A "Flexible Friend?" English Schemes of Arrangement, Multi-Creditor Restructurings and the Insolvency Regulation Reforming the European Insolvency Regulation a legal and policy perspective Joe Bannister, Partners, Hogan Lovells, London 12 June 2013
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 2
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 Spain 3
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 4
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" Re Telewest Communications [2004] BCC 342 5
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) 6
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 7
The Scheme procedure in a debt restructuring Agreement on details of Restructuring 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 8
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 What happens if a creditor brings a claim outside England and Wales? 9
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) 10
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 11
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 12
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 Hence it was capable of sanction 13
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 14
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 15
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" 16
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 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" Advising the lender to Archial Plc prior to its insolvency and subsequently PwC as administrators. Hogan Lovells 17
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