Vol 12 (2015) - Issue 1

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Parallel Schemes of Arrangement

Introduction There has been continued growth in companies incorporated outside England using the scheme of arrangement regime contained in the UK Companies Act 2006 to restructure debts governed by English law. But in what circumstances should the debtor also initiate a parallel (or mirror) scheme in the debtor’s home jurisdiction under its own local law?
The purpose of this article is to explore the use of parallel schemes of arrangement, taking in particular the example of a Jersey company with English law governed debts and operations worldwide.

Scheme procedure
Jersey has its own scheme of arrangement procedure. The scheme provisions contained in Part 18A of the Companies (Jersey) Law 1991 are in near identical terms to Part XIII of the UK Companies Act 1985 on which they are based, and remain similar to the current provisions in Part 26 of the UK Companies Act 2006. In the context of a debt restructuring, those provisions permit a compromise or arrangement proposed between a company and its creditors (or any class of them), if approved by the requisite majority of creditors and if sanctioned by the Court, to bind all creditors (or the relevant class of creditors) whether or not they voted in favour. In this context, it can be seen as a form of statutory cram-down procedure, which can be used even where the contractual documents only permit amendments with (for example) the unanimous consent of all lenders.
There are three key stages in implementing a scheme:
1. An application to court for an order convening a meeting of the creditors, or relevant class of creditors, to be considered at a 'directions hearing';
2. The creditors’ meeting at which the compromise is voted on; and
3. Assuming the relevant majorities are obtained (a majority in number of creditors or the relevant class of creditors representing 75% in value), a further application to court for sanction to be considered at a 'sanction hearing'.

The scheme becomes effective on the delivery of the Court order sanctioning the scheme to the Registrar of Companies for registration.

Why is English law relevant at all?
Under English common law, it is well established that a variation or discharge of a contract (including via a composition with creditors) is only effective if the contract is varied or discharged under the law applicable to the contract. The earliest authority for this principle is the case of Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399 where the English Court of Appeal held that the French liquidation proceedings did not discharge a French guarantor from its liabilities under an English law governed guarantee. So in a case where the debt facility is governed by English law, the English courts expect any variation or discharge of the debt (by a scheme or otherwise) to be carried out in accordance with English law.
This is so irrespective of the fact the borrower is incorporated in a foreign country and the law of that foreign country has its own scheme of arrangement procedure. A challenge to the principle was attempted in the English case of Global Distressed Alpha Fund One Limited v PT Bakrie Investindo [2011] EWHC 256 (Comm), where a creditor sued an Indonesian company in England under an English law guarantee.