestic law of each relevant state. While this is by no means a bar to recognition (in gategroup, for instance, evidence was adduced to the effect that the Plan would be recognised and enforced in Switzerland and Luxembourg) it does add potential cost and uncertainty, with the possibility of different results in different member states.
Still, every cloud has a silver lining. In some cases - as in gategroup - the ability for the UK court to claim jurisdiction in relation to a Part 26A plan without being bound by the jurisdictional rules of the Lugano Convention may be beneficial, or indeed essential. The flexibility this offers (being unavailable to Part 26 schemes) could outweigh any concerns around the loss of automatic recognition – particularly when taken together with other potential advantages of Part 26A, most notably the cross-class cram down provisions.
When determining the appropriate restructuring tool to be used in each case, issues of jurisdiction and recognition are an important part of the analysis. This decision potentially adds another factor to be considered when the choice is between a scheme or restructuring plan.