slaughter and may Re Rodenstock: the jurisdiction of the English courts to sanction schemes of arrangement of solvent overseas companies BRIEFING OCTOBER 2011 INTRODUCTION In a recent hearing in the Companies Court, Briggs J sanctioned a scheme of arrangement ( scheme ) for a Germanincorporated company, Rodenstock GmbH, whose centre of main interests ( COMI ) is in Germany. The company had no assets in this jurisdiction that were likely to be affected by the scheme. The purpose of the scheme was to vary the terms of a senior facilities agreement, governed by English law and subject to the jurisdiction of the English courts, in order to enable the company to implement a restructuring plan. The company, which was described as solvent, was at risk of being placed into an insolvency process in Germany when the existing waiver of its breach of financial covenants under the agreement expired. Because the case (Re Rodenstock GmbH [2011] EWHC 1104 (Ch)) raised serious questions concerning the court s jurisdiction and discretion to sanction a scheme of an overseas company, the judge, Mr Justice Briggs, provided detailed reasons in the judgment as to why the sanction order should be granted. This article examines three key issues that the case returns to the spotlight: the jurisdictional basis on which the English court can exercise its discretion to sanction a scheme of a solvent foreign company; the effect of Council Regulation (EC) No 1346/2000 on Insolvency Proceedings (the Insolvency Regulation ) and Council Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Judgments Regulation ) on the court s international jurisdiction to sanction solvent schemes; and the international effectiveness of such schemes. THE ENGLISH COURT S JURISDICTION The court s jurisdiction to sanction a scheme is found in section 895 of the Companies Act 2006 and hinges on its jurisdiction to wind up the company in question. A company for these purposes means any company liable to be wound up under the Insolvency Act 1986. It includes overseas companies that may be wound up on the basis that they are unregistered companies. The circumstances in which an unregistered company may be wound up are set out in section 221(5) of the Insolvency Act 1986 and comprise dissolution, cessation of business, carrying on business to effect a winding up of the company s affairs, inability of the company to pay its debts, or winding up on just and equitable grounds. The company does not have to be insolvent. Three preconditions, established by case law, must also be fulfilled in order for the English court to exercise its discretion to grant a winding-up order in respect of an overseas company: there must be sufficient connection with England (which may, but need not necessarily, consist of assets within the jurisdiction); there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order; and one or more persons interested in the distribution of the assets of the company must be persons over whom the court has jurisdiction. Lawrence Collins J, in Re Drax Holdings [2004] 1 WLR 1049, held that these preconditions were relevant to the exercise of the court s discretion (rather than to its jurisdiction) in determining whether it should make a winding-up order and so do not have to be fulfilled in the case of a scheme, where the company is not necessarily
insolvent. This view was later endorsed by Warren J in Re Sovereign Marine & General Insurance Co Ltd [2006] BCC 774. Briggs J noted the need for the sufficient connection requirement to prevent the court from exercising a prima facie exorbitant jurisdiction save where it was appropriate to do so. THE IMPACT OF EU LEGISLATION The effect (if any) on the court s international jurisdiction to sanction solvent company schemes created by the coming into force of the Insolvency Regulation and the Judgments Regulation lay at the heart of Briggs J s analysis in the Rodenstock case. He noted that a court s jurisdiction to wind up insolvent foreign companies had been limited by Article 3(2) of the Insolvency Regulation, which has the effect that the English courts can only wind up companies whose COMIs are situated in another EU member state if they have an establishment in the UK. Jurisdiction to wind up overseas companies under section 221 of the Insolvency Act 1986 is consequently confined to companies that fall outside the scope of the Insolvency Regulation. Briggs J was prepared to follow the court s findings in Dap Holding NV [2005] EWHC 2092 (Ch) that Article 3(2) did not prevent the English court from assuming jurisdiction to sanction a scheme of a company whose COMI was situated in another member state. In that case, Lewison J reasoned that, because circumstances such as an insolvency or an establishment within a member state are transient and may change, there is nothing to prevent the courts of a member state concluding that the company is liable to be wound up in the UK so long as there is sufficient connection with the UK. This approach was also adopted in cases such as Tele Columbus (No 7359 of 2010, 14 December 2010), concerning a scheme of a German company s obligations, and Metrovacesa [2011] EWHC 1014 (Ch), concerning a scheme of a Spanish company s obligations. The COMIs of both companies were situated in the member state in which they had been incorporated. Briggs J acknowledged that the position in relation to the English court s jurisdiction to wind up a solvent company was less clear. He did not consider it to be a form of proceedings excluded by Article 1 of the Judgments Regulation, since Article 1(2)(b) excludes only judicial arrangements, compositions and analogous proceedings relating to the winding up of insolvent companies. He felt that a proper construction of that provision, taking account of the German text of the Judgments Regulation and the Schlosser Report on the accession of the UK, Denmark and Ireland to the Brussels Convention, was that proceedings before an English court to sanction a scheme relating to a solvent company were plainly civil and commercial matters within Article 1 and therefore benefited from the recognition and enforcement provisions in Chapter 3. He was aware that a number of difficulties arose from the conclusion that schemes (at least in relation to solvent companies) are wholly excluded from the Judgments Regulation by Article 1(2)(b). The first was that, as indicated in the Schlosser Report, the Insolvency Regulation and the Judgments Regulation were intended to dovetail almost completely with each other. Further support for this proposition came from the expert evidence of a retired judge of Germany s Federal Supreme Court to the effect that the German language version of Article 1(2) clearly excludes only such judicial arrangements, compositions and analogous proceedings as arise in a bankruptcy or insolvency context. A similar approach is also to be found in the Virgos and Garcimartin commentary on the Insolvency Regulation. The more difficult question was whether such proceedings fall within the meaning of Article 22(2). This provision confers exclusive jurisdiction on the courts of the seat of a company in proceedings that have as their object the dissolution of the company, where that seat is located in an EU member state. Briggs J concluded that Article 22(2) precluded the English court from assuming jurisdiction to wind up a solvent company such as Rodenstock whose seat was located in Germany. The only exception to this was winding up on the public interest ground. 02 SLAUGHTER AND MAY
Briggs J went on to consider briefly the jurisdictional rules of the Judgments Regulation, which he observed were ill-equipped to deal with scheme applications as these are not aimed at specific defendants but may nonetheless be regarded as adversarial. He thought the solution might be for each member state to continue to apply its own rules of private international law or, alternatively, to shoehorn proceedings that do not involve suing anybody into the jurisdiction provisions of Chapter 2. He concluded that it was unnecessary to resolve that conundrum in the present case because more than 50% (by value) of the scheme creditors were domiciled in England. The English court would therefore have jurisdiction whichever solution were to be adopted. Finally, he declined to decide whether a scheme involving an insolvent company would also fall within the scope of the Judgments Regulation so the case offers no clarification on that issue. In the event, Briggs J s findings that neither the Insolvency Regulation nor the Judgments Regulation conferred jurisdiction on the English court to wind up a solvent company whose COMI or seat was located in another EU member state did not lead him to conclude that the English court had no jurisdiction to sanction schemes in relation to such companies. Instead, he found that the authority to do so lay in the phrase liable to be wound up used in section 895(2)(b) of the Companies Act 2006, which he described as a touchstone for the court s jurisdiction, finding it improbable that, on a purposive interpretation of those Regulations as part of English law, any such narrowing of jurisdiction was intended. He agreed with Warren J s obiter remarks (in relation to non-eu countries) in Re Sovereign Marine & General Insurance Co Ltd [2006] BCC 774 to the effect that the phrase liable to be wound up was designed simply to identify the types of company and association to which the jurisdiction applies and, at least so far as concerns solvent companies, nothing in either the Insolvency Regulation or the Judgments Regulation has narrowed the scope of the meaning of that phrase, or, therefore, the definition of company which it provides. In essence, the expression was to be construed as defining the type of entity that was capable of being wound up. For the purposes of sanctioning the scheme, the sufficient connection test in Rodenstock had been satisfied by the choice of English law as the governing law, and (for the benefit of the senior lenders) the exclusive jurisdiction clause in favour of the English courts. Briggs J considered it material that the scheme creditors had collectively chosen to use a single agreement regulating not just individual creditor-debtor relationships between each lender and the company but the relationship between each of the senior lenders inter se and between them as a body and the company. Two other factors, that the majority by value of the scheme creditors were situated in England and that the company had a modest English customer base, did not assist in establishing jurisdiction. The decision was in line with that in the Tele Columbus case, in which he ordered the convening of the scheme meeting. The connection with England in that case was also established on the basis that the finance agreements were governed by English law. In both cases, the court relied on expert evidence that the schemes would be recognised in Germany on the basis of German private international law. INTERNATIONAL EFFECTIVENESS OF SCHEMES The courts will be reluctant to exercise their jurisdiction to sanction a scheme if it (or its effects) will not be recognised in other jurisdictions. A scheme will not benefit from automatic recognition under the Insolvency Regulation as it is not a collective insolvency proceeding. Nor can it be assumed that a sanction order will receive automatic recognition under the Judgments Regulation as there is a risk that it may not be characterised as a judgment within the meaning of Article 32 of that regulation. Recognition was a key concern in the Rodenstock case where a small number of creditors had initially said that they would oppose the scheme. These creditors would be prima facie entitled to enforce their rights by litigating 03 SLAUGHTER AND MAY
in Germany since the jurisdiction clause in the agreement was exclusive only for the benefit of the senior lenders and could therefore be waived by them. Briggs J examined the decision of the German Higher Regional Court, Oberlandesgericht Celle (ref: 8 U46/09), relating to a solvent scheme of an English insurance company, Equitable Life. The German court refused to recognise the order sanctioning the scheme, which varied the terms of documentation governed by German law, on the basis that it was not a judgment under the Judgments Regulation, finding that it had the characteristics of a compromise rather than settling a contentious dispute between two parties. The insurance undertakings directive could not be relied on for recognition as it was not in force when the scheme was sanctioned. The decision has since been appealed to the German Supreme Court, the Bundersgerichtshof, and may ultimately be referred to the European Court of Justice ( ECJ ) unless a settlement is reached. Briggs J distinguished the case from Rodenstock, in which the underlying agreement was governed by English law. He relied on the expert evidence of a German professor on international private law and a retired senior judge of the division of the German Supreme Court. They opined that, in practice, a decision by the English court to sanction the scheme would be legally effective in Germany because the German courts would, pursuant to the Rome Convention on the law applicable to contractual obligations, apply English law to the question of whether the senior lenders rights against the company had been varied by the scheme. The use of expert evidence to confirm the effectiveness of the scheme in the jurisdiction of incorporation of the debtor company has previously been seen in relation to the Tele Columbus and Metrovacesa applications, where again the companies finance documentation was subject to English governing law and jurisdiction clauses. Note that, where the underlying contract is governed by the law of another jurisdiction, the risk of challenge by local creditors may be reduced by effecting a parallel scheme in that jurisdiction. However, this will only be possible if the debtor company has assets in that jurisdiction and the local law provides for an equivalent procedure. This approach was adopted in Drax Holdings, where simultaneous orders were made in the Jersey and Cayman Islands courts to ensure all creditors were bound. Similarly, the debtor company could seek recognition of the scheme as a foreign proceeding in the US courts under Chapter 15 of the US Bankruptcy Code if it has a connection with the US. Chapter 15 has none of the recognition problems associated with the EU legislation as it expressly provides, in its definition of foreign proceeding, for recognition of proceedings involving adjustment of debt, with the apparent intention of capturing solvent schemes. DEVELOPING TRENDS The pattern emerging from recent cases in scheme applications by companies incorporated in other EU member states is one of the courts applying the sufficient connection test, rather than the Insolvency Regulation test, for jurisdiction in cases where the company has an establishment in England. This was the position in La Seda de Barcelona SA [2010] EWHC 1364 (Ch), for example, concerning a scheme of a Spanish-incorporated company whose COMI was in Spain. The court sanctioned the scheme on the basis that the company had entered into English law contracts and submitted to the jurisdiction of the English courts although, as indicated in the judgment, jurisdiction could have been exercised under the Insolvency Regulation on the basis that the company had an establishment in England. As discussed above, other companies whose applications have been dealt with on the basis of the sufficient connection test include Dap Holding, Tele Columbus, Metrovacesa and now Rodenstock. It should be noted that, in some cases, the court s willingness to exercise its jurisdiction has been influenced by the absence of effective alternative procedures in the member state in which the applicant company is incorporated. 04 SLAUGHTER AND MAY
This situation is currently in a state of flux as key member states, such as Germany and Spain, are seeking to amend their insolvency regimes to facilitate debt restructurings outside a formal insolvency process. CONCLUSION Rodenstock provides a further example of a case in which the English court has been prepared to sanction a scheme of an overseas company on the basis that its jurisdiction has not been restricted by EU legislation and where the sufficient connection test has been met. Expert evidence confirming that local courts will generally be required to apply English law to the question of whether lenders rights under an English law agreement have been effectively varied by the scheme has gone some way to reducing concerns over non-recognition under the Judgments Regulation. The Rodenstock case may, as a result, encourage a greater use of schemes in cross-border restructurings, especially where the original financing documents contain an English governing law and jurisdiction clause. Note however that, as Briggs J pointed out, this is still an uncertain area that (in a reference to the Interedil Srl case) may soon fall to be reviewed by the ECJ in other litigation. This briefing broadly reproduces an article that appeared in the August 2011 issue of Corporate Rescue and Insolvency. Slaughter and May 2011 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. lje12.indd1011