Joe Bannister, Partners, Hogan Lovells, London. 12 June 2013

(1)

12 June 2013

A "Flexible Friend?" English Schemes of

Arrangement, Multi-Creditor

Restructurings and the Insolvency

Regulation

Joe Bannister, Partners, Hogan Lovells, London

(2)

www.hoganlovells.com

Outline

• Commercial and legal background

• What is a scheme of arrangement?

• When can a scheme be used?

• The scheme procedure in a debt restructuring

• When and how will schemes be relevant to banks

and borrowers outside the UK?

• Examples

• Schemes and CVAs compared

• Schemes and the European Insolvency Regulation;

Summary

• Conclusions

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Commercial and legislative background

• Increased range of financing options – eg. secured

senior lending, second lien lending, mezzanine

lenders, bonds and other debt instruments

• More stakeholders with divergent views

• Recent introduction of composition/"debtor in

possession" regimes in

– Germany

– Italy

(4)

What is a Scheme of Arrangement?

• A compromise or arrangement between a company and its

creditors or members or any class of them

– Statutory basis – Part 26 Companies Act 2006

– Implemented through court ordered meeting(s) and if approved at

meeting(s), subsequent court sanction

– Not an insolvency process under English law; contrast Chapter 11 plans

of reorganisation or CVAs

– Must be approved by the prescribed majorities (50% in number and 75%

in value in each class)

– Class members must have sufficiently common rights to enable them to

consult together in relation to the proposed scheme

– Starting point will be creditor ranking/priority but other factors include

• actual -v- contingent claims

• sources of payment to creditors

• Compare rights to be released or varied and the new rights created Re Hawk

Insurance [2001] 2 BCLC 480

• "fairness" ie. correct classification -v- need to avoid "ransom" element. Courts will

be pragmatic where company insolvent or financial impact of separate classes

would be low

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What is a Scheme of Arrangement?

• Grounds for court sanction

– Have the requirements of CA 2006 been complied with;

for each class

– Is the majority of a class acting bona fide; is there

sufficient creditor participation?

– Would an "intelligent and honest man" reasonably

approve?

– Court discretion is unfettered; scheme need not be the

only scheme, or the "best" scheme but it must be "fair" –

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When can a Scheme be used?

• The procedure is broad – all that is needed is some "give and take"

• 'Solvent' schemes may be used in

– Corporate takeovers

– Corporate demergers

– In "insurer" cases schemes have been employed

– As an alternative distribution procedure to liquidation – eg. English and American

Insurance, Sovereign Marine and General Insurance (and Orion!)

– To estimate and pay out claims against insurers or in respect of classes of

insurance business in run-off – EW Payne, St Helens Trust, Sphere Drake

• To overcome objections to a restructuring by minority lenders

• Unanimous lender consent provisions common in loan agreements, eg in

relation to

– New money

– Extension of maturity

– Changes to the ranking and repayment of facilities

– Converting debt into other instruments (ie. debt write off)

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When can a Scheme be used?

• Minority lenders can find themselves in a very strong

negotiating position even if they hold a small amount of

the overall debt

• Schemes can help overcome these differences and

force minority dissenting lenders into a restructuring

– Departure from existing contractual obligations (NEF Telecom)

– Imposition of new contractual terms

– Exercise of court jurisdiction and discretion very important

when contractual rights are interfered with

– Must be supported by good valuation evidence – IMO Car

Wash, MyTravel

• Very helpful for distressed borrowers with large and

diverse lending syndicates

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The Scheme procedure in a debt restructuring

8

Heads of Terms agreed between Borrower and Lead Banks

Lock-Up Agreement

Scheme and Explanatory Statement drafted

First Court Hearing to Convene Creditors Meetings

Creditors Vote on Scheme

Second Court Hearing to Sanction Scheme

Scheme Becomes Effective

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When and how will Schemes be relevant to

banks and borrowers outside the UK?

• English courts will sanction a Scheme even where borrowers and lenders are not English

–

Rodenstock (Germany)

–

NEF Telecom (Bulgaria)

–

Cotfifiel (Spain and Luxembourg)

–

SEAT Pagina (Italy)

–

Gallery (Russia)

–

Wind Hellas (Netherlands)

• Why?

–

Not an insolvency process means outside EU Insolvency Regulation,; hence no COMI or "establishment" in UK is necessary

–

Rodenstock Judgment

• Under English law the court can sanction a Scheme in relation to "any company liable to be wound up under the

Insolvency Act 1986" which includes "unregistered companies"

– ie. companies incorporated outside England

and Wales

• All that is required for the court to exercise its jurisdiction in relation to overseas companies is a "sufficient

connection" with the UK

• What is a "sufficient connection"?

–

At the discretion of the court but English law as the governing law in the loan agreement is essential

–

Exclusive jurisdiction for English courts to settle disputes is helpful

–

No requirement for the company to be incorporated in England or to have a place of business, customers,

assets, employees or to trade in England

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When and how will Schemes be relevant to

banks and borrowers outside the UK?

• Will an English scheme of arrangement be enforceable

outside the UK?

• Common law jurisdiction

– Concurrent schemes; Drax (UK and Jersey); New Cap Re (England

and Australia)

– Recognition in court; Re Contel Corporation (Bermuda Commercial

court regulation of a Singapore scheme of arrangement)

• US

– Section 304 US Bankruptcy Code and Chapter 15 US Bankruptcy

Code; as a "proceeding relating to adjustment of debt, where debtor's

assets or affairs subject to control or supervision by a foreign court"

• Germany

– Equitable Life Scheme not recognised by German Supreme Court as

purported to compromise German law rights

– Expert opinions that a Scheme could be recognised as German courts

would apply English law obligations (Rodenstock)

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When and how will Schemes be relevant to

banks and borrowers outside the UK?

• Spain and Luxembourg

– Norris, J satisfied on expert evidence that Spanish and Luxembourg

courts would recognise English schemes (Cortifiel)

• Netherlands and Bulgaria

– Vos, J accepted expert evidence that the Dutch and Bulgarian courts

would recognise an English scheme

• England

– Either proceedings to sanction a scheme fall in Judgments Regulation

(Regulation EC44/2001 of 24 December 2001) as "Civil or commercial

matters" (Rodenstock)

– AND Judgments Regulation applies because of English law

jurisdiction Clause (Article 23) or Submission to Jurisdiction (Article

24)

– OR Scheme Creditors are not defendants (Article 2) so conflict of law

principle of "sufficient connection" applies

– As a practical alternative, all Scheme Creditors could instead sign an

undertaking to be bound by the Scheme

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Some Recent Examples: Rodenstock (Germany:

2010)

• A German company manufacturing frames and lenses for spectacles

based in Munich

• €305 million senior debt facility but unable to continue serving debt

• A restructuring was proposed to:

– Provide a new €40m debt facility to rank ahead of existing senior debt

– Increase pricing on existing facilities

– Reset financial covenants to bring them into line with the revised business plan

– Provide for subordination of existing debt in the event that assets become

insufficient to cover liabilities

• Unanimous consent required to implement restructuring arrangements

• Alchemy funds objected to the restructuring and wanted to present their

alternative. They held:

– 7% in value of all debt; and

– 11% in number of creditor claims

• Company decided to use an English law Scheme to implement the

restructuring

• Approved by the English court in April 2010

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Some Recent Examples: Cortifiel (Spain and

Luxembourg: 2012)

• A leading Spanish high street clothing retailer

• Refinanced in 2007 with English law €1.4 billion senior facility.

Covenant breach anticipated in early 2012

• A restructuring proposed to

– Extend its RCF and term facilities

– Reset financial covenants in exchange for increased margin and fees

• Loan documents required majority lender consent and individual

consent of each lender affected. Requisite consent threshold

absent

• Scheme of Arrangement proposed to implement restructuring

• No creditor opposition

• Creditor majorities "comfortably" exceeded requirements

– There was sufficient evidence to show the scheme would be recognised

in Spain and Luxembourg

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Some Recent Examples: NEF Telecom

(Bulgaria and Netherlands: 2012)

• Bulgarian Telecom ("BT") second largest telecoms company in Bulgaria

• Combined losses of €606 million 2010-2012

• Restructuring of BT and NEF Telecom ("NEF") – incorporated in The

Netherlands

• Under restructuring

– Bulgarian Bank CCB ("CCB") and KTB Bank invested €670 million

– Group indebtedness would be reduced by over €1 billion

– KTB Bank, a senior creditor, opposed scheme

– In excess of 95% of all creditor classes approved the restructuring

• The court sanctioned the scheme holding

– There was "sufficient connection" with the UK to found jurisdiction

– English choice of law provisions in the facilities agreements meant that creditors

had to accept the company's right to propose schemes of arrangement

– The scheme process overrode the consent provisions in the facilities agreements

– Expert evidence showed the scheme would be recognised in Bulgaria and The

Netherlands

– The classes of scheme creditor had been properly constituted

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Schemes and the European Insolvency

Regulation: Summary

• Insolvency Service "Call for Evidence" on reform to the EU Insolvency Regulation

– February 2013. UK Government has "opted in" to proposed reforms

• Proposed inclusion of "interim proceedings".. based on the law relating to

insolvency or adjustment to debt.. for the purpose of rescue.. where the assets

and affairs of the debtor are subject to control or supervision by a court

• Why not include Schemes of Arrangement, since

–

They are court supervised and have been used as alternatives to distributions in liquidations

– eg. English & American and Sovereign Marine & General Insurance

–

They have been used by distressed borrowers to amend, extend or compromise debt; IMO,

Cortifiel, NEF Telecom

–

Inclusion would be consistent with inclusion of CVAs?

• BUT

–

Schemes are a Companies Act procedure

–

They are not a fully collective process – cf. insurance cut-off schemes for pools of business

eg. EW Payne, St Helens Trust

–

Schemes are also used to compromise some but not all debts – eg. NEF Telecom, Cortifiel

–

When is a scheme proposed "for the purposes of rescue"?

–

Use of schemes where there is no financial distress at all – eg. solvent corporate

reorganisations, return of capital to shareholders and takeovers

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Conclusions

• Schemes are versatile and there are very few limits on

the terms that can be included ina Scheme

• Very useful in syndicated lending deals where minority

creditors are holding out

• Identifying different classes of creditors for voting

purposes is essential as all classes must approve the

Scheme

• It should be possible to bring non-UK companies within

the jurisdiction of the English courts for the purposes of

a Scheme as long as there is an English law loan

agreement / disputes clause

• No "COMI" or "establishment" in the UK required to

formal jurisdiction – merely "sufficient connection"

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Hogan Lovells 17

Joe Bannister, Partner

London

Joe specialises in all aspects of corporate restructuring and insolvency. He has particular experience in cross-border and financial services insolvencies, especially banks, insurance companies, Lloyd’s members agencies and pools. Joe is admitted as a solicitor in London and Hong Kong where he worked between 1998 and 2002 as the partner in charge of the firm’s business restructuring and insolvency practice in Hong Kong and China.

Experience includes:

•

Advising on a number of insurer insolvencies and solvent schemes of arrangement including Orion, HIH, St Helens Trust and Drake Insurance.

•

Advising a major motor manufacturer as a creditor of Collins & Aikman, Wagon PLC, Visteon Group and other distressed suppliers.

•

Acting as UK counsel to the Official Committee (the "Committee") of Asbestos Creditors in the formulation of company voluntary arrangements ("CVAs") for Turner & Newall Limited) ("T&N") and its subsidiaries.

•

Advising the trustees of the defined benefit pension scheme of a quoted food manufacturing group at all stages in the renegotiation of the group’s banking facilities, including the successful development of a pan-European security package for the pension fund trustees.

•

Acting for the pension fund trustees of Nortel Networks UK Limited in the prosecution of their claims for financial support directions in the UK, US, EMEA and Canada. This case, along with the court ruling treating liability for financial support directions as administration expenses is one of the highest profile and most complex cross border bankruptcies of the 2008-2011 recession.

•

Advising as UK counsel to ISTC plc, an investor in Tier 1 bank capital, in its Irish examinership.

•

Acting as a UK counsel to a major Irish bank in relation to its exposure to a major industrial,

insurance and property group.

•

Advising a leading bank and other financial creditors on its position as a counterparty to Lehman Brothers' entities.

•

Advising the Icelandic Government in relation to the current Icelandic financial crisis.

•

Acting as UK counsel to the provisional liquidators of Kaupthing Singer & Friedlander (Isle of Man) Limited ("KSFIM") in the formulation of a proposed Isle of Man scheme of arrangement to make payments to depositors and other creditors of KSFIM.

•

Advising the senior syndicate in relation to the restructuring of the Pearl Group.

•

Advising the administrators in relation to the Luminar Group

•

Advising the lender to Archial Plc prior to its insolvency and subsequently PwC as administrators.

Joe Bannister

Business restructuring and insolvency Partner, London

T +44 20 7296 2900

joe.bannister@hoganlovells.com

•

Ranked in Band 1 for Insurance Insolvency in Chambers UK, 2012

•

Listed as a leading lawyer for

Restructuring and Insolvency in IFLR

1000, 2011

•

Chambers UK, 2010 describes Joe as

having "vast experience and is able to communicate complex ideas clearly"

•

UK Legal 500, 2009 describes Joe as

"creative and pragmatic" and goes on to say that Joe is noted as "going that extra mile"

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