Focus on arrangements and reconstructions

In the matter of Co-operative Bank plc

18 December 2013

Companies Court (David Richards J)

[2014] EWHC 4397 (Ch)

This application arose out of the Co-operative Bank’s highly-publicised financial difficulties following its acquisition of the Britannia Building Society and the imposition of increased capital requirements by the Prudential Regulation Authority (PRA). Following overwhelming majorities at a meeting of noteholders, the Court approved a scheme to restructure just under £1bn of the Bank’s subordinated loan notes, under which the noteholders subscribed for 70% of the Bank’s equity (as well as new debt instruments) in place of the notes.

Interestingly, the Court also specifically approved a release of all possible claims arising out of or in connection with the scheme – a feature which had been required by those underwriting the subscription offer.

In the matter of Vodafone Group Plc

1 May 2014

Companies Court (Henderson J)

[2014] EWHC 1357 (Ch)

This application concerned one of (if not the) largest scheme to come before the Court. It arose out of Vodafone’s highly-publicised sale for US$130bn of its 45% interest in a joint venture with Verizon Communications and a proposed return of value to shareholders of US$84bn.

Section 646(1) of the 2006 Companies Act provides that where, on a proposed reduction of capital, a creditor can show “a real likelihood” that the reduction would result in the company being unable to discharge his debt or claim when it fell due, then that creditor is entitled to object to the reduction; and s. 646(2) provides that the court shall settle a list of creditors entitled to object. The leading case on the “real likelihood” test is Re Liberty International [2010] 2 BCLC 665, where Norris J focused on three aspects: “factual” (i.e. grounding the assessment in the facts as they are presently known, avoiding “the purely speculative”); “temporal” (i.e. “only looking forward for a period in relation to which it is sensible to make predictions”) and “evaluative” (i.e. an injecting creditor must “go some way up the probability scale, beyond the merely possible, but short of the probable”).

Henderson J made an order dispensing with the settlement of a list of creditors because he could conclude that, on the evidence and applying the tests, there was no real likelihood of prejudice to any non-consenting creditor. In so doing he held that, in the circumstances of this case, a three-year cash-flow forecast (which was double the length of that relied on in Re Liberty International) and a 12 month forward working capital statement were inter alia sufficient bases on which to reach this conclusion.

As a practice point, Henderson J also observed that it had been “worthwhile and helpful” for the Company to have explored with the judge at an earlier hearing the nature and quality of the evidence which was likely to be acceptable to the court in deciding whether to dispense with a list; and, indeed, Henderson J gave a non-binding preliminary indication about those matters early on in the proceedings.

In the matter of (i) TSB Nuclear Energy Investment UK Ltd and (ii) Toshiba Nuclear Energy Holdings (UK) Ltd

19 February 2014

Companies Court (Henderson J)

[2014] EWHC 1272 (Ch)

This application concerned a so-called ‘transfer scheme’ and involved taking advantage of the “little-used” section 900 of the Companies Act 2006. The purpose was to streamline the group’s corporate structure by bringing about a merger between Holdings and Investment (with the consequent dissolution of Investment), so as to result in the principal shareholder – the well-known Japanese company Toshiba Corporation – coming to hold 87% of the shares in (and thus controlling) Holdings directly, rather than holding 20% directly and 67% indirectly through Investment (in which it was the sole shareholder). The Court approved the scheme, reiterating that there can be a “meeting” for the purposes of CA 2006, Part 26 where there is only one member of the relevant class.

In practice, s.900 is rarely invoked because, in its current form, it does not permit the transfer of rights which as a matter of general law are not transferable (e.g. Nokes v Doncaster Amalgamated Collieries [1940] AC 1014). That did not matter here, because no such rights were involved. Another cause for concern was whether, viewed in the round, the proposed scheme was an impermissible return by Investment of the entirety of its assets to its sole-shareholder. However, Henderson J held that, in providing for a specific regime for schemes in the 2006 Act, Parliament intended it be exhaustive and not implicitly subject to the general capital maintenance regime.

A greater concern was whether the scheme, the particular structure of which was very desirable for Toshiba from a tax perspective, should be disapproved as an artificial exercise in tax avoidance (see e.g. Re Rylands-Whitecross Ltd (an unreported decision of Brightman J in 1973). Although the proposals had a “certain air of artificiality” and were “fairly close to the line”, the Court felt able to sanction the scheme on the basis that the streamlining and cost-saving at the heart of the scheme were “genuine commercial objectives”.

In the matter of Magyar Telecom BV

3 December 2013

Companies Court (David Richards J)

[2013] EWHC 3800 (Ch)

This is an interesting example of the court sanctioning a scheme which, at first blush, had little real connection to England & Wales. It demonstrates the width and flexibility of English restructuring law.

Magyar was a Netherlands company, the (intermediate) parent of a Hungarian company (Invitel) and part of a wider group whose principal business was the operation of telecommunications services in Hungary. The proposed scheme involved an arrangement with the company’s noteholders under which they would exchange their existing rights for new notes and a 49% equity stake in the company. In the absence of a restructuring, Magyar was facing a formal insolvency process, having already defaulted on the Notes. The Notes, however, were governed by New York law (and subject to the non-exclusive jurisdiction of the New York courts).

Two lines of authority were engaged: first, the requirement to show that, even if the English court had technical jurisdiction, there was a “sufficient connection with the jurisdiction” (e.g. Re Drax Holdings [2004] 1 WLR 1049); and, second, the requirement to show that the scheme would have a “substantial effect” and achieve its purpose. Richards J “inclined to the view” (at [21]) that these two requirements “are not wholly separate questions” and were at least “closely related”.

Notwithstanding all this, the court sanctioned the scheme. In anticipation of the scheme, Magyar had successfully taken steps to move its COMI from the Netherlands to England (such that any formal insolvency process would take place in England under English law); and expert evidence showed:

• a likelihood that the US courts would recognise and give effect to the Scheme under Chapter 15 of the US Bankruptcy Code and UNCITRAL Model Law; and
• that the courts of Hungary and the Netherlands would recognise and give effect to the scheme.

In the light of these facts, and given that the scheme would not (absent a waiver by the company) become effective unless the company obtained an order from the US Court under Chapter 15, “on any footing” the requirements set out above were satisfied. The court also discussed:

• A “point of practice” concerning evidence of foreign law. Magyar had relied on expert reports from the New York and Hungary offices of its own solicitors. While “satisfied” that those reports were “expertly and conscientiously prepared”, the Court noted that “the important feature of independence would be enhanced if such reports were provided by experts unconnected with the law firm professionally engaged in the scheme. This consideration is all the more important in cases where [like this one] there is no opposition to the scheme”;
• The interaction of schemes and the Judgments Regulation. First the Court addressed the question (left open by Briggs J in Re Rodenstock GmbH [2013] BCC 201) whether schemes relating to insolvent companies are within the scope of the Regulation even if they are not made as part of insolvency proceedings: i.e. do they concern “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings” such that they are excluded by Article 1.2(b). David Richards J said that it “logically follows” that, so long as the insolvent company is not subject to formal insolvency process, Article 1.2(b) is not engaged and the order approving the scheme would be entitled to recognition under Chapter III of the Regulation. He also held that the Court had jurisdiction under Chapter II of the Regulation: even if an application to sanction a scheme involved persons being “sued” – which “may fairly be described…as an open question” – a number of the noteholders were domiciled in England and were thus ‘anchor’ defendants for the proceedings.

Re Apcoa Parking (UK) Ltd and others

26 March 2014

Companies Court (Hildyard J)

This was another scheme application with an interesting international dimension. It concerned the leading European car park group Apcoa, which comprises two English companies, two German companies and subsidiaries incorporated in Belgium, Austria, Denmark and Norway. Each of the group companies was a borrower under a €595m and £38m facilities agreement, which would terminate on 25 April 2014. Refinancing negotiations were continuing; and the sole purpose of the proposed scheme was to extend the termination date. The “most novel feature” of the case was that the facilities agreement, when incepted, was not governed by English law did not contain a jurisdiction clause selecting the English courts: that only came about as a result of the governing law and jurisdiction clauses being changed by a majority of creditors in accordance with provisions in the agreement permitting the same.

The court approved the constitution of the various classes proposed by the companies, on the usual basis i.e. that persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. Although this was only the preliminary directions hearing to convene scheme meeting, given what the judge “compendiously” described as the “cross-border elements”, the court went on to consider whether there were “factors which made it plain that the proposed meetings are not appropriate and/or that [the court] has no jurisdiction”: in accordance with the changed practice mandated by Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 and Practice Statement (Companies Schemes of Arrangement) [2002] 1 WLR 1345.

The court noted that although no creditor objected to the class meetings proposed, there were “rumblings of discontent” in the correspondence suggesting that the scheme might be challenged at the final, sanction, stage. However, having considered the “international element” the court gave “a preliminary indication” that it was satisfied about the relevant matters and gave leave for the scheme to proceed to the meeting stage (emphasising, of course, that those matters would still be ‘at large’ at the sanction stage).

• First, there was expert evidence that the changes in governing law and jurisdiction were valid according to the original law governing the facilities agreement. The court was also satisfied (having raised the point of its own motion) that the creditors effecting those changes were aware that their purpose was to enable the implementation of a scheme under English statutory provisions.
• Secondly the court was satisfied that there was a “sufficient connection” with England (as to which see Re Magyar, above); and was also satisfied, by expert evidence, that the courts of Germany, Belgium, Austria, Denmark and Norway would give effect to any scheme formally sanctioned by the court.