Speed Read

  1. Classes – turnover agreement was between creditors and not with the company, so neither it nor lock up changed rights being compromised
  2. Even if it had, judge found that rights were not so dissimilar – judge considered at a high level what FMS would suffer on liquidation compared with turnover and found that this would cause all reasonable senior lenders to “unite in a common cause”
  3. New Obligations – although not decided, concern raised by judge about ability of scheme to impose new obligations to indemnify new guarantees, at least directly. New obligation therefore deleted from scheme prior to sanction
  4. Stay provisons – scheme provisions preventing senior lenders taking action overseas deleted prior to sanction. FMS therefore free to commence actions in Germany
  5. Court confirmed jurisdiction over overseas companies and effect of law change to establish sufficient connection
  6. Court of Appeal has granted leave to appeal, to be heard in December

Background

The second Apcoa scheme of arrangement was sanctioned by the English High Court on 30 October 2014 and Hildyard J’s 74 page judgment, which covers both the convening and sanction hearings, was released on 19 November 2014 (see link below to the full length judgment). Both hearings were contested by FMS, a minority senior lender. This RW article summarises the key points from Hildyard J’s judgment.

Key points

1.  Creditor class issues

Convening hearing – correct constitution of classes

During the restructuring, FMS refused to be a party to turnover and lock-up arrangements which subordinated the claims of the other senior lenders to the claims of new money lenders that provided emergency liquidity to the company. FMS argued that it should therefore have been in a separate class for the purpose of voting on the scheme.

The judge held that as the arrangements operated substantively between the new money lenders and the other senior lenders who were parties to those arrangements they did not, as a matter of substance, alter the rights of those lenders against the company and did not therefore constitute an agreement for subordination against the company which might require a separate class to be created for the subordinated lenders.

Also, such arrangements did not create a conflict of interest which required a separate class meeting for those lenders who were not parties to those arrangements. As the judge was persuaded that the only alternative to the scheme was a German insolvency, the judge’s view was that the risk of imminent insolvency (which would have resulted in a materially worse outcome for all senior creditors) would cause all reasonable senior lenders to “unite in a common cause” when it came to voting on the scheme.

The court therefore approved the constitution of the creditor classes and noted that if FMS had been in a separate class it would have had a power of veto over the scheme which would have defeated its purpose.

Sanction hearing – fairness issues

At the sanction hearing FMS argued that the class of senior creditors had not been fairly represented at the creditor’s meeting as the majority vote cast at that meeting was not representative of, and should not therefore be treated as binding upon, the class as a whole. However, the court rejected this argument, taking into consideration, among other factors, the relatively high majorities of creditors who had voted in favour of the scheme.

2.  Establishing the court’s jurisdiction

Before the court will exercise its jurisdiction to sanction a scheme in relation to a foreign company, the court must be satisfied that the foreign company has both a “sufficient connection” with England and that it is reasonably likely that an order to sanction the scheme will be recognised in the relevant jurisdiction.

Establishing sufficient connection

As RW readers may know, before the first Apcoa “amend and extend” scheme of arrangement earlier this year, the company changed the governing law clause of its credit facilities from German law to English law. The court held that this created a sufficient connection between the company and England in line with a number of recent cases starting with the decision in Rodenstock.

Although FMS did not challenge the validity of the change of governing law, FMS argued that there was an “insufficiency of connection” where changing the governing law was not carried out to accomplish any substantive commercial change in the economic relationship between the parties but solely to create a connection with England in order to persuade the English court to exercise its jurisdiction. FMS claimed this was analogous to “forum shopping”.

Notwithstanding, Hildyard J held that there was sufficient connection for the same reasons set out in his judgments in the first Apcoa scheme.

Recognition

The company also submitted foreign law evidence from experts in Germany, Belgium, Denmark, Norway and Austria that the scheme would be recognised and enforced in each of those jurisdictions.

3.  Imposition of new obligations on creditors

FMS also opposed the scheme on the basis that the court did not have jurisdiction to sanction a scheme which imposed “new obligations” on creditors which, in this case, would have involved the imposition on all senior lenders of a new obligation to indemnify certain new guarantees.

However, in the interests of time, the scheme was amended to remove this obligation (and to provide instead an option on the senior lenders to assume the relevant obligation) so the judge was not required to make a final decision on this point. However, it was noted that the imposition of a new obligation on third parties is very different from the release in whole or in part of an obligation to such parties, which is the arrangement typically proposed by the company in a restructuring scheme.

Nevertheless, the distinction in other cases may not be so clear. This issue will therefore be of critical importance in the design of future schemes.

4.  Ability to challenge the scheme in foreign jurisdictions

FMS also objected to a term of the scheme which prevented creditors from bringing any proceedings to challenge the scheme in other jurisdictions and agreed with the company an amendment to the scheme terms which preserved FMS’s rights under the existing German law intercreditor agreement and security documents.

What will happen next?

Given FMS preserved its rights under the German law finance documents, we expect FMS may attempt to challenge the restructuring in the German courts. The Court of Appeal has also recently granted FMS permission to appeal the High Court’s decision which is scheduled to be heard on 9/10 December 2014 (date to be confirmed). RW will be watching this space.

Please click here to read Hildyard J’s full judgment

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