Vol 11 (2014) - Issue 4

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‘Flip-Up Pre-Packs’: A New Approach to Accessing the UK Insolvency Regime

The UK has long-since established itself as a jurisdiction of choice for complex cross-border restructurings involving corporate groups whose principal operations are overseas.
Typically, the English Court has accepted jurisdiction because the borrower or issuer entity had shifted its centre of main interests ('COMI') to England, openingup substantially the full range of restructuring and insolvency options available under English law; or because the obligations being restructured were English- law governed and expressly subject to the English Court's jurisdiction, which provides a 'sufficient connection' to the UK for the court to sanction a scheme of arrangement.
Notwithstanding the above, in certain situations, a COMI shift may not be practical (e.g. for tax reasons) and/or possible (e.g. if the debt was borrowed by an operating company), and a borrower group will often need to restructure obligations that are not governed by English law. The recent decision in Re Christophorus 3 Ltd establishes that, if an intercreditor agreement containing certain commonly used terms is in place, there is a third way of accessing the UK insolvency regime – namely, by 'flipping-up' the borrower group to an English (former) subsidiary of the principal borrower, and placing that English company into a UK insolvency process. The new 'flip-up' technique will not displace the COMI shift and/or the use of English law governed documents as methods of establishing the jurisdiction of the English Court, but the door is now open for more overseas groups to access the UK regime.

Facts
The Auto-Teile Unger Group (the 'Group') is a car repair business and spare parts retailer operating in Germany and certain other European markets.
So far as material, the Group was financed by:
– An English law revolving credit facility (the 'RCF') borrowed by Auto-Teile Unger Handels KG GmbH ('Handels');
– New York law governed senior notes (the 'Senior Notes') issued by Handels; and
– New York Law governed junior notes (the 'Junior Notes') issued by Handels' immediate (German) parent ('Investment').

An English law intercreditor agreement (the 'ICA') provided that the RCF would rank senior to the Senior Notes, which would in turn rank senior to the Junior Notes. The Junior Notes were also structurally subordinated to the Senior Notes.
The Group's overall ownership structure was complex, but principally involved a combination of German and Luxembourg holding and operating companies. For present purposes, it is sufficient to add that Investment was owned by another German company ('Holdings'), which was in turn owned by a Luxembourg holding company ('Luxco'). Prior to the restructuring, the group had no connection with the UK.
A simplified structure chart is set out in Figure 1. The Group's liabilities significantly exceeded its assets. A liquidation analysis confirmed that, in a German liquidation, whilst the RCF would be repaid in full, the Senior Noteholders would receive only 3.72% of the amounts outstanding to them, and the Junior Noteholders would receive nothing.