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UK Schemes of Arrangement
Overview
Disclaimer
•
The work product in this presentation contains elements of a general overview
of UK Schemes of Arrangement
•
This presentation is not intended to be conclusive nor should it be assumed that
it necessarily addresses every relevant issue and detail
•
This presentation is offered solely as guidance and is not intended to offer
specific advice nor intended to provide the basis of any credit or investment
decision or other evaluation
2
General Principles
• A scheme of arrangement is not an insolvency process. It is a statutory procedure under Part 26 (sections 895-901 CA) of the Companies Act 2006
• The purpose of a scheme of arrangement is to allow the company to reach agreement for a consensual restructuring with 75% of a certain class of its creditors, which agreement then binds all creditors in that class (even if they vote against the scheme or have not had notice)
• In practice therefore, it is used to implement any step in the restructuring process which requires unanimity from the relevant class of creditors
• There is a relatively light-touch court supervision of the process, chiefly regarding the two separate hearings re: class composition and the sanction (see below)
• A scheme is an arrangement or compromise of debt claims, i.e. a commercial deal, which can be sought by the company and its creditors (or any class of its creditors – e.g.
Countrywide plc [2009]) and/or its members (or any class thereof). Typically the company is the party that initiates the scheme once it has agreed a restructuring with the key (“in the money”) stakeholders
• A scheme is binding on all creditors upon completion of the requisite formalities including a vote by a majority in number and 75% in value of all creditors entitled to vote in any particular class (this includes secured creditors, a marked difference with CVAs)
• The scheme does not effect a release of junior/out-of-the-money liabilities (unless junior creditors are themselves schemed or left behind in the Oldco structure pursuant to a sale). Accordingly, a scheme is not a substitute for satisfying the intercreditor release clause requirements.
• No automatic moratorium comes into place unless the scheme is combined with an administration
3
4
Process
A scheme of arrangement will involve the following procedural stages (approximately an 8-week process if you do not count the months of negotiation of the restructuring terms):
1. Lock-up to agreed restructuring term sheet
2. Preparation of scheme documentation including: PSL, an explanatory statement, scheme, witness statement, final form restructuring documentation and security documents
3. Company applies for hearing date to convene 1st creditors meeting and issues (more often than not) a ‘practice statement letter’ (“PSL”) to bring the process to the attention of the creditors
4. “Class Hearing”: first court hearing to obtain directions to convene scheme creditor meetings; the Court usually gives guidance at this early stage on whether the creditor classes are correctly constituted
5. On the same day or immediately thereafter, a notice of scheme meetings and
explanatory statement (“ES”) is circulated to all known affected creditors; the statement must explain in detail what the scheme is intended to achieve and its economic and legal effect
Process (cont.)
7. “Creditors Meeting”: scheme meetings are typically held 3 weeks after the explanatory statement is circulated. This is where the scheme proposals are put to the creditors (and/or members) for voting (in SEAT, the meetings were held days after the ES was circulated)
─ resolutions are passed by 75% in value and 50% in number of scheme creditors
present and voting either by person or by proxy at the creditors’ meeting
8. “Sanction/Fairness Hearing”: sanction of the scheme at which point court reviews the findings at scheme meetings and if satisfied, sanctions the scheme (see next slide for further detail)
─ the court is very open to hearing submissions from any party connected with, or who may be affected by, the restructuring, even those who may be deemed to be “out of the money”
9. The scheme becomes legally effective in accordance with its terms/may be conditional upon delivery of the court order to the Registrar of Companies
− the Scheme may provide for additional conditionality before the compromises take effect (e.g. receipt of third party consents, completion of administration sale to Bidco, etc.)
6
Sanction Hearing
At the sanction hearing, the court needs to be satisfied that:
• the approval of the scheme is reasonable and fair;
• each class was fairly represented by those attending the meeting and that the statutory majority acted bona fide; and
• the statutory provisions have been complied with, including:
– correct notice having been given of the scheme meetings; – correct distribution of the explanatory statement; and
– passing of the appropriate resolutions at the creditors’ meetings to approve the
scheme
• A dissentient junior creditor could potentially challenge the scheme at the fairness hearing, including on the issue of class composition
• The Court’s role at this stage is not a rubber-stamping exercise; it has a real discretion to refuse to sanction the scheme:
• number of insurance schemes that Court has refused to sanction, e.g. British Aviation Insurance Co Ltd (2005)
• especially in context of Schemes to purely circumvent ‘all lender consent’, absence of ‘a problem requiring a solution may be a factor (Scottish Lion Insurance Company Ltd vs Goodrich Corporation & Ors [2010] ScotCS CSIH 6, SCLR 167
7
Illustrative timeline
DATE ACTIONS AND DOCUMENTS
1 March Proposals for principal terms are formulated; heads of terms and/or lock-ups entered into; first drafts of scheme
document and explanatory statement are circulated – the timing of this depends on the complexity of the scheme
14 April Prepare explanatory statement and scheme document
24 April FORMAL COMMENCEMENT OF THE SCHEME:issue 'practice statement letter' to creditors outlining the scheme
process, the objective of the scheme and the composition of the creditors’ meeting
26 April Witness statement and evidence in support of first Court hearing application filed by the Company
8 May FIRST COURT HEARING: Court hearing to convene scheme meetings and review classes
9 May Notice of creditors’ meetings and explanatory statement circulated to all ‘known affected’ creditors
30 May CREDITORS’ MEETINGS: to vote on the scheme
6 June SANCTION HEARING: fairness hearing to sanction the scheme
6/7 June Immediately post-sanction hearing, obtain all Court orders and file with the Registrar at which point the scheme
becomes legally effective
7 June Completion of restructuring via an English scheme of arrangement. If required, pre-pack and release of junior
Classes
• It is up to the company to decide which classes of creditor it wishes to scheme:
─ no obligation to consult any creditors whose rights are not affected by the scheme or who have no “economic interest” in the scheme
─ among those creditors who do participate in the scheme, they will fall into separate classes (each therefore having a veto) if their rights are “so dissimilar” as to prevent them from consulting among themselves with a view to their common interest in the scheme
─ this requires an examination under the Finance Documents (and local insolvency law if the scheme is proposed as the only alternative to liquidation) of their respective rights (secured/unsecured; control/voting under the documents etc) and what they are being offered out of the scheme. Are these rights/entitlements sufficiently similar to constitute those creditors or class?
─ the court will be keen not to create too many classes and therefore increase the chances of holdouts; will take a practical view
Classes (cont.)
• In practice:
─ scheme will be used by company to “cram-in” minority non-participating creditors, for example into exchanging old debt for NewCo debt/equity
─ scheme will often not have junior creditors as a party and will therefore not purport to deal with the junior debt, leaving this behind in the old Holdco structure, or releasing it using the ICA release provisions
─ to be sanctioned as fair, the company may have to show that the junior creditors are out of the money and therefore are not necessary to the scheme/the restructuring
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Constituting the Classes
• Creditors whose rights are so dissimilar that they cannot sensibly consult together with a view to
their common interest should be given their own separate meetings (Re Hawk Insurance
Company Ltd [2001])
• It is the difference in rights, not motives or interests that counts (Re Telewest Communications
plc [2004]). The difference is circumstantial; in Telewest for example, a solvent scheme, the similarities between the 2 sets of bonds outweighed their different maturity dates, interest rates and currencies
• Millett in the Hong Kong case of UDL Argos Engineering [2001] noted:
“The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings” Therefore, e.g., the fact that some creditors in a class hold CDS would not automatically
constitute them as a separate class. Such matters would however be taken into account at the sanctions hearing stage if they created a fundamental fairness issue
• In Re Heron International NV [1994], no separate meetings were required to account for lender/bondholder cross-overs creditors
• In Primacom Holding GmbH [2012], the following distinctions did not create a separate class:
─ different interest rates and maturity dates
─ the fact that certain parties had entered into a lock-up agreement in advance (see also
Cortefiēl SA - the first time a scheme has been used to implement an amend-and-extend)
─ the fact that certain parties had received a consent fee, provided such fee was de minimis
and was made available to all (DX Services, July 2010)
─ the fact that some scheme creditors had opted not to participate in a new loan facility (see
also Re Metrovacesa SA [2011]
• Equally, giving creditors an option on the scheme consideration (e.g. just equity or a
combination of debt and equity) is unlikely to lead them to falling into separate classes depending on which form of scheme consideration they choose
• Even RCFs are not necessarily treated as a class of their own (Cortefiēl SA [2012], as per
Justice Norris who noted that the RCF matured before any part of term loan B but that:
“if one looks at the rights in the context of what the effective rights are now and will be under the scheme, (…) this is not a difference that has a material effect upon those supporting the (RCF)”
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Types of Creditor Schemes
• There are few limits on what a company can propose to its creditors in a scheme, but broadly 2 main types of scheme have evolved (with schemes often containing elements of both types)
• One the one hand: “pre-pack/transfer” schemes, instigated either by the Holdco board or an English administrator :
− A debt restructuring plan is effected by a transfer of the Opcos to a Newco owned by the “in the money” creditors; a release of any out-of-the-money junior claims (via the release mechanism in the Intercreditor Agreement) and the allocation of equity and/or new debt issued by Newco to lenders
− The scheme ensures that any unanimity requirement is met – e.g. to write off/exchange debt for equity or new debt issued by Newco; to transfer debt claims to Newco to enable it to credit bid or to allow Newco to assume the sustainable debt obligations of the
schemed company
− This mechanism avoids the cash leakage-risk otherwise present when there are non-consenting creditors that can hold out and insist on repayment of their claims in cash
Types of Creditor Schemes (cont.)
− Importantly:
─ it is the transfer pursuant to the security documents and the Intercreditor Agreement and not the scheme which triggers the security agent’s right to release any out-of-the money claims/unsustainable debt and/or make it possible to leave any structurally subordinated claims behind in the Oldco structure
─ the scheme is just a distribution mechanism; not to cram-down creditors who are not party to the scheme, but to cram-in minority/dissentient scheme creditors in the
relevant class
─ however, the scheme does give even creditors not party to the scheme a forum in which to be heard (e.g. IMO CarWash)
− An administrator would be appointed to effect a “pre-pack” sale of the business to Newco:
− all the preparatory work (eg. valuations, negotiation of the sale and purchase agreement etc.) has been done prior to the appointment
− administrator is appointed and sells the secured shares with consent of the Security Trustee unless Court permits otherwise
Types of Creditor Schemes (cont.)
•
“Cram-down” schemes involve no sale of the business but could either, like in
Cortefiēl , Monier
,
Tele Columbus
and the
M6 Toll Road
scheme, purely involve
an amend-and-extend of the financial indebtedness, or, alternatively/additionally,
like in
Seat
, implement a debt-for-equity swap of the unsustainable part of the
debt or simply effect a debt reduction
•
These type of schemes are emerging as a new technique to deal with ‘all lender
consent’ hurdles; a note of caution however, as the Court will carefully consider:
•
what the alternative to the scheme would be if not sanctioned (in
Cortefiēl
,
the court placed considerable emphasis on the risks to the business and its
value if the scheme did not go through); and
•
to what extent the scheme could be regarded as abusive or oppressive to
non-consenting lenders
The relationship between schemes and pre-packs
• Not every pre-pack requires a scheme (e.g. unanimity can be achieved consensually) and not every scheme requires a pre-pack (e.g. because the restructuring is fully consensual and there is no need to break the existing structure via a share pledge enforcement)
• The following table illustrates various recent examples:
Scheme Admin sale/ Pre-Pack
Notes
IMO CarWash (Germany) Scheme of Seniors and pre-pack required to leave behind the Mezz
Gallery (Russia) Two parallel Noteholder schemes involving a plan B COMI shift. Consensual transfer of opcos, leaving behind holdcos, with 25% equity retained by Russian sponsor so no need for
a pre-pack
Wind Hellas (Greece) Combination of scheme and consent solicitation to transfer Senior Notes, pre-pack administration to transfer opco shares and leave junior notes behind; coupled with a Ch 15
recognition
La Seda de Barcelona (Spain) Debt-to-equity swap of syndicated loan debt within existing corporate structure. La Seda had UK presence (one of its plants was sold by administrators). Release of third party guarantor. Primacom (Germany) Share pledge enforcement and 2-step acquisition from administrator. Junior creditors left
behind.
Seat Pagine (Italy) Scheme of senior creditors only. Consensual consent solicitation and bondholder meetings combined with administration of Lux company for tax reasons. Restructuring within existing
corporate structure. Consensual with juniors so no need for pre-pack. Global Investment House (Kuwait) Consensual debt-for-equity and asset swap of debt facilities so no need for pre-pack;
scheme of multiple lenders in one class in parallel with bondholder meetings Vivacom (Bulgaria and NL) Share pledge enforcement and share transfer to SPV, junior debt write-down and parallel
schemes to effect a restructuring under the existing facilities
Biffa (UK) Consensual deal with the Mezz so no need for pre-pack. Restructuring effected in the existing corporate group
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Valuation, Valuation, Valuation
• Whether the scheme involves a pre-pack or not, valuation is key:
─ it determines which classes should be included in the scheme and which can be left out
─ it determines to which classes the directors of a company owe their fiduciary duties (other
jurisdictions in Europe do not have similar concepts of shifting duties)
─ it determines the extent to which the administrator will requires a full M&A process in order to test the market, should the scheme be combined with a re-pack
• Now litigated three times: MyTravel [2004], IMO CarWash [2009] and Stabilus [2012]
• A liquidation valuation, as approved in MyTravel, was fact-specific to that case.
• All parties in IMO CarWash agreed that a going concern valuation is the appropriate basis for valuing an asset in the typical case (see next slide)
• Stabilus, although a very factual decision, confirmed the following: (1) full market testing and sales process may not be practical or required in every set of circumstances, (2) desktop valuations, despite their limitations, are still useful and do not have to be reviewed with the benefit of hindsight
Valuation, Valuation, Valuation
• In IMO CarWash the following approach to valuation taken by PWC was implicitly accepted by the judge as being the correct one. This approach has not been challenged in subsequent cases
• The company should be valued on a going concern basis, not on a liquidation or even a fire
sale basis
− the objective of the PWC valuation was to come up with a figure, or range of figures, for the
"Business Realisation Proceeds" which they defined as "the amount that the business is expected to realise in a sale at the current time
• To achieve this, PWC adopted the following alternative valuation methodologies:
─ An Income Approach: indicates Business Realisation Proceeds based on the cash flow that the business can be expected to generate in the future. This is a discounted cash flow ("DCF") basis. In this approach they added an "alpha factor" to the cost of capital to reflect uncertainty in the market and the impact of the credit crunch on the availability and cost of financing. It had the effect of depressing the final valuation figure
Valuation, Valuation, Valuation (cont.)
− A Market Approach: indicates Business Realisation Proceeds based on a comparison of the business to comparable publicly traded companies and an analysis of statistics derived from transactions in its industry“
− A Leveraged Buy-Out ("LBO") Analysis. "....we have considered how a potential private equity purchaser could look to fund a deal for IMO CarWash by performing a high-level debt capacity analysis. We have then used this debt capacity to assess, on a LBO model, the level of equity investment a private equity investor could be prepared to make, given a typical required equity rate of return, in the current market“
• The Stabilus judgment provided further useful guidance on the approach to be taken to valuation, such as: − for the desktop valuation to be useful, it is important for it to be reflective of management’s projections − limited availability of acquisition finance in the market can be relevant to the question of value as the
fair market price has to be considered in the context of the prevailing market conditions
− a trustee would only fall foul of his duty to obtain the best price for the assets subject to enforcement if his conduct is (as per Justice Eder):
“plainly on the wrong side of the line”
− evidence that the senior debt was trading well below par provided (as per Justice Eder):
“strong corroborative force for the conclusion that the (Mezz) were “under the water” by a very large margin”
Use of Schemes by overseas companies
• Schemes of arrangement may be sanctioned in relation to a foreign company as courts may wind-up a foreign company as an unregistered company under section 221 of the IA 1986
• In the absence of express jurisdictional restrictions conferred by the IA 1986, courts previously relied on judge-made conditions to determine the courts' jurisdiction to wind up foreign corporations, as established in Re Latreefers Inc [1999]:
− The company has “sufficient connection” with England, historically in the form of assets in the jurisdiction
− There is a reasonable possibility of benefit accruing to creditors from the making of a winding-up order; and
− One or more persons interested in the distribution of assets are persons over whom the English court could exercise jurisdiction
• However, recent decisions assessing jurisdiction in respect of schemes, including Re Drax Holdings [2003], Re DAP Holding NV [2006] and Re Rodenstock [2011], interpret these conditions as going to the discretionary
exercise of power rather than to jurisdiction. In other words, they do not have to be satisfied for the court to have jurisdiction to sanction a scheme of arrangement (nor could they practically be, as in the context of a scheme, a winding-up is precisely that which is avoided!), but they have historically served the purpose of ensuring that the court will only make orders where some useful purpose will be served.
• In the contexts of schemes, courts will primarily consider whether a company has “sufficient connection” with England; in doing so, they have more recently pushed the envelope further in its interpretation, relying primarily on English-law governed finance documents to establish the connection (e.g. Metrovacesa SA [2011], Re
Rodenstock [2011], Re PrimaCom [2012], Cortefiēl SA [2012], Re NEF Telecom Co BV [2012], Global Investment House [2012] and Monier [2013])
Recognition
• If the scheme will not be recognised in the relevant jurisdiction (usually the company’s place of incorporation), it will likely not be effective to achieve its purpose. In exercising its discretion to sanction the scheme, the English court will want to be satisfied that the scheme is reasonably likely to achieve its intended purpose and will not be futile or in vain, i.e. that it will likely be recognised by the courts in the relevant local jurisdiction
• A scheme, unlike a CVA (in the EU), is not generally thought to be the subject of
automatic recognition as it falls outside the scope of foreign proceedings as defined in the Insolvency Regulation 2000; this would perhaps be different if it was conducted under the umbrella of a UK administration procedure
• Both schemes and CVAs are capable of recognition in the US under Chapter 15 (and historically under its predecessor, section 304) of the US Bankruptcy Code
• Chapter 15-like legislation does not exist outside of the US; in each of the cases
mentioned on the previous slide, the courts required expert evidence (often from local law professors and retired judges) that the scheme would be capable of recognition and no equivalent procedure existed in the home jurisdiction of the debtor
Recognition (cont.)
• In the Russian Re Gallery Capital SA [2010] case, the Court preferred to allow the
question to be considered at the sanction hearing stage, when the extent of dissent from creditors, if any, would be clearer
• It is generally accepted that expert evidence can’t be expected to be conclusive; courts should weigh the overall benefit of the scheme against the risk that some creditors may take action abroad
• A judgment has to be exercised to consider the extent of that risk; in the Gallery case, there was some doubt that a Russian court would recognise the scheme; however this was considered in the context that local courts would not necessarily be sympathetic to US bondholders bringing claims in Russia
• German and Spanish academics in the previously mentioned cases have provided expert opinions to the English courts that the scheme would be capable of recognition under the 1980 Rome Convention and the related EU Regulations (‘Rome I’ and ‘Rome II’), which provide that a contract shall be governed by the law chosen by the parties
Recognition (cont.)
• Private international law rules may also be relied on by foreign courts to recognise English
schemes; in the recent Bulgarian Telecom (‘Vivacom’) [2012] case, a Dutch expert gave
evidence that the scheme would be recognised in the Netherlands under the domestic private international law of the Netherlands.
• Private international law rules were also referred to by Judge Hildyard in the January 2012
Primacom judgment, which reaffirmed the extraterritoriality of English schemes, despite the fact that the majority of the company’s creditors were domiciled in Germany
• The main distinction with the Equitable Life case in 2009 (OLG Celle 8 U 46/09) - a decision
upheld by the German Federal Court in February this year), where the German court declined to recognise a solvent scheme as a ‘judgment’ under the EC Regulation No 44/2001 (the “Judgments Regulation”) was that:
− the Equitable Life scheme was a solvent scheme and sought to vary insurance policies governed by German law;
− the PrimaCom loan agreements had exclusive English law and jurisdiction clauses which would allow the German court, pursuant to private international law rules, to apply English
law to the question of whether the creditors’ rights against PrimaCom had been varied by
the scheme even if the scheme was not entitled to recognition under the Judgments Reg
Sanctioned Schemes of Foreign Companies
British Virgin Islands
• Gallery - 2009
Bulgaria
• Bulgarian Telecom (‘Vivacom’) - 2012
Canada
• Cavell Insurance Company Limited - 2006 Cayman Islands • Re Drax Holdings - 2003 Denmark • Icopal - 2013 Dutch Antilles • Heron International NV - 1994 Germany • Tele Columbus – 2010, 2014 • Rodenstock – 2011 • Primacom – 2012 • Monier – 2013 Greece • Wind Hellas – 2010 23 Hungary
• Invitel (via Magyar Telecom BV) – 2014
Guernsey • Re A Company – 1991 Indonesia • PT Garuda – 2002 Ireland • Sovereign Marine - 2005 Italy • Seat Pagine - 2012 Jersey • Re Drax Holdings – 2004 • Telewest – 2004 Kuwait
• Global Investment House - 2012
Luxembourg
• Vita Group - 2009
• European Directories – 2010
• Gallery - 2009
Sanctioned Schemes of Foreign Companies
(cont.)
Netherlands
• DAP Holding – 2005
• NEF Telecom Co (‘Vivacom’ ) – 2012
• Magyar Telecom BV (parent of Invitel) – 2013
Poland
• Cognor (formerly Zlomrex) – 2014
Russia • Gallery – 2009 Spain • La Seda de Barcelona – 2010 • Metrovacesa – 2011 • Cortefiēl – 2012 • Orizonia – 2012 Vietnam • Vinashin – 2013 24
