Public Joint-Stock Company Commercial Bank ‘Privatbank’ Privatbank, a Ukrainian bank which had been badly affected by difficulties in the region, proposed a scheme to restructure its liabilities under two series of English law-governed subordinated loan notes maturing in 2016 and 2021. This would involve the cancellation of both series of notes in exchange for new notes issued by an English-incorporated SPV, in the same amount and on the same terms as the existing notes except that the margin would increase and all would mature in 2021. Absent the scheme, it was likely that the bank would be put into temporary administration resulting in its sale, nationalisation or liquidation. Asplin J granted permission to convene a single scheme meeting of the holders of the notes. The scheme was then approved by 98.26% (in number) of noteholders at the meeting (representing 98.95 % in value) and David Richards J made the sanction order.
The judge's key findings were that: Contingent creditors: The noteholders were contingent creditors of Privatbank. Although it had not issued the existing notes, shortly before launching the scheme it had entered into a deed poll pursuant to which it assumed liability to the noteholders as if it were the original principal obligor in respect of the notes. Provisions of the existing security arrangements also gave noteholders direct recourse against Privatbank and would have sufficed for this purpose; Class issues: The two sets of noteholders could form a single class because (i) although the two series of notes had different maturity dates, the realistic alternative to the scheme was insolvency in which the noteholders would rank pari passu; and (ii) they were entitled to the same rights under the scheme; Consent fees: The payment of a consent fee of 2% of outstanding principal did not make the scheme unfair. It was relevant that the fee had been offered to all noteholders, had been available until five days before the date of the meeting and that there had been no material adverse change making the scheme less favourable prior to the meeting. Therefore it was not necessary to consider the materiality test, although the judge mentioned, but did not decide, the issue of whether it might be more appropriately judged by reference to the price at which the notes were acquired than the outstanding principal; Previous creditor opposition: In light of earlier opposition to a consensual restructuring of the first series of notes, it was possible that the second series had been issued (to a shareholder) and structured so as to enable them to constitute a single class. Given the lack of opposition to the scheme, and that the votes of the holder of the second series of notes had not determined the outcome, it was not necessary to consider this further. However, it was necessary to consider why the noteholders who had opposed the consensual restructuring had voted in favour of the scheme, particularly to confirm that there had been no side deal or other inducement; Sufficient connection: The bank was incorporated in Ukraine but had a sufficient connection with England to access the scheme jurisdiction. The critical point was that all the agreements and trust deeds relating to the two classes of notes were governed by English law; Application of the Judgments Regulation: If Chapter 2 of the Judgments Regulation applies to schemes, the English court could nonetheless assume jurisdiction in relation to the scheme under Article 8, on the basis that 12% by value of the notes were held by creditors domiciled in the UK; and International effectiveness: It was clear that, if sanctioned, the scheme would have a substantial effect because expert evidence established that the Ukrainian courts would recognise and give effect to it. Codere Finance (UK) Ltd The Codere group, which operates gaming activities in Latin America, Italy and Spain, acquired an English-incorporated company and arranged for it to accede as co-obligor to two series of New York law governed notes, with the Luxembourg incorporated issuer, so that a scheme could be used to restructure the notes. The scheme would discharge both companies’ obligations under the notes, as well as the obligations of guarantors, in exchange for new debt instruments (with a lower face value) and shares in the Spanish holding company. The scheme also provided for new funding to be raised. Restructuring options in a number of relevant jurisdictions, including Luxembourg, Spain, Mexico and Argentina, had been considered but only value-destructive insolvency proceedings were available. Certain group companies would enter such proceedings if the scheme was not implemented. Nugee J granted an application for a single scheme meeting to be convened but raised concerns about the court’s ability to sanction the scheme given that the accession of the co-obligor appeared to be ‘slightly novel’ and ‘quite an extreme form of forum shopping’. At the scheme meeting 98.78% of scheme creditors (by value) voted on the scheme, all in favour. Newey J sanctioned the scheme.
The key findings were that: Class issues: Although certain creditors had different rights, they could comprise a single class. Payment of an early consent fee, the right to subscribe for instruments to provide new finance, and the opportunity to backstop the raising of new finance (and earn a fee for doing so) had been made available to all noteholders. It was also relevant that the consent fee was a very small amount (0.125% of principal outstanding). However, it was difficult to see what the cumulative effect of these different rights might be, and it would have been helpful to have a statement setting this out. The right of certain creditors to nominate directors caused Nugee J pause for thought, but he did not elaborate on this; Jurisdiction: The scheme company was an English company, with its COMI in England and therefore the court had jurisdiction to sanction the scheme. The Judgments Regulation did not pose an obstacle (if it applied) given the presence of 18 creditors in England; Accession of co-obligor – forum shopping: At sanction, Newey J was not deterred by Nugee J’s concerns about the accession of the co-obligor purely to promulgate the scheme. There was no reason to refuse to exercise the court’s discretion to sanction the scheme. Even if the co-obligor had been the only connection with England and Wales (which it was not), the English courts have become comfortable with exercising the scheme jurisdiction in relation to companies which have not had long standing connections with this jurisdiction and that ‘if … it is appropriate to speak of forum shopping at all, it must be on the basis that there can sometimes be good forum shopping’. The clear implication was that this was such a case. The key factors were that: the scheme had been devised following close consultation with creditors (who were themselves represented by counsel), received overwhelming levels of support from creditors (and no opposition), there were no alternatives available to the group in other jurisdictions and declining to grant the scheme would cause significant loss of value; and International effectiveness: Expert evidence indicated that the scheme would be effective in other relevant jurisdictions, either directly or as a consequence of the grant of relief under Chapter 15 in the US (which was a non-waivable condition of the scheme). | Indah Kiat International Finance Company BV Indah Kiat Finance Company BV (Indah Kiat), an SPV finance company incorporated in the Netherlands, notified creditors that it had shifted its COMI to the UK and proposed a scheme to compromise its liabilities, and those of its Indonesian parent guarantor, under two series of New York law governed notes which went into default in 2001. The scheme would release and discharge both companies from their liabilities under the notes and under related long standing US judgments. In exchange, the parent would issue new notes (which would be unsecured, have a lower interest rate and mature in 2020 and 2036) together with a cash payment of about 13.5% of the face value of the existing notes. This application was prompted by enforcement action by a noteholder (APPIO) which had recently taken an assignment (from the note trustee) of rights under one of the US judgments. APPIO strenuously opposed the scheme at the convening hearing and Snowden J granted its request for the hearing to be adjourned. His key findings were as follows: Inadequate notice: Giving scheme creditors 14 days’ notice via clearing systems was inadequate in this case. It was relevant that this scheme was complex, there was no urgency (the relevant debts had been outstanding for years and the parent had carried on running an ostensibly profitable business with no concern that it might be subject to any immediate insolvency proceedings) and only one creditor (the so-called ‘Supporting Creditor’) had been consulted. Concerns about APPIO “stealing a march” to the detriment of other creditors, could have been addressed by applying for a stay to enable the scheme to be promoted. Material deficiencies in evidence: The witness statement provided by the director of Indah Kiat was unsatisfactory and did not comply with the CPR because it did not identify the sources of information of which, by reason of his very recent appointment, the director did not have personal knowledge; Inaccurate and/or incomplete information appeared to have been provided in relation to the Supporting Creditor, who held around 28.6% (in value) of the notes and had apparently negotiated at arms-length with the company in relation to the scheme. This meant that scheme creditors could not form a view as to the appropriate weight to be attached to the Supporting Creditor’s intention to vote in favour of the scheme, and also raised concerns about compliance with the duty of full and frank disclosure, the accuracy of all of the materials to be circulated to scheme creditors and as to whether the Supporting Creditor was connected or associated with Indah Kiat or its parent (which could have implications for class composition and/or whether the court should exercise its discretion to sanction the scheme); The draft explanatory statement and fairness opinion identified two alternatives to the scheme - a consensual agreement (which would not be achievable because of the difficulties in identifying noteholders) and formal insolvency proceedings (which would likely result in lower returns for noteholders) - but did not contain a sufficient analysis. In particular, the parent appeared to be balance sheet solvent. Also, it should have been made clear whether the authors of a fairness opinion were prepared to accept responsibility to scheme creditors for it; and Attention should have been drawn to the wide-ranging releases of liability for current and former directors in relation to breach of fiduciary duty and other claims in connection with the notes. Cross border issues: Challenges which APPIO intended to make in relation to the effectiveness of the company’s COMI shift to England, the application of Chapter II of Judgments Regulation, the release of the parent’s obligations and the prospects of the scheme being recognised in the US, should be considered at the sanction hearing. It would be unusual for an opposing creditor to be able to demonstrate at convening stage that the scheme company’s evidence in relation to connection and recognition manifestly fails to show that there is a realistic prospect of the court sanctioning the scheme; Compromising a foreign judgment debt: The question (raised by the judge) of whether the court should be circumspect about convening a scheme meeting or sanctioning a scheme to compromise a debt which was not merely a contractual obligation governed by foreign law, but arose out of a judgment and order for payment made by a foreign court, was to be addressed at the sanction hearing. The scheme did not proceed. Indah Kiat withdrew its application, reportedly after APPIO sold its claims. | Comment Although these cases are highly unusual in certain respects, they cover a lot of familiar ground and provide some useful guidance of wider application in relation to the scheme procedure, class issues and the use of schemes by overseas companies.
All three cases demonstrate that the court remains reluctant to fracture classes. For example, although he did not decide the point, Snowden J‘s provisional view in the Indah Kiat case was that APPIO should not be in a separate class by virtue of the assignment of rights under the US order. However, scheme proponents should bear in mind that the rights for some creditors to nominate directors in the Privatbank case clearly caused Asplin J some pause for thought, presumably in light of the Stemcor decision (Stemcor Trade Finance Limited, 17 September 2015, [2015] EWHC 2662 (Ch),Snowden J, 30 September 2015, [2015] EWHC 2803 (Ch), Morgan J.). Also, where a number of rights may be available to creditors, Nugee J’s suggestion that, a statement setting out the cumulative effects of those rights should be issued, warrants further consideration. The approach taken to consent fees is not new. However, David Richards J’s suggestion that, where materiality needs to be tested, this would be better done by reference to the price paid for the debt, rather than its par value, raises difficult issues. Not least because scheme creditors are likely to be reluctant to disclose price information, and may have bought debt piecemeal at a range of prices.
In each case, familiar considerations were key to the analysis: the level of creditor engagement and support and what alternatives to the scheme were available. Clearly these are relevant in a number of respects, including when assessing what constitutes adequate notice. Snowden J’s guidance on this is helpful: ‘The more complex or novel a scheme, and the less consultation that has taken place with creditors as a whole beforehand, the longer the notice should generally be unless the matter is of great urgency because the company is in real financial distress’.
The same factors (among others) are relevant when considering whether to sanction the scheme. However, Codere and Privatbank serve as a reminder that the court does not serve as a rubber stamp. Even a scheme which enjoys high levels of creditor support, is unopposed and urgent, must be considered carefully by reference to all the evidence. So, in the case of Privatbank, the judge was keen to consider why the creditors, which had previously opposed the scheme, had changed their position, and in Codere the accession of the co-obligor warranted the court’s scrutiny. However, the greatest scrutiny is reserved for those cases where there is opposition, such as Indah Kiat. In these cases, the court will be particularly alert to failures to satisfy procedural requirements and deficiencies in the evidence, especially in relation to the alternatives to the scheme, which must be fully analysed (though precisely what this means is not clear). It seems unlikely that firms will be prepared to permit reliance on fairness opinions, as was suggested by the judge in Indah Kiat, though one wonders whether this had more to do with his questioning the whole process of the scheme than anything else.
Since his judgment in Van Gansewinkel, Snowden J has been associated by some commentators with a drive to increase scrutiny in scheme cases. In Indah Kiat he had the opportunity to record the rationale for this, being that ‘the scheme jurisdiction can only work properly and command respect internationally if parties invoking the jurisdiction exhibit the utmost candour with the court.’ This is clearly right, and a timely reminder given the popularity of schemes with overseas companies and the innovative ways in which they are accessing the scheme jurisdiction. Newey J’s explicit acknowledgement of the concept of good forum shopping is a further, and welcome, example of the English judiciary’s commercial approach and willingness to facilitate this practice. Unlike Nugee J, at the convening hearing, Newey J had the benefit of extensive submissions on the various ways in which forum shopping has already been endorsed by the courts, both in relation to schemes and pre-packs. Arguably, though, he was not being asked to sanction anything “novel” or “extreme” given that the relevant finance documents contemplated the accession of a new obligor, and this was not the first case in which a company has assumed liabilities in order to use a scheme to restructure them (Privatbank’s use of the deed poll was cited as an example, as was the insurance scheme Re AI Scheme Ltd [2015] EWHC 1233 (Ch)). Whether the scheme procedure does command respect internationally is difficult to verify. On the basis of the expert evidence submitted in these cases, the number of jurisdictions in which a scheme may be recognised continues to increase (including Panama, Mexico and Argentina in the Codere case). However, the approach that the courts in these jurisdictions will take cannot be clarified unless recognition is actively sought, or a challenge is raised. A question that remains unresolved is the application of the Judgments Regulation to schemes. If the Indah Kiat scheme had proceeded, this point may have been decided. APPIO intended to contend that the regulation applies to schemes such that it would have deprived the English court of jurisdiction to sanction the scheme in that case (because no scheme creditors appeared to be domiciled in England). Whether clarification of the Judgments Regulation issue is desirable becomes a rather more complex question in the light of the UK referendum decision to leave the European Union and the uncertainty as to what the UK's relationship with the EU and the rest of the world will be. |
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