Vol 9 (2012) - Issue 6

Article preview

German Federal Court Rules on the Equitable Life Scheme of Arrangement

A key recent development in European restructurings has been using English schemes of arrangement to restructure English law governed debt of European companies without moving the relevant centre of main interests to England. The Spanish company La Seda de Barcelona, S.A. started the development in 2010 and the German company Telecolumbus GmbH came later the same year. Further Spanish and German companies (Metrovacesa SA, Rodenstock GmbH and PrimaCom Holding GmbH) followed and the recent English schemes of Italian, Dutch and Bulgarian borrowers (SEAT Pagine Gialle S.p.A. and two companies in the NEF Telecom group) have confirmed the general applicability of this valuable tool for European borrowers of English debt.
However, there has been a shadow lurking, albeit more dimly over time. In the restructuring of the insurance company Equitable Life, which involved an English scheme, a German policyholder challenged in Germany the recognition and effectiveness of the scheme to compromise his policyholder claim. The first two German Court hearings held that the compromise effected by the English scheme was unenforceable in Germany. Whilst commentators noted that the claim in question was a policyholder claim and governed by German law, concerns remained that this challenge and the resulting German judgment might undermine the effectiveness around Europe of the English scheme restructuring tool - in particular because the litigation was appealed to the highest German court, the German Federal Court (Bundesgerichtshof ). Accordingly, any statements from that Court would be given great weight in Germany and potentially further afield.
As often with appeals the process ran for years, but at last the long awaited final judgment was given. The Equitable Life scheme was not recognised in Germany as compromising the policyholder's German law claim. However, the German Federal Court limited that non-recognition to the specific facts and made some helpful (albeit non-binding) statements regarding the recognition in Germany of an English scheme generally.

Executive summary
Disappointingly for schemes (but not unexpectedly), the German Federal Court decided that: (i) the Equitable Life scheme of arrangement was not an 'insolvency proceeding' within the meaning of the international insolvency law provisions of the German Insolvency Code (Insolvenzordnung) and therefore could not be recognized as a foreign insolvency proceeding under those German rules; and (ii) the scheme of Equitable Life as an insurer, could not be recognised as a 'judgment' under the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the 'Brussels I Regulation') due to the specific jurisdictional requirements of the Brussels I Regulation in insurance cases. These requirements compel an insurer to bring insurance litigation against a policyholder in the jurisdiction where the policy holder is domiciled.
More positively for schemes, the German Federal Court commented obiter on whether a non insurance related English Court order sanctioning a scheme could be classified as a 'judgment' for the purposes of the Brussels I Regulation. The German Federal Court stated that (i) the term 'judgment' was to be afforded a wide interpretation; and (ii) a scheme process involved adversarial characteristics and that there were therefore arguments in favour of classifying a sanctioning order as a 'judgment' under the Brussels I Regulation.