Gategroup: Planning and scheming - are super schemes actually insolvency proceedings?
The new Part 26A Companies Act Restructuring Plan procedure, dubbed the “Super Scheme”, (summarised here) was gathering pace in the English courts since its introduction in June last year. Last week’s judgment in gategroup presents a potential speed bump in terms of its implementation as the restructuring tool of choice in European cross-border restructurings.
One aspect that distinguishes the Restructuring Plan from its closest sibling - the English law Scheme of Arrangement under Part 26 of the Companies Act 2006 - is that in order for a debtor to avail itself of a Restructuring Plan it must have “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”1. There is no such “financial difficulty” condition in relation to a Scheme of Arrangement. It is this distinction that has been the focus of debate particularly as to whether a Restructuring Plan might be characterised as an insolvency proceeding which characterisation would have an impact on recognition of Restructuring Plans outside of England and Wales. On 17 February 2021 Justice Zacaroli handed down judgment following the convening hearing of gategroup2 and held that an exclusive choice of court agreement in a bond is overridden in the instance of a Restructuring Plan because a Restructuring Plan is deemed an insolvency proceeding which provides a rare exception to following an express choice of court agreement. In practice for gategroup this means the courts of England and Wales will have jurisdiction notwithstanding the choice of jurisdiction set out in the bonds.
A reminder of the position on recognition as it pertains to (i) Restructuring Plans and (ii) Schemes of Arrangements is summarised in table 1.
The Gategroup case - brief facts
Gategroup is the largest provider of airline food and catering services in the world, and has suffered a significant adverse effect on it business as a result of the Covid-19 pandemic and the dislocation that the pandemic has brought to the airline industry. As part of a wide ranging debt restructuring and recapitalisation exercise, gategroup1 launched a Restructuring Plan on 30 December 2020 to amend and extend the maturity of its senior debt and bond liabilities in order to afford itself some further breathing space to trade through the pandemic.
Swiss Exclusive jurisdiction clause vs English court jurisdiction - Lugano
Gategroup’s bonds contain an exclusive jurisdiction clause in favour of the courts of Zurich. For Restructuring Plan applications commenced before 1 January 2021, the usual way of proceeding to permit the English courts to assume jurisdiction in situations where a debtor is a non-UK entity, per the recent Deep Ocean and Virgin Restructuring Plans4 for example, was to assume the application of the Brussels Regulation5. However, that route was not available here because the exclusive jurisdiction clause in favour of the courts of Zurich under the bonds was a complete bar to the court assuming jurisdiction if the Lugano Convention6 did apply. While the UK is no longer party to the Lugano Convention from 1 January 2021 (as a result of leaving the EU), as the Restructuring Plan was issued prior to this date, the Lugano Convention continues to apply. If the Lugano Convention was construed as applying to Restructuring Plans, it was accepted by Gategroup that the Swiss exclusive jurisdiction clause would take precedence over any assertion of the English court's jurisdiction.
The key question for Lugano – is a Restructuring Plan a “civil and commercial matter” or a “bankruptcy proceeding”?
For a Restructuring Plan to fall within the ambit of the Lugano Convention, it was necessary for Justice Zacaroli to decide whether Restructuring Plans constitute "civil and commercial matters" or, alternatively, are outside the scope of the Lugano Convention falling within the exclusion applicable to "bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings" (the Bankruptcy Exclusion).
The Bankruptcy Exclusion is materially identical to that contained in the Brussels Regulation and Justice Zacaroli relied heavily on the so called “dovetailing” principle in coming to his decision. The “dovetailing” principle is that the Brussels Regulation and the Recast Insolvency Regulation should be interpreted in such a way to avoid any overlap or conversely lacuna between the application of the two instruments. In practice what this means is that any proceedings which fall within the Bankruptcy Exclusion should be covered by the Recast Insolvency Regulation.
What are Insolvency Proceedings?
Therefore, in reaching his decision, Justice Zacaroli focused on whether Restructuring Plans would be covered by the Recast Insolvency Regulation. He found the elements of insolvency proceedings as defined by Article 1(1) of the Recast Insolvency Regulation to be as follows:
- They must be collective proceedings;
- They must be based on laws relating to insolvency and have as their purpose rescue, adjustment of debt, reorganisation or liquidation; and
- They must encompass at least one of the following:
- the debtor is partially or totally divested of its assets;
- the assets and affairs of the debtor are subject to control or supervision of a court; or
- a temporary stay is imposed, by a court or by operation of law, on individual enforcement proceedings to enable negotiations to take place between the debtor and its creditors.
Justice Zacaroli found that each of these elements was satisfied for Restructuring Plans. As a result the Bankruptcy Exclusion applies and the English court had jurisdiction in respect of the Restructuring Plan and Justice Zacaroli ordered the convening of meetings of creditors of Gategroup accordingly.
Lugano no longer helpful to recognition of Restructuring Plans
As set out in Table 1 the Lugano Convention was seen as a possible route to achieving recognition of English law restructurings and insolvencies. Note that the application in Gategroup was made when the Lugano Convention still applied to the UK (i.e. prior to 1 January 2021). While the Lugano Convention no longer applies to the UK, an application has been made to accede to it in its own right, but there is no definitive timing on whether that application will be successful and take effect. The application was not made specifically to assist with recognition of Restructuring Plans but it was seen by many as a potentially helpful route to achieving recognition and enforcement of Restructuring Plans. This judgment makes it clear that the (current) position is that the Lugano Convention will not assist with recognition of Restructuring Plans and indeed recognition outside the UK of such plans is a matter for the relevant foreign court.
International Effects and Options Analysis
It will be even more crucial at the planning stage of any restructuring to take joined up expert advice across the relevant jurisdictions early on as to the most appropriate restructuring tool routes to recognition in the jurisdiction in which the debtor is incorporated and where it may hold assets. There are an ever increasing number of restructuring tools available such as the Dutch “WHOA” (Wet homologatie onderhands akkoord) and the German Scheme or StaRUG which will have the advantage of automatic recognition within the EU not afforded to UK Restructuring Plans. (The availability of these options in themselves may present further challenge to situations where a Restructuring Plan is proposed where the debtor’s COMI is outside the UK). There is clearly some risk around requiring (possibly) parallel mechanisms for example in situations where there is a non-English debtor of agreements governed by English law where the rule in Gibbs would make it difficult to compromise the debt outside of England and Wales.
On top of expert advice and evidence, more supporting evidence is likely to be useful that the Restructuring Plan will have substantial effects in EU member states through demonstrating the Restructuring Plan has the support of as overwhelming a majority of creditors as possible or lock ups which not only support the Restructuring Plan but restrict locked up creditors ability to challenge it in other relevant jurisdictions.
Aviation Restructurings and the Cape Town Convention
A Restructuring Plan of an airline may take effect subject to the Cape Town Convention. Whether a Restructuring Plan is an "insolvency proceeding" for the purposes of the Cape Town Convention (and in the UK, the UK Cape Town Regulations) is important in this. The reason why this is important is because if Restructuring Plans are treated as "insolvency proceedings" under the UK Cape Town Regulations, the company proposing the Restructuring Plan will need to respect a Cape Town Convention creditor's rights to terminate the lease (or other relevant agreement) and to recover its aircraft, by offering such airline creditors a choice between exercising such rights to terminate or repossess (as relevant) or agreeing to the amendment of the airline's lease obligations in line with the terms of the Restructuring Plan.
If no such choice is available to the creditor then the effect of the application of the UK Cape Town Regulations will be that the creditor could argue that the agreement between the creditor and the airline is not capable of being amended without the consent of the particular creditor therefore removing the power of the Restructuring Plan to bind those who have not voted in favour. While beyond the scope of this note, the court’s construction of the bankruptcy exclusion in the Lugano Convention is likely to be very similar to its interpretation of the scope of the UK Cape Town Regulations.
Recognition of Restructuring Plans (and Schemes of Arrangement) – Routes to recognition
|Brussels Regulation||Does not apply to proceedings issued post 1 January 2021||Formerly if the English court order is considered to be a “judgment” for the purposes of the Brussels Regulation that order would be automatically recognised in other EU member states without any further formalities.|
|Rome I||Applies pre and post Brexit in the same way||Provides that the contracting parties’ choice of governing law should govern their contractual relations. As such, the choice of English law to govern contractual relationships (and by extension to vary or extinguish them by way of a Scheme of Arrangement or Restructuring Plan) should be recognised by courts in EU member states.|
|Private International Law||Notionally should apply pre and post Brexit in the same way||EU member states may have their own laws that enable recognition of a Scheme of Arrangement or Restructuring Plan, but this would be a matter for each member state and would not be automatic or universal across the entire EU.|
|Hague Convention||UK party in its own right post 1 January 2021 by virtue of Private International Law (Implementation of Agreements) Act 2020, section 1(2))||Provides protection among its signatories for the choice of court made in contractual documents, but only for exclusive jurisdiction clauses (not asymmetric which are more common in most finance documents). Unclear whether the Hague Convention will apply to Schemes of Arrangement and Restructuring Plans.|
|Lugano||No longer party post Brexit (but application pending)||Rules in the Lugano Convention are similar to the original Brussels Regulation. The UK has made an application to sign up to the Lugano Convention (April 2020). All Lugano states need to consent to a new member joining. As the EU is a Lugano state, its consent would be required for the UK to accede.Scheme of Arrangement recognition may still be available by this route. However note position on Restructuring Plans post gategroup that the Lugano Convention does not apply owing to the Bankruptcy Exclusion.|
1Section 901A, Companies Act 2006
2Gategroup Guarantee Ltd, Re  EWHC 304 (Ch)
3Gategroup Guarantee Limited (“Plan Company”) which was incorporated on 8 December 2020 as a wholly owned and England and Wales incorporated subsidiary of gategroup Holding AG ”, a company incorporated in Switzerland. The Plan Company was made a guarantor under the Bonds by way of a Deed Poll. This case is also therefore of note for recognition of the use of Deed Polls in this way (which has been used previously with Schemes of Arrangement)
4Additionally as per Scheme of Arrangement precedent under Part 26 of the Companies Act 2006
5Regulation (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 (recast)
6The Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial matters signed in Lugano on 30 October 2007