Centros@20 Series - The Legacy of Centros: Lessons learned from debt restructuring

Debt restructuring is an issue that has come to prominence in the twenty years since Centros, in large part due to the difficulties faced by companies in the aftermath of the 2007-08 global financial crisis. Considering the development of debt restructuring in this period can provide a perspective on two issues that caused disquiet in the wake of Centros, namely concerns about (i) forum shopping; and (ii) regulatory competition.

(i) Forum shopping

It has become commonplace for companies with a COMI in an EU Member State other than the UK to make use of an English scheme of arrangement in order to restructure their debts or to enter into some other form of compromise or arrangement with their creditors. See, eg, Re Rodenstock GmbH [2011] EWHC 1104 (Ch), Primacom Holdings GmbH [2012] EWHC 164 (Ch), and Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch), although there are many other examples.

In some cases this has involved the company in question moving its COMI to England. More usually, however, the companies in question have been able to make use of the English scheme of arrangement even without a change of COMI, by relying on an English choice of law and English jurisdiction clause to satisfy the requirement that the proposed scheme has a sufficient connection with England. This raises the issue of forum shopping (for discussion see, eg, J Payne, ‘Cross-border schemes and forum shopping’ (2013) EBOR 563).

Forum shopping often gets a bad press. It can be regarded as an abuse, for example where a plaintiff seeks to manipulate the choice of forum to best suit its needs, perhaps by choosing a regime known for lengthy court procedures in order to delay a legal dispute. However, it is increasingly recognised that forum shopping might not always be a bad thing.  In some instances a debtor may be driven by a desire to utilise a form of proceeding in a particular jurisdiction with a view to maximising returns to creditors. For example, where a financially distressed company has no domestic option that allows it to restructure at an early stage and to carry dissenting creditors with it in order to avoid liquidation, to deny access to that restructuring mechanism may result in insolvency for the company.  Such an outcome is likely to be worse for creditors than a successful debt restructuring. 

A particular concern about forum shopping is the uncertainty it is said to raise for creditors, ie, not knowing which law will be applied where the debtor becomes insolvent or restructures its debts to avoid liquidation. Creditors may be concerned about the insolvency or restructuring regime being unfamiliar, and less attractive, to them than the one that it was assumed would apply when the creditor entered into the contractual relationship with the company.  However, in the cases where EU-registered companies have been able to make use of the English scheme jurisdiction, one of the main ways in which ‘sufficient connection’ is shown is that the governing law for the creditor agreements is English law. In such circumstances it is difficult to see how creditors can be surprised if their contractual relationship with the company is subsequently amended by means of an English law restructuring mechanism, particularly when it is borne in mind that schemes tend to restructure only the debts of sophisticated financial creditors.

(ii) Regulatory competition

The importance of jurisdictions containing effective mechanisms to restructure viable companies has increasingly been recognised. The fact that companies elsewhere in the EU travel to the English courts to make use of the scheme of arrangement has been a prompt for a number of other jurisdictions to introduce a similar mechanism (see, eg, Spanish Law 38/2011 as amended and the draft Dutch Scheme (WHOA)).

In addition, the fact that over the last 20 years or so English restructuring tools have been utilised by companies elsewhere in the EU was one of the prompts behind the EU Commission’s drive for a Restructuring Directive, on which political agreement has recently been reached. The substantive content of the EU Restructuring Directive was also influenced by the English scheme of arrangement, as well as by US Chapter 11 (for discussion see eg H Eidenmueller and K van Zwieten, ‘Restructuring the European Business Enterprise: The EU Commission Recommendation on a New Approach to Business Failure and Insolvency’ (2015) EBOR 625). 

These developments demonstrate the positive aspects of regulatory competition, but also its limitations. One of the reasons why the English scheme is so successful is that it is overseen by a small number of highly specialised, commercially sensible judges who are involved at two points in the scheme process (see J Payne, Schemes of Arrangement: Theory, Structure and Operation (CUP, 2014) ch 2). The EU Restructuring Directive seeks to sideline the courts to some extent, in part because of the costs associated with court oversight (notably, the EU Restructuring Directive aspires to provide a mechanism for SMEs as well as large companies), but also because of concerns that not all Member States have the kind of specialised experienced judges that oversee the English scheme.

Conclusion

Some of the early fears raised by Centros have not materialised, at least in the debt restructuring context. Instead a more complex situation exists, where forum shopping can be seen to bring benefits as well as challenges, and regulatory competition can facilitate beneficial change, as long as the transplantation of legal procedures and ideas from other jurisdictions is achieved in a way that takes account of differences in markets and institutional arrangements on the ground.

Jennifer Payne is the Linklaters Professor of Corporate Finance Law, University of Oxford