Scheme of Arrangement: Are hurdles for restructuring German companies getting higher?
To date, English courts have recognized Schemes of Arrangements of foreign companies quite liberally. However, current developments in the case Indah Kiat might lead to more stringent standards in the future.
A Scheme of Arrangement (“Scheme”) is a procedure by which failing companies can be restructured under English law – even if their business operations are not conducted in England. The Scheme allows a majority (75%) of the creditors to make decisions that are binding for all absent or opposing creditors. However, the Scheme constitutes no formal insolvency procedure whereby all creditors have to be included, but allows a limitation to specific creditor groups – in most cases the financial creditors. It can therefore be used for a restructuring process without the stigma of insolvency and with few formal hurdles. Furthermore, the procedure is short; with adequate preparation it is possible to file the appropriate application, hold the necessary creditor’s hearing and receive the judicial recognition by the English court within a timeframe of six to eight weeks. This makes the Scheme very attractive for overseas companies, especially for businesses from countries like Germany that (still) have no comparable procedure. Despite these advantages, there are still some uncertainties with regard to Schemes successfully executed in the UK being recognised by the German courts.
Legal requirement: Sufficient connection to England
In order to approve a Scheme of a foreign (for example German) company, English judges essentially require that a “sufficient connection” to England can be shown. In contrast, the company is not required to have its centre of main interest (“COMI”) in England. It is enough to show that some of the company’s assets are held in England or that a substantial part of the financing documentation is subject to English law and the jurisdiction of the English courts.
Former Schemes of non-English companies
In the last few years, the Scheme has often been used by companies with a business seat abroad. English courts have, for instance, recognized Schemes of the following companies (and these Schemes were than later executed successfully):
The Spanish Codere Group (“Codere”) succeeded in implementing a Scheme at the end of 2015. Codere established an English subsidiary, which jointly and severally assumed the liability for the existing bonds. The bonds were issued by a Luxemburg Codere subsidiary and were subject to New York law. While one judge raised doubts in the first hearing concerning the court’s jurisdiction, the court later approved the Scheme. There were, however, no dissenting votes of opposing creditors in that case.
Among German companies, the APCOA Group (“APCOA”) attracted special attention with its Scheme procedure. The affected syndicated loan contract was governed by German law, but this was changed in favour of English law by a majority vote. Two Scheme procedures were subsequently executed. The decision in the APCOA case was affirmed in 2015 by the Scheme procedure of the Dutch company DTEK BV. The question remains, however, whether changing the choice of law clause by a majority decision is admissible or whether it constitutes an abuse of rights, if the financial documents do not provide for such a fundamental change to be effected by a majority rather than a unanimous vote.
The current Indah Kiat case
On November 9, 2015, the Dutch Indah Kiat International Finance Company BV (“Indah Kiat”) registered a branch in England and informed its creditors about relocating its COMI to England. The relocation of the registered office was supposed to enable Indah Kiat to restructure a bond under an English Scheme of Arrangement. This case clearly resembles the Codere case. However, one creditor, APP Investment Opportunity LLC (“APP IO”), publicly criticized the Scheme in the run-up to the first hearing in England. The Scheme terms provided for a change of the existing secured bonds against new unsecured bonds with less interest and a one-off payment amounting to 13.5% of the nominal value. According to APP IO, these terms would neither be fair nor in the best interest of the affected creditors. A major concern expressed by APP IO was the loss of a solvent guarantor. Furthermore, the proposed class composition was criticized as inappropriate. Whether this Scheme might be the first foreign one in a while to not be approved by English courts remains to be seen. The first hearing conducted on January 21 and 22 2016 was unusually long. In addition, the fact that the judge did not sanction the Scheme immediately, but waited until February 12 is quite exceptional. The court hearing on the class composition scheduled for January 21 was adjourned for another six weeks. Judge Snowden, in charge of the case, found the notification period of two weeks too short and pointed to the enormous complexity of the scheme and the lack of urgency. He also remarked that Indah Kiat should have provided the creditors with more information on possible consequences. In his interlocutory ruling judge Snowden virtually bench-slapped Indah Kiat, giving the opposing creditors’ needs very careful consideration. This case deviates from all cases so far because there is no overwhelming creditor majority supporting the scheme. An analysis of the interlocutory judgment suggests that going forward, where significant creditor opposition is at hand, English judges will examine foreign Schemes much more carefully.
Introducing a German Scheme?
In Germany, even after the restructuring-friendly 2011 insolvency reform (ESUG), demands to introduce a Scheme-like procedure have continued. Most recently, the German Registered Association of Insolvency Administrators (VID) has submitted a proposal for implementing such a restructuring procedure in addition to the regular insolvency proceedings in Germany.
A study conducted by Noerr and McKinsey
in 2015 has also shown strong interest by market participants in the introduction of such a procedure. It is hoped that German legislators will finally respond to the continuing exodus of companies from Germany to England.