This case reiterates the opportunity that an English scheme provides to companies in emerging market jurisdictions seeking to restructure their English law debt obligations with international lenders. Mr Justice Snowden’s detailed review of the scheme, focussing in particular on jurisdictional aspects and overseas recognition of the scheme, demonstrated again that the sanction of the English court was not a mere formality¹. 

On 3 November 2017, the English High Court sanctioned a scheme of arrangement (the Scheme) relating to the obligations of Far East Capital Limited S.A. (the Issuer) under US$550m 8% notes due 2018 and US$325m 8.75% notes due 2020 (Eurobonds).  

Background

The Issuer is a subsidiary of the Russian company, Far-Eastern Shipping Company PLC, which, together with its subsidiaries (FESCO), is a leading public transportation and logistics group in Russia, controlling the Port of Vladivostok and other strategic assets and having operations spanning rail, sea liner and shipping services.  An ad hoc group of holders of the Eurobonds (AHG) formed to explore restructuring options after the occurrence of a payment default with respect to the Eurobonds on 31 May 2016.  The restructuring implemented by the Scheme was completed in November 2017, with Dechert LLP acting for the AHG.

Restructuring

Following over a year of negotiations between FESCO and the AHG, on 23 June 2017, the parties entered into a lock-up and standstill agreement (the LUA) for the purposes of, among other matters, facilitating the implementation of a restructuring plan that would result in a US$547.5 million cash payment to bondholders holding US$655 million of the outstanding Eurobonds (i.e. a recovery of c.83.5% plus fees).  In return for such payment, all claims under the Eurobonds were discharged and released.  About US$220 million of the Eurobonds were previously repurchased by another company within the Group and therefore did not receive any portion of the cash settlement.  All holders of the Eurobonds were offered the opportunity to enter into the LUA and receive the payment of monthly lock-up fees.  The lock-up fees were structured to be higher than in certain comparable restructurings. The AHG also received a work fee under the LUA.

Scheme

The Scheme was put to a single meeting of holders of the Eurobonds (being the Scheme creditors) pursuant to an order made by Mr Justice Morgan on 11 October 2017.  The Scheme received the support of Scheme creditors holding 92.89% by value of the Eurobonds.

At the sanction hearing, the judge, Mr Justice Snowden, confirmed that the scheme formalities had been fulfilled and the Scheme was fair and reasonable.  Among other matters, he confirmed he was satisfied that the holders of both series of Eurobonds were properly constituted in a single class, re-affirming the principle that the payment of the lock-up fees did not put the recipient Scheme creditors in a separate class given “the amount of the lock up fee was not such that might have prompted a Scheme creditor to vote in favour in circumstances in which they might otherwise not have been minded to do so”.

Jurisdiction

Snowden J’s analysis of the jurisdictional issues predominantly reaffirms the position set out in the existing leading cases concerning schemes of overseas companies, but is nonetheless informative and re-iterates that the English courts will conduct a detailed examination of the facts to verify its jurisdiction before proceeding to sanction a scheme. In this case, Snowden J was happy that the court should exercise its discretion to sanction the Scheme on the basis that English law governed the lending relationship between the Scheme creditors and FESCO, and accordingly there was “sufficient connection” to English law.  He was also satisfied that the Scheme would be recognised in the relevant overseas jurisdictions taking into account the expert evidence provided and the high levels of support for the Scheme.

Snowden J followed the usual practice taken in recent cases, and worked on the assumption that the (recast) Brussels I Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Regulation (EU) No 1215/2012) (the Recast Judgments Regulation) is applicable to English schemes of arrangement for the purposes of establishing jurisdiction, and Article 8 of the Recast Judgments Regulation enables the court to establish jurisdiction to sanction a scheme affecting creditors domiciled elsewhere in the EU (as an exception to the general restriction under Article 4 that a person must be “sued” in the Member State in which they are domiciled) where the scheme creditors include parties domiciled in the UK. 

He then considered the issue of how many UK creditors are required to be domiciled in the UK for the purposes of Article 8.  Some of the authorities (for instance Re NEF Telecom Co BV [2014] BCC 417) indicate that only a single UK domiciled creditor is needed for the court to establish jurisdiction.  This was the “provisional view” taken by Newey J in his judgment at the convening hearing for Re DTEK Finance plc [2017] BCC 165, which considered the issue in detail. However, in the recent case of Re Global Garden Products Italy SpA [2016] EWHC 1884 (Ch) Snowden J appeared to prefer the view that the court should review the number and weight of creditors domiciled in England so as to obtain some reassurance that it really is “expedient” to assert jurisdiction over all creditors, wherever they are domiciled.

In this case, while Snowden J concluded that there was no reason to decide between these two approaches with respect to FESCO’s Scheme, his approach was consistent with his decision in Re Global Garden as he was satisfied on the evidence that the number and weight of creditors domiciled in England meant that the court had jurisdiction to sanction the Scheme under the Recast Judgments Regulation (to the extent it were necessary to find such jurisdiction).

Conclusion

From a legal and commercial perspective, this case again demonstrates the English courts’ willingness to sanction a scheme facilitating the restructuring of the debt of an overseas company.  Schemes continue to provide a valuable tool for the purposes of implementing a debt restructuring, provided that its terms and other elements are compliant with the applicable rules and criteria.