Restructuring Plans in European Cross-border Restructurings – One Gate Closes but Another One Opens

• The use of the UK restructuring plan ("Plan") introduced last summer has been gathering pace with a handful of recent judgments seeing it used to implement cross-border restructurings instead of UK schemes of arrangement ("Schemes").
  
• In a significant recent judgment in respect of a Plan proposed by Gategroup¹, the High Court decided that Plans are insolvency proceedings falling outside the scope of the Lugano Convention.²
• Classifying Plans as insolvency proceedings is likely to complicate their use in Europe, and it is clear that, based on this decision, the Lugano Convention will not provide a post-Brexit route for Plans to be recognised in Europe.
• Plans will remain a key tool to implement cross-border restructurings in a wide range of circumstances. This was the case in Gategroup where the expert evidence anticipates the Plan’s recognition in Luxembourg and Switzerland notwithstanding that it is classified as an insolvency proceeding for the purposes of the Lugano Convention.
• Schemes remain ready alternatives to implement cross-border restructurings, and it is expected that they will continue to be recognised across Europe post-Brexit.

A) UK Restructuring Plans

The Plan was added to the UK's restructuring toolkit last year by the Corporate Insolvency and Governance Act 2020. While Plans were modelled on Schemes, there are significant differences designed to allow companies to be more efficiently restructured.

Similar to Schemes, Plans require creditors and shareholders to vote on a Plan in classes, with each class deemed to have approved a Plan if 75 percent in value of that class vote in favour (although there is no requirement that a majority in number also vote in favour, unlike Schemes). To become binding on a company and its creditors and/or shareholders, a Plan must be approved by the court.

However, the new Plan has certain key features distinguishing it from a Scheme, including in particular:

1. Cross-class cram down. Unlike Schemes, Plans can be confirmed by the court even if one or more classes do not vote in favour, provided the court is satisfied that:

a) If the Plan is sanctioned none of the members of the dissenting class would be any worse off than they would be in the “relevant alternative” (i.e. what the court considers would be most likely to occur if the Plan were not approved – e.g. sale of the assets or insolvent liquidation); and

b) The Plan has been agreed by at least one other class of creditors who have a genuine economic interest in the company in the event of the "relevant alternative".

2. Financial condition. Schemes can be used irrespective of the financial condition of the company. However, Plans are only available if the following two threshold conditions are satisfied:

a) The company has encountered, or is likely to encounter, financial difficulties that are affecting (or will or may affect) its ability to carry on business as a going concern; and

b) The purpose of the Plan is to eliminate, reduce or prevent, or mitigate the effect of any of the financial difficulties mentioned in (a) above.

In the handful of Plans that have been sanctioned to date, the court has been satisfied that the companies proposing the compromise with its creditors have been in financial difficulties. This has been the case even where the financial difficulties are "self-inflicted", with a newly incorporated English company unilaterally choosing to assume the liabilities being compromised for the purposes of using a Plan.

B) Gategroup Restructuring

Gategroup is a leading international airline catering services provider whose business has significantly declined during the COVID-19 pandemic. As part of a wider restructuring and recapitalisation, the Plan of Gategroup Guarantee Limited (the "Company") will “amend and extend” its senior debt and bond liabilities by pushing out their maturity by an additional five years.

The bonds are governed by Swiss law and are subject to the exclusive jurisdiction of the Swiss courts. This gave rise to the question at the convening hearing as to whether the English court has jurisdiction under the Lugano Convention to confirm a Plan in respect of the bonds.

C) Lugano Convention

As of 1 January 2021 the UK is no longer a party to the Lugano Convention (previously, it had been a party by virtue of its membership of the EU). However, the claim form for Gategroup was issued on 30 December 2020 and, therefore, it remains applicable for these purposes.

To the extent the Plan is a "civil and commercial matter" within the scope of the Lugano Convention, it was accepted that the English court would not have jurisdiction to sanction the Gategroup Plan to amend the bonds due to the Swiss jurisdiction clause. The Company argued that the Plan is not a "civil and commercial matter" as it falls within the bankruptcy exception, which comprises "bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings".

It is well established in the context of Schemes that judges make the reasoned assumption that they constitute civil and commercial matters for the purposes of the Brussels Regulation,³ which for these purposes contains materially identical provisions to those in the Lugano Convention (including the same bankruptcy exception). In the recent cases on Plans,⁴ judges have indicated that they would expect the same approach to be taken in respect of Plans (i.e. they would be seen as civil and commercial matters and not insolvency proceedings), but in none of the cases did this point need to be decided (as the judge in Gategroup noted).

D) Restructuring Plans as Insolvency Proceedings

The judge in Gategroup determined that Plans do fall within the bankruptcy exception to the Lugano Convention (i.e. that effectively, they constitute an "insolvency proceeding").

In coming to this decision, given the relevant similarities between the Lugano Convention and the Brussels Regulation, the judge applied the so-called "dovetailing principle". This principle provides that there should be no gap or overlap between the Brussels Regulation and the Recast Insolvency Regulation,⁵ which meant the question facing the judge was whether Plans were civil and commercial matters under the Brussels Regulation, or whether they constituted insolvency proceedings for the purposes of the Recast Insolvency Regulation.

The judge identified three relevant factors in deciding whether Plans are insolvency proceedings in this context:

1. They must be collective proceedings;
2. They must be based on laws relating to insolvency and have as their purpose rescue, adjustment of debt, reorganisation or liquidation; and
3. The assets and affairs of the debtor are subject to the control or supervision of a court.

A crucial factor that led the judge to find that Plans satisfied the first two elements was the requirement for financial difficulties, as set out in the threshold conditions concerning eligibility for a Plan (see section A) 2. above).

The judge also concluded that the third element was satisfied – i.e. under a Plan, a company's assets are subject to the supervision of the court. In support of this, the judge referenced section 233B of the Insolvency Act 1986. This disapplies so-called "ipso facto" clauses in a contract, which allow for the termination of such contract where a company becomes subject to a "relevant insolvency procedure". Under Section 233B, a "relevant insolvency procedure" includes a court order summoning a meeting of creditors to consider a Plan (and the court has discretion to permit the termination provision to take effect if it is satisfied that continuation of the contract would cause the supplier hardship).

E) One Gate Closed

The UK has made an application to accede to the Lugano Convention in its own right, but there is no definitive timing on whether that application will be successful and take effect. Even if the UK's application is successful, based on the decision in Gategroup it will not be possible to rely on the Lugano Convention for recognition of a Plan. On the same basis it appears it will not be possible to rely on the Hague Convention for recognition of a Plan (given the Hague Convention also excludes “insolvency, composition and analogous matters”).

F) Another Gate Opened

On the facts in Gategroup, the decision that the Company's Plan falls within the insolvency exception enabled it to proceed to a creditors’ vote. Reassuringly, the judge confirmed that the expert evidence provided by the Company supported that the Plan would be recognised and enforced in Switzerland and Luxembourg under their respective domestic rules of private international law, notwithstanding that it is regarded as an insolvency proceeding for the purposes of the Lugano Convention.

This decision draws out the differences between Schemes and Plans, helping debtors assess which restructuring tool best fits their circumstances, and will most readily facilitate recognition in relevant jurisdictions.

G) Going Forward From Here

Key elements of the analysis in Gategroup that led the judge to conclude that Plans constitute insolvency proceedings for the purposes of the Recast Insolvency Regulation were features of Plans that do not apply to Schemes (including in particular the presence of the financial threshold conditions). This judgement does not, therefore, alter the previously established convention that Schemes should be seen as civil and commercial matters for the purposes of recognition in the EU and other overseas jurisdictions.

We anticipate that private international law will play a predominant role in the recognition of Schemes and Plans across EU member states. These laws are a matter for each member state and recognition would not be automatic or universal. Generally speaking, recognition in the domestic law of an EU country is likely to be more straightforward (and achievable) in respect of Schemes (assuming these are treated as civil and commercial matters) than Plans (to the extent these are treated as insolvency proceedings, per Gategroup).

In addition, Rome I⁶ continues to apply across the EU pre- and post-Brexit in the same way. This provides that the contracting parties’ choice of governing law should govern their contractual relations. Accordingly, where English law is the governing law of a contract, Schemes and/or Plans implementing amendments to such contract should be recognised by courts in the EU. However, this remains untested in many cases and we are aware of certain local jurisdictions, such as the Netherlands, raising doubts as to whether Rome I provides a viable route to recognition in such jurisdictions (and this position is only likely to be further complicated by local law considerations where the Plan is treated as an insolvency procedure).

Gategroup does not alter the analysis in respect of the U.S. where Chapter 15 provides a tried and tested route for the recognition of Schemes and Plans.

H) Conclusion

The Plan remains an important alternative to Schemes in circumstances where it may be necessary to make use of the "cross-class cram down" mechanism and avoid one class vetoing an otherwise viable arrangement.

However, its apparent classification as an insolvency procedure will, post-Brexit, make recognition more difficult across Europe, and in some jurisdictions will likely make parallel local enforcement procedures necessary. This adds to the transaction risks and costs, although recent innovations in restructuring tools in many European jurisdictions will help mitigate this.

Overall, Gategroup underlines the importance of undertaking careful planning and options analysis to ensure that the appropriate restructuring tool is chosen. It must have the necessary features to implement the required transaction and provide a route to being recognised in all of the relevant jurisdictions where the obligors are incorporated and/or hold assets.

Footnotes

1) Re DeepOcean 1 UK Ltd [2020] EWHC 3549 (Ch).
2) The reasoned judgment was handed down on 28 January 2021.
3) Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, the Recast Brussels Regulation.
4) Re Virgin Atlantic Airways Ltd [2020] EWHC 2191 (Ch); Re Pizza Express Financing 2 plc [2020] EWHC 2873 (Ch); Re DeepOcean 1 UK Ltd [2020] EWHC 3549 (Ch).
5) Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), the Recast Insolvency Regulation.
6) Regulation 593/2008 on the law applicable to contractual obligations, Rome I.