Vol 7 (2010) - Issue 4

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UK Schemes Of Arrangement: A Risk of Non-Recognition in Germany?

A proliferation of leveraged lending in recent times led to the creation of increasingly complicated capital and financial structures. Investors are now familiar with mezzanine, second lien and PIK debt instruments alongside more traditional investment categories such as senior secured lending, equity instruments and high yield bonds. Following the onset of the credit crisis at the end of 2008, the relatively benign economic climate and high levels of liquidity that existed prior to the crisis gave way to much tighter credit conditions. As a result of this stringency in a period of continued macroeconomic strain, there are currently large numbers of companies in the distressed sphere seeking to delever heavily-indebted balance sheets that have become unsustainable in light of reduced cash flows.

The options available to companies and creditors to carry out a restructuring of liabilities, as opposed to formal insolvency alternatives such as administration or liquidation, have become more important than ever. In England and Wales, a scheme of arrangement (or 'scheme') is a flexible tool that enables a company to reach a 'compromise' or 'arrangement' with any class of its creditors. Schemes have been used with considerable effect in the past with regard to complex restructurings such as Marconi, Telewest Communications, My Travel and, more recently, with companies including Countrywide, McCarthy & Stone and the Vita Group.

This article considers the use of schemes as part of the toolkit available to companies and their restructuring advisors and, more importantly, the significance of a recent court decision in Germany which may cast doubt on their extra-territorial enforceability.

Schemes of arrangement
A scheme is a formal statutory procedure commenced under the Companies Act 2006 pursuant to which a company may propose and settle on a compromise or arrangement with all or some of its creditors. There are no prescribed limits in relation to the subject matter of a scheme – a flexibility that enables a scheme to be tailored to the precise requirements of each specific restructuring – and schemes are particularly useful for enabling companies to implement measures, including debt compromises, without the unanimous approval of its creditors and thereby bind any dissident or 'holdout' creditors.

For a company to be able to take advantage of a scheme, a company must demonstrate a ‘sufficient connection’ to England and Wales, although English courts have tended to adopt a generous view in this regard. There is a three-stage process established for a company wishing to promote a scheme. First, the company must apply to the court for directions, and the court must grant permission to summon meetings of affected creditor classes in order to seek approval of the scheme. Second, the scheme must be accepted by a majority in number representing 75% in value of the creditor classes that attend and vote at each of the meetings. Third, the court must sanction the scheme, taking into account issues of fairness and compliance with procedural requirements.

Once sanctioned, a scheme will 'cram down' and bind all of the creditors in each relevant class, irrespective of whether or not they voted in favour of the proposals. Consequently, schemes can impose a solution on dissenting creditors where 75% approval has been obtained and in a manner that would circumvent higher consent thresholds in the applicable finance documents. This characteristic of a scheme may prove indispensable in dealing with groups of creditors in a complex capital structure, whose diverse interests might otherwise present an insurmountable obstacle to a consensual restructuring.