PrimaCom: Stand by Europe and Beyond, for a New Wave of English Scheme Restructurings

The English High Court has recently sanctioned a scheme of arrangement of the German cable television and internet provider PrimaCom Holding GmbH, approving a restructuring of its finance facilities to enable it to meet its borrowings and to provide further working capital.  Commercially, the formal sanctioning of the scheme was of critical importance as, without the scheme, the company’s directors would have had to initiate German insolvency proceedings.  As to this outcome, the judge in PrimaCom commented as follows:

It is, as I understand it, not disputed at present that an insolvency process in Germany would be likely to lead to very substantially less recoveries on behalf of the broad constituencies of creditors than would be available if a scheme is successfully promulgated under the provisions of the English statute.

From a legal perspective, the PrimaCom case is also of some significance as it establishes that the English court has jurisdiction to approve a scheme of arrangement of an overseas company under English Companies Act legislation even where the majority of the company’s creditors are domiciled outside of England.  This was a point that previously had not been determined by the English courts.  The PrimaCom case is likely to lead to other overseas entities contemplating using an English scheme of arrangement to achieve a restructuring.

Background to the Issues in PrimaCom

The decision in PrimaCom follows an initial wave of English High Court decisions in recent months sanctioning schemes of arrangements of foreign-incorporated companies.  These have included the Spanish companies La Seda and Metrovacesca and German companies Telecolumbus and, most recently, Rodenstock.  As we noted in our blog entry on Rodenstock, the English High Court concluded that it had jurisdiction to sanction a scheme of arrangement of a foreign company even where neither its center of main interests (broadly equating to headquarters) nor an establishment (similar to the US chapter 15 concept of ‘non-main proceedings’, and consisting broadly of a branch) was in England.  These factors were not part of the jurisdictional threshold requirements that needed to be satisfied for schemes.  Weil Bankruptcy Blog readers may be aware that, for insolvency proceedings listed as falling within the EC Insolvency Regulation (Council Regulation EC 1346/2000) (‘EIR’), a regulation of mandatory application in Europe, a European member state’s courts are only permitted to exercise jurisdiction if, in the case of main proceedings, the entity’s center of main interests is located in the relevant member state or, in the case of secondary proceedings, an establishment is located in that member state.  The Rodenstock decision thus helpfully cast away some initial jurisdictional barriers to implementing schemes for overseas companies.  If the court had ruled that the English court’s scheme jurisdiction was linked to its jurisdiction under EIR, this would have had the affect of significantly restricting the use of English schemes for overseas companies headquartered in Europe.

Unhelpfully, in Rodenstock Briggs J ‘left open for another day’ some important subsidiary issues including the question of whether the English court would have jurisdiction if all or a majority of scheme creditors were domiciled outside England.  This issue was unresolved because the judge found two potential routes to permit English court scheme jurisdiction and opted for a hedged decision.  One route simply involved applying the English common law test of ‘sufficient connection,’which the judge held would be satisfied on the facts, as the finance documents that were the subject of the scheme compromise were governed by an exclusive English jurisdiction clause.  The other potential route permitting of jurisdiction, however, concerned the application of certain provisions of a second piece of European-wide mandatory legislation, namely the European Regulation on Jurisdiction Recognition and Enforcement of Judgments in Civil and Commercial Matters Council Regulation (EC) No 44/2001 (the Judgments Regulation).  Briggs J held that, arguably, Article 2 of the Judgment Regulation, which requires defendants to be sued in the member state of their domicile, applied and that in applying this provision to schemes, this may require a majority of the scheme creditors to be domiciled in England to permit English courts to have jurisdiction over the scheme.  On the facts of Rodenstock, the majority creditors were so located, so that Briggs J did not have to decide the ‘conundrum’ as to which of the competing routes to jurisdiction were correct.

The Court’s Analysis of the Issue in PrimaCom

In PrimaCom, as all of the creditors affected by the proposed scheme were outside England, the ‘conundrum’ issue raised in Rodenstock had to be resolved.  The court heard arguments at two different hearings.  After hearing argument, Hildyard J was satisfied on a number of separate alternate bases that it was not a pre-requisite to jurisdiction that the majority of the creditors were domiciled in England.  Hildyard J’s preferred argument was that Article 2 of the Judgments Regulation did not apply to schemes, which, after all, were not a conventional form of adversarial proceeding.  This left it open for the English court to have jurisdiction where only the ‘sufficient connection’ test was satisfied.  In PrimaCom, the finance facilities that were the subject of the restructuring were governed by an exclusive English jurisdiction clause, and this by itself would satisfy the ‘sufficient connection’ test.  Alternatively, Hildyard J reasoned, if Article 2 of the Judgments Regulation did apply, that provision was in turn subject to Articles 23 and 24, which were both satisfied.  Article 23 of the Judgments Regulation broadly allocates jurisdiction according to jurisdiction clauses agreed between the parties, and Article 24 permits the courts to have jurisdiction where defendants have submitted to the jurisdiction.

Comment

Because English schemes of arrangements do not fit easily within or alongside the EIR or the Judgments Regulation, the legal analysis of scheme jurisdiction has developed through quite a tortuous case-law route.  Although there are some remaining issues, following PrimaCom further welcome clarity has been brought and there appears to be little in the way of barrier to implementing English schemes for overseas companies, wherever located, where the finance facilities requiring restructuring are English law governed documents.  English law schemes of arrangements have already established an enviable track record in delivering flexible restructuring solutions for both domestic and overseas companies and we expect further scheme restructurings to follow.