Global | Publication | Q3 2022
It has been some two and a half years since the UK officially withdrew from the European Union on January 31, 2020 (with the subsequent transition period having ended on December 31, 2020). In the restructuring world, the fall-out from "Brexit" continues, in terms of legal consequences and new issues continuing to emerge on a regular basis.
In the years leading up to Brexit, much had been done to facilitate cross-border restructurings in Europe. Insolvency and the legal regimes that govern it had been identified as obstacles to the free movement of capital within the customs union. The European legislators and the Court of Justice of the European Union, as well as EU member states themselves, worked to streamline national legal frameworks to reflect the increasingly transnational nature of business operations and, correspondingly, insolvency proceedings and corporate and financial restructurings occurring in the life-cycles of multi-national enterprises. The European Insolvency Regulation (EIR) laid the foundation for the allocation of jurisdiction for opening insolvency proceedings, as well as their recognition once opened, and widespread cooperation between courts in member states. EU member states have now endeavoured to implement the EU Restructuring Directive (Directive (EU) 2019/1023) (the Restructuring Directive) amidst the challenging backdrop of the COVID-19 pandemic in order to make available to debtor companies effective, preventive restructuring frameworks, which are modelled in many respects along the lines of what had come to be regarded—at least pre-Brexit—as the omnipotent UK scheme of arrangement.
When the European Commission announced in a recommendation in 2014 that it sought to require the implementation of early-stage preventive legal frameworks in all member states, scholars and practitioners alike anticipated a wave of forum-shopping and different member states' restructuring regimes vying for competitive advantage as financially troubled debtors sought to turn around their fortunes.
For the better part of two decades, UK schemes had largely dominated the market for financial restructurings of sizeable UK and non-UK companies across the EU—and even beyond European borders. By the time the Restructuring Directive had been approved by the European Parliament and the Council of the EU in June 2019, the UK was well on its way to implementing the "leave" referendum vote delivered three years earlier, and so predictions on the consequences for the European restructuring market abounded.
While opinions on the prospects for mutual recognition of insolvency and restructuring measures in the EU and the UK post-Brexit diverged vastly among professionals (and, in some circles, continue to do so), one thing became clear: key legislation for EU-nexus restructurings—notably the EIR and the Brussels I Regulation on jurisdiction and the recognition and enforcement of civil and commercial judgments—would no longer apply in relation to the UK.
The repercussions of Brexit on pre-insolvency financial restructuring are best illustrated through a case study.
A Germany-based manufacturer (the Corporation) with dozens of operating entities across continental Europe is financed primarily through an internationally-syndicated secured loan facility at the parent company level, governed by English law (the HoldCo Debt). Secondary sources of external financing to the group are through certain secured and unsecured trade finance facilities made available to subsidiaries (the OpCo Debt). There is some overlap among the lender groups for the HoldCo Debt and the OpCo Debt. There are also intercompany loans, and the Corporation has guaranteed certain of the OpCo Debt.
Following declining sales, COVID-19-related disruptions, overleveraging and alleged fraud at the management level of one of its key subsidiaries, the Corporation finds itself in severe financial distress and defaults on its payment obligations under the HoldCo Debt. Payment defaults follow under the OpCo Debt. The financing parties—the HoldCo Debt lenders and the OpCo Debt lenders—agree to sign temporary standstill agreements in relation to their respective facilities, for the purposes of allowing the formulation of a workable turnaround plan. It is hoped that entry into the standstill will facilitate negotiations for the implementation of suitable operational and financial restructuring measures to ensure the successful delivery of the plan and the continuation of the group as a going concern.
It becomes apparent, however, that a consensual restructuring is unlikely to be feasible. Since the Corporation has its statutory seat and centre of main interests (COMI) in Germany, its working assumption throughout has been that restructuring plans in respect of both itself and the relevant borrowers under the OpCo Debt under the relatively newly-implemented StaRUG1—Germany's version of a preventive restructuring framework—will be the main available option for ensuring the compromise of claims of potential dissenting creditors, if the "Plan A" consensual deal appears to be unattainable. Ideally, then, the Corporation and its affected subsidiaries would achieve a holistic restructuring within Germany, utilizing the form of compromise now available under the StaRUG.
However, it is only the OpCo Debt that is governed by German law; the HoldCo Debt is governed by English law. The ramifications of this seemingly incidental choice of law are significant: under English common law, following the so-called "Rule in Gibbs", which derives from the 1890 judgment in Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (25 Q.B.D. 399), contractual claims can only be discharged in accordance with their governing law. As such, provided that a creditor with English law-governed debt does not submit to the jurisdiction of the relevant foreign court, its claims cannot be discharged in the course of the relevant foreign proceeding. The practical effect of the Rule in Gibbs is that the StaRUG cannot be a one-size-fits-all restructuring solution for the Corporation and its affected subsidiaries.
The implications of the Rule in Gibbs for the Corporation's group are as follows: a German StaRUG restructuring plan can validly compromise only the OpCo Debt lenders' claims and those of any creditors which are governed by German law, the laws of any other EU member state, or the laws of any third country which recognizes the StaRUG proceedings as a valid and effective compromise.
If and to the extent that the Corporation intends to include in the StaRUG the claims of the HoldCo Debt lenders—which account for the largest share of the Corporation's financial obligations, dwarfing the amount of OpCo Debt—the purported compromise under the StaRUG will not be effective as a matter of English law, unless the HoldCo Debt lenders were to submit to the jurisdiction of the German courts. In other words, while the HoldCo Debt can be restructured by a German restructuring plan as a matter of German law, the effects of the plan would not be recognised in the UK. Therefore, in view of the sheer amount of the HoldCo Debt liabilities relative to other liabilities of the Corporation, a German StaRUG proceeding in isolation is unlikely to be sufficient to stave off the insolvency of the Corporation.
Since there is no equivalent to the Rule in Gibbs under German law, one possibility might be to reverse the strategy and simply subject all German and non-UK law-governed liabilities, including the claims of the OpCo Debt lenders, to a UK scheme of arrangement or Part 26A restructuring plan, along with the claims of the HoldCo Debt lenders. This, however, leads the Corporation to consider the next issue: will UK restructuring measures, if approved, be recognized as being valid and effective in Germany and other EU member states?
Whether, and to what extent, schemes of arrangement and their younger sibling, restructuring plans, will be recognized in EU member states post-Brexit has been the subject of lively discussion amongst international restructuring professionals in recent years. Various viewpoints have been expressed but consensus has yet to be reached.
In reviewing the possibilities for the recognition of UK restructuring proceedings in Germany, and in the absence of applicability of Brussels I, the Corporation and its advisors consider the following potential bases for recognition:
As matters stand, none of the above bases provide sufficient certainty of recognition being granted, from the perspective of the Corporation.
There remain questions as to whether or not the Hague Convention applies in the case of schemes (including in relation to whether schemes fall within an exclusion for insolvency and compositions, and whether a non-consensual form of compromise, so far as dissenting creditors are concerned, qualifies as an exclusive choice of court agreement).
The 1960 UK-German Treaty operates to uphold strict priority of national recognition provisions of the recognising state (Art. 2 (3)) and therefore does not constitute a viable legal basis for recognition.
Rome I is of universal application, i.e. it applies in the case of choice of laws of third countries as well as EU member states. It defines the law applicable to contracts and defers to an express choice of law by contracting parties. Therefore, the effects of a UK scheme or restructuring plan on English law-governed liabilities might be capable of recognition in Germany on this basis. This would not of itself provide a basis for the recognition of a UK compromise of German law-governed liabilities, however, since the parties to such contracts have chosen German law as the governing law. Furthermore—similar to the position vis-à-vis the Hague Convention—it is perhaps questionable to consider a UK scheme or restructuring plan as being "contractual" in nature, in the case of non-consenting creditors.
The Lugano Convention, like the EIR and Brussels I, is no longer applicable to the UK post-Brexit. While the UK did in fact apply to accede separately to the Lugano Convention in April of 2020, the EU Commission has taken a rather clear stance, in issuing a statement recommending that the EU should not provide its consent to the UK's accession.
It is apparent, therefore, that supranational instruments do not provide a clear basis for recognition of a UK scheme of arrangement or restructuring plan in Germany. Accordingly, determination of the question comes down to national recognition rules. No solution can be found in Sec. 343 of the German Insolvency Code, however, since it applies exclusively to insolvency proceedings. Arguably, however, both schemes and restructuring plans may lack the requisite characteristic for these purposes of being a collective proceeding involving all creditors; consequently, it remains an open question whether they qualify as insolvency proceedings within the scope of the German Insolvency Code.
Finally, recognition could be achieved under Sec. 328 of the German Code of Civil Procedure, which broadly governs the recognition of foreign "court decisions" in Germany. Amongst other requirements, the application of the provision depends on so-called reciprocity, meaning that recognition must be rejected if, in the reverse case, a corresponding decision by a German court would not be recognized in equivalent circumstances in the United Kingdom. This is where the Rule in Gibbs may once again come into play, as it would almost certainly preclude reciprocal recognition of a German StaRUG proceeding in the UK.
Despite the above, it is worth pointing out that challenges to cross-border schemes were relatively rare pre-Brexit—notwithstanding that schemes previously sat outside the recognition framework under the EIR (as being creatures of corporate and not insolvency legislation)—and also to note that there had been conflicting authorities in terms of the application of Brussels I to schemes in any event. Accordingly, it is to be hoped that any concerns about recognition of schemes and—also now restructuring plans—post-Brexit are considerably overplayed.
On a practical level, too, it is worth noting that difficulties are likely to be encountered from a scheme recognition perspective only in circumstances in which a compromised, aggrieved creditor is inclined to take the point and proceed to litigate it. Clearly, this will depend on the facts in any given case, but it is often the case that the economics militate against making such claims—as do the downside risks of mounting a challenge which ultimately fails (notably, from an adverse costs perspective).
The apparent legal impasse in which the Corporation finds itself might be capable of being resolved through taking a comparatively rarely-seen and unconventional approach, which may well become the preferred means of effecting cross-border financial restructurings in the years to come: the commencement of parallel or "in-tandem" reorganization schemes in multiple jurisdictions. The advent and refinement of the various preventive restructuring frameworks across the EU by reason of the Restructuring Directive is opening up new and exciting possibilities in this regard.
As both the German StaRUG restructuring plan and UK schemes and restructuring plans are selective proceedings (meaning they are capable of affecting only certain creditors' claims and do not necessarily extend to all creditors' claims), it seems appropriate for the Corporation to commence a StaRUG proceeding in Germany and only subject the OpCo Debt lenders and potentially other creditors with German and non-UK law-governed liabilities to the compromise under the StaRUG. Simultaneously, the Corporation would commence a scheme or Part 26A restructuring plan in the UK, which would include only the HoldCo Debt lenders and their English law-governed claims.
Another possibility in an appropriate case—which might be more attractive while the position vis-à-vis recognition remains unsettled—would be to subject the same creditor claims to equivalent compromises in different jurisdictions (subject to local law approval tests and thresholds), effectively "back-to-backing" (for example) the terms of a StaRUG with a UK restructuring plan, to ensure that the compromise is binding and effective in all relevant jurisdictions—i.e. parallel forms of compromise properly so-called. There are historic analogues for this approach in cases like Drax Holdings (on which Norton Rose Fulbright represented the debtors).
In addition, it is worth bearing in mind that a UK restructuring plan or scheme may operate so as to, and be approved on the basis that it will, become effective on an inter-conditional basis with a German StaRUG restructuring plan. This will allow the courts in both jurisdictions, and all affected stakeholders, to reach a high level of certainty that a holistic and all-encompassing restructuring is capable of being achieved in both key jurisdictions. This allows some scope for coordinating a StaRUG proceeding with the process for seeking the approval (or sanction) of a UK plan or scheme. Sec. 62 StaRUG expressly states that the restructuring plan may contain conditions, in which case judicial approval will be given if such conditions have been satisfied or if there are no reasons that they cannot be satisfied.
The fact that the Corporation has its statutory seat and COMI in Germany does not restrict the availability of a UK scheme or restructuring plan, because, unlike in many other jurisdictions, the debtor requires only a "sufficient connection" with the UK in order for the UK courts to have jurisdiction. In this regard, the location of significant assets or domicile of creditors in the UK are generally a strong indicator, as is the existence of English law-governed debt.
As matters stand, it appears that the implementation of in-tandem or parallel schemes might well be the principal reliable reorganization method for EU groups with significant English law-governed liabilities, since taking this course avoids many of the prevailing uncertainties regarding mutual recognition of formal restructuring processes.
That said, however, this course inevitably involves the incurring of increased costs for debtors and creditors, as court and legal fees accrue in relation to both (or indeed all such) proceedings. In addition, coordinating large professional and advisory teams across borders invariably increases the burden of structuring and coordinating efforts, with a view to ensuring a smooth and efficient process and a successful and lasting outcome to the restructuring. It seems clear, then, that financial restructurings which utilize parallel schemes will remain primarily the preserve of large-scale multinational groups. Where this route is feasible, however—including in the case of the Corporation from our case study—it is likely to present the most robust and reliable option for effectively implementing a successful cross-border restructuring across an enterprise group.
The authors gratefully acknowledge the assistance of Lorenz Scholtis, an international trainee in the firm's Frankfurt office and member of the banking group, for his assistance in preparing this article.
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Come da accordi, segnaliamo qui di seguito alcune tematiche giuslavoristiche meno consuete ma che nondimeno meritano attenzione da parte delle aziende, per prevenire possibili rischi o in generale per migliorare la gestione delle risorse umane.
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