Vol 8 (2011) - Issue 2

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Schemes of Arrangement in Cross-Border Restructurings – Issues of Jurisdiction and Recognition

English law schemes of arrangement continue to play an important part in many complex cross-border restructurings. The viability and practical effectiveness of a scheme as part of an overall restructuring solution will depend upon the English court exercising its jurisdiction in relation to the scheme proposal and the subsequent recognition of that scheme in other jurisdictions.



Introduction

The scheme of arrangement procedure has proven to be an important insolvency tool during the course of the current economic downturn in order to achieve a transfer or compromise of a company’s debt obligations as part of a wider financial restructuring. For example, at the start of the 'credit crunch', the restructurings of IMO, British Vita, Countrywide and McCarthy & Stone were all implemented, in part, pursuant to schemes. More recently, the WIND Hellas, La Seda, Gallery, Orion Cable, European Directories and Cattles restructurings have all involved schemes of arrangement.

One of the main advantages of a scheme is that it can provide an opportunity to implement a restructuring solution at a lower approval threshold than would ordinarily apply under the terms of financing documentation (indeed, often avoiding the need for the unanimous consent of a particular group of creditors), thereby limiting the ‘hold-out’ value of any minority group of dissident creditors who might otherwise seek to frustrate a widely-supported restructuring process. As such, schemes have become increasingly instrumental in the restructuring of the indebtedness of overseas-incorporated companies, as they have come to be viewed as more efficient and ‘user-friendly’ than the available local law alternatives.

While it is widely known that class and valuation issues have generally been key considerations in the viability of schemes, more recently issues surrounding jurisdiction and recognition have come to the fore as concerns for restructuring advisers. This article considers the basis for the exercise by the English judiciary of its jurisdiction to sanction a scheme of arrangement, in particular in the case of a scheme proposed by an overseas-incorporated entity, and highlights some of the practical issues which may arise when seeking recognition of a scheme overseas. The impact of the EC Regulation on Insolvency Proceedings 2000 (the ‘EC Regulation’) and the UNCITRAL Model Law on Cross- Border Insolvency (the 'Model Law') is considered briefly in this context.



'Sufficient Connection'

The question as to whether it has jurisdiction to sanction a scheme is of central importance to an English court when it is presented with a scheme proposal in respect of a foreign company. In such circumstances, the court will only exercise its discretion to order that the creditors’ meeting to consider the scheme be convened if it is satisfied that, among other things, the company proposing the scheme is a company ‘liable to be wound up under the Insolvency Act 1986’1 (the 'Insolvency Act').

Section 221 of the Insolvency Act allows for the winding up of unregistered companies and section 220 of the Insolvency Act clarifies that an 'unregistered company' for these purposes includes 'any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom'. This provision has been interpreted to include foreign-incorporated companies.