Schemes and Company Voluntary Arrangements. Mark Sterling Partner, Banking Ian Field Partner, Banking

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1 Schemes and Company Voluntary Arrangements Mark Sterling Partner, Banking Ian Field Partner, Banking 18 June 2010

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3 påüéãéë=~åç=`çãé~åó=sçäìåí~êó=^êê~åöéãéåíë ENOKPMéã=Ó NKPMéãF Mark Sterling Ian Field Summary Ian Field and Mark Sterling will give an overview of schemes of arrangement and company voluntary arrangements that were the procedures used in some of the most complex restructurings in recent years. The speakers will look at the advantages and disadvantages of each procedure and the key issues that have arisen in this cycle. Allen & Overy LLP

4 péé~âéê=_áçöê~éüáéë Mark Sterling, Partner Banking Mark is the Managing Partner of Allen & Overy's Global Restructuring and Insolvency Group. He has spent the last 20 years working on cross-border cases in many parts of the world. On coming back to England in 2003 he became Managing Partner of the group and led the insolvencies of Boxclever, TXU and Metronet (UK), and the restructuring of the Schefenacker group. In the current downturn he has acted for a number of debtors, creditors and government institutions on the restructurings of Monier, Dometic and Incisive Media and the insolvencies of Lehman and the Icelandic banks. Tel +44 (0) mark.sterling@allenovery.com Ian Field, Partner Banking Ian deals with all types of restructuring and corporate insolvency work, regularly acting for banks, bondholders and other financial institutions, insolvency practitioners and corporations. Ian has recently advised on a number of cutting-edge restructuring cases both in the UK and across Europe. Ian Field is a past President of the Insolvency Lawyers Association and a member of R3. Tel +44 (0) ian.field@allenovery.com Allen & Overy LLP

5 Mark Sterling and Ian Field 18 June 2010 Creditor Schemes and Arrangements BK Overview Introduction to statutory binding procedures Company Voluntary Arrangement Scheme of Arrangement Comparing the processes Schemes Hot Topics: Jurisdiction, Recognition and Valuation 2

6 Introduction to statutory binding procedures Statutory binding mechanism often required when it is impossible to achieve support required for a consensual restructuring Binds those who vote against or those who do not participate in the restructuring process In last wave of restructurings schemes tended to be used as a mechanism to restructure unsecured public debt However a scheme of arrangement can equally be used to override amendment provisions in senior secured facilities Fragmentation of debt holdings and increased number of debt tranches in leveraged deals is leading to more statutory bindings being required to achieve successful restructurings Schemes are also increasingly being used to restructure debt of international companies whose local jurisdictions lack an effective restructuring procedure 3 Company Voluntary Arrangement (CVA) The directors or administrators make a proposal to the company and its creditors for a voluntary arrangement Nominee identified to supervise implementation of the voluntary arrangement Nominee must be a licensed insolvency practitioner (can be administrator / liquidator) 4

7 Implementing the CVA: Approvals required Creditor Approval Majority in excess of three-quarters in value of the creditors present and voting and the meeting; Binds all creditors who had notice of the proposal and were entitled to attend the meeting as well as creditors who would have been entitled to receive notice; AND Shareholder Approval Simple majority of the members present and voting at the meeting However if Creditors approve the CVA but members do not creditor approval prevails. 5 Implementing the Company Voluntary Arrangement: Process File report of meetings with the court Challenge to CVA within 28 days Unfair prejudice Material irregularity Possibility of appeal Implementation by supervisor 6

8 Uses and Limitations of CVAs No Court Approval No Classes No Numerosity No CVA can affect the rights of a secured creditor without his consent Moratorium only available for eligible companies Automatic EU Recognition (probably) Recognition in the US (we got it last time) Creditors of a company can agree in a CVA to release claims against third parties Fairness Issues Synthetic Classes 7 I can t get no Satisfaction - 1 The Common Law Debtor Discharge by agreement Creditor No Claim over Co-Obligor Discharge by accord and satisfaction Unless the contrary intention appears, the claim of the creditor is discharged against the co-obligor by accord and satisfaction. 8

9 I can t get no Satisfaction - 2 Schemes of arrangement Debtor Discharge by operation of law Creditor Claim over Claim Co-Obligor The claim against the co-obligor is not automatically discharged by accord and satisfaction. 9 I can t get no Satisfaction - 3 Company Voluntary Arrangement Debtor Discharge by agreement Creditor No Claim over Co-Obligor Discharge by agreement (if that s what the CVA says) Creditors can agree a discharge of a co-obligor in a CVA with the debtor if the CVA so provides. 10

10 Scheme of Arrangement Part 26 of the Companies Act 2006 (came into force April 2008) Creditors Scheme What is a Creditors Scheme? A compromise or arrangement made between a company and its creditors or any class of them. Any company which is capable of being wound up under the Insolvency Act 1986 Must be the company s Scheme company formulates compromise proposal 11 Implementing the Scheme: Approvals Required Creditor Approval Majority in number representing three quarters in value of creditors or each class of creditors present and voting, either in person or by proxy Binds all creditors in each class including those which have not attended or voted or which voted against the proposal Court Approval Court must sanction the Scheme 12

11 Implementing the Scheme: The Process First court hearing seeking leave to convene creditor(s) meeting Scheme Document (incorporating Scheme and Explanatory Statement) sent to creditors Meeting(s) of creditors one meeting per class Second court hearing seeking court sanction for the scheme Scheme effective upon delivery of Court Order to Registrar of Companies 13 Scheme Issues: Creditor Issues Who are the creditors? Financial creditors Bond Trustee or the bondholders? Excluded creditors Those not affected by the scheme Those who have no economic interest in the company Constitution of classes of creditors Separate meeting for each class of creditors Class test those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest form a class 14

12 Schemes -v- CVAs CVAs no class issues but cannot affect rights of secured creditors Schemes shareholder vote not always required but need to pass numerosity test Recognition Timing of possible challenges Market pressures and creditor preferences Timetable for implementing process Cost 15 Jurisdiction English law Companies Act 2006 defines a company as any company liable to be wound up under the Insolvency Act 1986 Insolvency Act provides that any unregistered company (which includes a foreign company) may be wound up, subject to certain requirements Case law sets out factors to be taken into consideration, but ultimately it is a question of discretion But what about the EU Insolvency Regulation? Liquidation proceedings can only take place in the jurisdiction where a company has its COMI or an establishment So does the EU Insolvency Regulation effectively displace the jurisdiction of an English court to wind up, and therefore sanction a scheme of arrangement in respect of, a company with its COMI elsewhere in the EU? What is the answer two views: Doves EU Reg has no application as schemes are not an insolvency proceeding, and in any case COMI is a factual matter and can change Hawks a company is not liable to be wound up in England if its COMI is elsewhere in the EU 16

13 Recognition: schemes of foreign companies Once a scheme has been sanctioned by an English court, will it be recognised in the jurisdiction of incorporation of the company and/or where it has assets? EU Insolvency Regulation does not help! schemes are not listed as available as main or secondary proceedings and indeed do not arise under the English Insolvency Act EU Judgments Regulation does not help! Judgments Regulation does not apply to bankruptcy proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings Re DAP Holding NV Case Law Germany Equitable life 17 Can creditors agree to release third parties in a scheme of arrangement of the debtor? No English authority but useful case in Singapore British Vita Recognition The release clause in the Inter Creditor Agreement 18

14 Debt ranking Valuation Creditors holding different priority claims have different interests in any restructuring that are linked to the value of company Scheme may seek to exclude creditors who are thought to have no economic interest in the company and this raises the question of whether such creditors can properly be excluded in 2 recent cases where restructuring scheme proposed, the court had to decide whether junior creditors could vote. Valuations Senior debt 350m 250m Liquidation/break up Senior Lien Debt Mezzanine Debt Unsecured Bond Debt Unsecured Pension Debt 50m 150m 100m 100m 400m 550m 600m 650m Distressed/forced sale Underlying asset DCF approach Market comparison Going concern valuation 19 Schemes of Arrangement: MyTravel Proposed scheme (simplified) Senior Creditors Shareholders Shareholders Senior Senior Creditors Creditors Remaining Subordinated Bondholders My My Travel Travel NewCo NewCo OpCo OpCo OpCo OpCo OpCo OpCo Valuation Liabilities in excess of 2bn Net liabilities in balance sheet, 877m (i.e. assets ~ 1.23bn) Priority ranking Secured creditors 1.74bn+ Unsecured creditors Subordinated bondholders 216m 20

15 Justice Richards in Telewest There is no dispute that, in the circumstances of a case like the present, the relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation. Strictly speaking, because the company is not in liquidation, the legal rights of bondholders are defined by the terms attached to the bonds. However, the reality is that they will not be able to enforce those rights and that in the absence of the scheme or other arrangement their rights against the company will be those arising in an insolvent liquidation. 21 Justice Mann in MyTravel I consider it to be clear that the hypothesis of an insolvency (for the purposes of testing the economic interest of the bondholders in the company) is the correct one. The question is whether the bondholders have any real economic interest in the company That involves looking at reality. 22

16 Justice Mann in MyTravel [Telewest and Hawk] therefore demonstrate that when it is necessary to ascertain the real rights of a creditor, one is entitled to see if the rights could realistically only be enforced in a winding up, and if so to use the notional winding up as the method of assessing what those rights were If in reality the only way in which the bondholders would ever be repaid is through a winding up then the method of valuing that interest must be to predicate a winding up. 23 Schemes of Arrangement: IMO Carwash Similar scheme to MyTravel: transfer assets and c. 313m of senior liabilities to Newco where part of those senior claims would be equitised c. 119m of mezzanine left behind in an empty shell transfer by a pre-pack; scheme required to bind dissenting minority of seniors to transfer of debt & equitisation Companies presented 3 different going concern valuations. Each showed a value less than senior debt. Argued, mezzanine had no economic interest Mezzanine argued that Monte Carlo simulation produced a valuation that showed value broke in the mezzanine Court held that, on basis of companies going concern valuations, the mezzanine had no economic interest; their valuation was unpersuasive 24

17 Schemes of Arrangement: Conclusions No clear ruling as to which approach is appropriate in any given situation senior achieved their goal in IMO on a going concern valuation; didn t need to argue liquidation value. key test yet to come? Few tentative conclusions in the meantime appropriate valuation likely to depend on particular circumstances of company, no one size fits all MyTravel: if agreement not reached, liquidation a real possibility IMO: if scheme had failed, senior creditors could have enforced their security and sold the business as (distressed) going concern courts will test reliability and accuracy of valuations put before them which should involve real world judgements about company s prospects 25 The Valuation question MyTravel Class Valuation Distribution Rights on Liquidation Liquidation Valuation Liquidation Priority IMO Rights on Liquidation Forced Sale Valuation Liquidation Priority 26

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20 One Bishops Square London E1 6AD United Kingdom Tel +44 (0) Fax +44 (0) These are seminar notes only. The information within this document does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. In this document Allen & Overy means Allen & Overy and/or its affiliated undertakings. Any reference to a partner means a member, consultant or employee of Allen & Overy LLP. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi, Amsterdam, Antwerp, Athens, Bangkok, Beijing, Bratislava, Brussels, Bucharest (associated office), Budapest, Doha, Dubai, Düsseldorf, Frankfurt, Hamburg, Hong Kong, London, Luxembourg, Madrid, Mannheim, Milan, Moscow, Munich, New York, Paris, Perth, Prague, Riyadh (associated office), Rome, São Paulo, Shanghai, Singapore, Sydney, Tokyo, Warsaw. MKT