The long running saga in relation to the 2019 Galapagos SA out of court restructuring appears to have reached its conclusion. The disputed elements of the restructuring included a share security enforcement and utilisation of distressed disposal release mechanics to release subordinated debt. Following litigation and attempted insolvency proceedings in multiple jurisdictions, the English High Court held in July 20231 that the distressed disposal and enforcement and release was indeed valid. The decision is important because it is the latest in a long line of English cases2 to reinforce the efficacy and practical utility of distressed disposal release provisions commonly included in European intercreditor agreements and commonly utilised in out of court restructuring transactions. Although this article focuses on the recent English decision, we also outline the broader cross-border context and jurisdictional disputes.
In October 2019, the Galapagos group attempted an out of court restructuring of its financial indebtedness. Prior to the restructuring, Galapagos SA (GSA), a Luxembourg company whose principal business was the manufacture of heat exchangers, was the borrower of group debt under a secured revolving credit facility (RCF), a secured bank guarantee facility, and senior secured notes. It was also the guarantor of high yield secured notes issued by its immediate parent, Galapagos Holding SA (Holding). Under an English law intercreditor agreement dated 30 May 2014 (ICA), the debt claims were ranked as follows:
As part of the restructuring, GSA sold its shares in the wholly owned subsidiary, Galapagos Bidco S.A.R.L (Bidco), to Mangrove IV Luxco SARL (Mangrove). The ultimate owners of GSA were private equity funds managed by Triton Investment Management Limited (Triton). Mangrove was also a subsidiary of Triton pursuant to a Loan Market Association style ICA distressed disposal provision.
The proceeds of the sale discharged 100% of the amounts due under the RCF and bank guarantee facility and 90% of the liabilities under the senior secured notes. However, the restructuring left approximately EUR33.35 million owed to the senior secured noteholders and approximately EUR250 million owed under the guarantee of the high yield notes. There was also a liability under an intercompany loan owed to Bidco.
Several junior creditors, including Signal Credit Opportunities (Lux) Investco II SARL (Signal), objected to the restructuring on the basis that it was in breach of the existing ICA, and legal proceedings were commenced in various jurisdictions, namely England, the United States, Germany, and Luxembourg. Signal was a high yield noteholder who held approximately 29% of the notes.
As highlighted above, the focus of this article is on the English proceedings. However, it is helpful to understand the broader cross-border challenges to appreciate the full context of the English proceedings.
In August 2019, when the United Kingdom was still part of the European Union, the Dusseldorf court granted a preliminary insolvency order appointing Dr. Kebekus as German insolvency administrator in respect of GSA. The proceedings were designated as main proceedings for the purposes of the Recast EU Insolvency Regulation (EU Regulation). Four days previously, GSA’s English director had applied for an English administration order. That director was then removed by the high yield noteholders and a German director was appointed in their place. The new director opposed an English administration, and the English administration proceedings were stayed.
The English proceedings in relation to the restructuring were commenced the following month in September 2019, prior to the restructuring being completed. At that time, Bidco sought various declarations from the English court that the restructuring complied with the terms of the ICA and in particular the distressed disposal provisions. Signal and the German insolvency administrator challenged the English court’s jurisdiction (which the English court subsequently rejected). Shortly afterwards, proceedings were commenced in New York by Signal where Signal similarly argued that the restructuring did not comply with the ICA. The New York proceedings were eventually stayed in July 2020 pending the outcome of the English proceedings.
Following the October 2019 restructuring, the German insolvency administrator commenced proceedings in December 2019 in Luxembourg against Bidco and Mangrove, arguing that the restructuring constituted a fraud and seeking a recission of the share transfer.
In September 2020, the German insolvency administrator commenced a clawback action in the German courts in Dusseldorf against Mangrove seeking an order that Mangrove transfer its shares in Bidco back to GSA pursuant to Germany insolvency law. In March 2022, those proceedings were referred to the Court of Justice of the European Union (ECJ) with the ECJ concluding that the Dusseldorf court did not have jurisdiction to open insolvency proceedings in respect of GSA where an application was pending before the English court to commence insolvency proceedings in England (i.e. the stayed administration proceeding).
The Dusseldorf court eventually dismissed the clawback proceedings.
Bidco and the senior secured noteholders wanted the English administration to proceed. However, Signal opposed this. Finally, in April 2022, the stay in respect of the English administration application was lifted, and the administration application was converted into a winding up application. A winding up order was made in June 2022, in which the English court concluded that the German proceedings were not in fact the main proceedings under the EU Regulation. Instead, the English court was satisfied that GSA’s centre of main interests (COMI) was in England. An appeal against the winding-up order was dismissed in January 2023, with the English court refusing to recognise the status of the German insolvency administrator. The result was competing insolvency proceedings in England and Germany, a phenomenon that would not have been possible prior to the UK’s departure from the European Union.
Focusing in on the proceedings before the English court, once the restructuring had been completed in October 2019, the English proceedings were amended to seek declarations that, amongst other things, the Security Agent had effectively released the liabilities of GSA and its subsidiaries and the disposal was in accordance with the distressed disposal provisions of the ICA. Signal also sought opposing declarations that the restructuring was ineffective.
The ICA was governed by English law, and the courts of England had exclusive jurisdiction over any dispute arising in connection with it. It contained a standard distressed disposal release provision. The sale of GSA’s shareholding in Bidco to Mangrove amounted to a distressed disposal, and on the same day that the disposal occurred, the Security Agent executed a deed of release purporting to release the transaction security and all claims of the Primary Creditors.3 The main dispute in the litigation was around whether certain conditions to the distressed disposal were satisfied. It was common ground that the sale of GSA’s shareholding in Bidco amounted to a ‘distressed disposal’ under the documentation and that a Financial Advisers’ Opinion had been obtained prior to the distressed disposal occurring (concluding, amongst other matters, that the consideration for the proposed sale was fair and was in accordance with the Enforcement Principles, as defined in the ICA). However, there was dispute over whether two other conditions were met.
The key questions for the English court were:
The SPA stated that the consideration was payable in cash, which was to be paid to the Security Agent for application in accordance with the ICA waterfall. The payment by way of set-off (approximately €275m out of the total circa €425m sale proceeds) occurred because some of the Primary Creditors who were entitled to receive a share of the sale proceeds of the distressed disposal agreed to provide new lending to the Mangrove entities for the purpose of funding the purchaser group. The judge, Mr Justice Trower, was of the view that the fact that certain Primary Creditors essentially chose to reinvest their share of the sale proceeds in providing new notes post completion to the restructured group did not mean that the new notes were consideration for the distressed disposal: the new notes were merely another aspect of the restructuring. The sale proceeds themselves constituted cash consideration, notwithstanding any subsequent reinvestment in new notes and notwithstanding set-off being applied to the sale proceeds. The structure simply cut out the round tripping of cash from the purchaser to the Security Agent and back to the purchaser.
In addition, following previous authorities that regarded set-off as payment in cash, it was held that the fact that set-off was applied did not mean that the sale proceeds were not in cash. Therefore, there was no requirement for the completion payments to be structured so that the full amount of the sale proceeds must be received by the Security Agent and then certain amounts transferred back on behalf of the re-subscribing note holders.
More broadly, this indicates that parties can continue to use set-off as a practical and commercial way of settling parties’ payment obligations.
The deed of release released all claims of the Primary Creditors (in their capacity as Primary Creditors). Signal submitted that, given that certain Primary Creditors had entered into the new note financing provided to the purchaser group, an unconditional release did not occur and that the commercial reality was that the claims of the Primary Creditors continued.
The English Court held that the fact that new notes were documented (under new documents on new terms) and provided by certain Primary Creditors to the purchaser group did not limit the effect of the releases given pursuant to the deed of release. Therefore, the distressed disposal conditions were met, and the disposal of Bidco’s shares to Mangrove was in accordance with the ICA. Had Signal been successful with its submission, this would have created uncertainty as to whether (and the precise timing at which) an existing lender would have been able to provide new funding to the purchasing group.
The judge considered that such uncertainty would be a “wholly uncommercial consequence” and “would remove from the potential pool of refinancing lenders those who are most likely to have an appetite to continue to support the Group with new finance” [at para 155].
As a result, existing lenders may continue to provide new funding to the purchasers of distressed disposals without prejudicing the effect of a previous security release.
As a back up position, against Signal’s objections to the distressed disposal, Bidco argued that the distressed disposal conditions may be disregarded because the high yield noteholders were out of the money.
Bidco submitted that, on a true construction of the ICA, the conditions stipulated in the distressed disposal clause did not have to be satisfied if the holders of the high yield notes had no economic interest in the high yield shared debt security and would receive no return should the distressed disposal not occur. The judge disagreed that it was legitimate to simply disregard the distressed disposal conditions on the basis that the high yield noteholders were out of the money. He was not prepared to hold that the conditions could be disregarded since the opening wording of the distressed disposal conditions—“at any time”—were inconsistent with Bidco’s interpretation.4
Taking all of the above determinations together, the English court’s conclusion was that the restructuring was valid and effective.
It is understood that the German insolvency administrator opted not to appeal the German Regional Court of Dusseldorf’s decisions. With respect to the German proceedings, as there are no other assets available in the insolvency proceedings, the position is now final.
In November 2023, the parties agreed to discontinue the New York proceedings in the light of the English High Court’s decision.
With regards to the English proceedings, permission to appeal was refused by the trial judge, and at the time of writing, no appeal to the Court of Appeal is listed, suggesting that the matter is now settled in England.
Ultimately the English court’s decision will be welcomed by senior creditors who often look to the distressed disposal provisions to facilitate a restructuring transaction (usually out of Court).
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