DTEK offers guidance for schemes of arrangement in a post- Brexit world

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Sir Alastair Norris’  High Court judgment of 14 May 2021, confirming the sanctioning of the scheme of arrangement of DTEK Finance PLC in respect of existing bank lenders (the “Bank Scheme”) and the scheme of arrangement of DTEK Energy B.V. in respect of the outstanding notes (the “Note Scheme”) has now been published. This is the first scheme of arrangement to be heard post- Brexit which required consideration of the international recognition of a scheme, and as such this important judgment affirming the effectiveness of schemes of arrangement internationally provides welcome clarity for creditors and companies alike. 

Summary:

  • The international effectiveness of schemes has not been altered as a result of Brexit. Pre-Brexit, the Judgments Regulation was not assumed to apply when looking at the international effectiveness of schemes; the fact that the Judgments Regulation no longer applies to English proceedings does not alter the position.  The English Courts will continue to use expert evidence to consider alternative bases for recognition.   
  • The English Court does not require certainty on international recognition when sanctioning schemes, but rather evidence that there is a reasonable prospect of such scheme having substantial effect in a jurisdiction.

Background

In the latest in the long running saga of DTEK restructurings that began in 2015,  DTEK Finance PLC and DTEK Energy B.V. entered into UK schemes of arrangement in respect of all offshore bank debt and outstanding notes respectively. The inter-conditional Bank Scheme and Note Scheme enabled DTEK Finance Plc and DTEK Oil & Gas B.V. to issue new secured notes to both existing lenders and noteholders alike in place of the offshore bank debt and outstanding notes.

Whilst both the Bank Scheme and the Note Scheme obtained  the overwhelming support of lenders and noteholders, with lenders holding over 95% of the aggregate commitments subject to the Bank Scheme and holders of almost 90% principal outstanding of the Notes in attendance and approving the relevant scheme, Gazprombank, both a lender and a noteholder, was a notable dissenting lender, and objected at both the convening hearing and sanction hearing stages of the Bank Scheme.

At the sanction hearing, Gazprombank’s key arguments were as follows:  

The Intelligent Man

Gazprombank argued that the Bank Scheme had a materially disproportionate effect on them and felt that they were so different when compared to Bank Scheme creditors that the Bank Scheme failed the “fairness test”- “whether the arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest might reasonably approve”. Gazprombank held guarantees from entities that in their view would still be able to repay the debt owing to them even if the Bank Scheme failed and certain members of the group entered insolvency.  The Court concluded that on the entirety of the evidence available to it, Gazprombank was not in a significantly stronger position than any other Bank Scheme creditor and that the Bank Scheme did not operate unfairly by compelling Gazprombank to compromise recovery rights which were materially better than those of other Bank Scheme creditors.  Accordingly the Court rejected this challenge.

The “Blot”

Gazprombank questioned the recognition of the Bank Scheme in the EU and Singapore and argued that the English Court could not be satisfied as to the international effectiveness of the Bank Scheme post-Brexit, such that any grant of sanction would be an act in vain.

The principles setting out the “modest standard” to be considered by the English Court are:

  1. The Court must be satisfied that the scheme will achieve its purpose and will not make an order which has no substantial effect.
  2. The Court must be satisfied that the scheme achieves a substantial purpose in the key jurisdictions in which the scheme company has liabilities or assets.
  3. The Court does not need certainty as to the position under foreign law, but does require credible evidence it will not be acting in vain.
  4. Credible evidence must show that the scheme is “likely, or at least will have a real prospect, of having substantial effect” or “at least a reasonable prospect that the scheme will be recognised and given effect”.

In response to these principles, the Court considered:

Judgments Regulation

The Court stated that there was always uncertainty as to how schemes of arrangement fitted within the framework of the EU Regulation 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the “Judgments Regulation”).  When considering whether the Judgments Regulation presented a jurisdictional bar to the Court exercising jurisdiction over EU domiciled scheme members or creditors, it was assumed to apply but when considering international effectiveness it was not assumed to apply, and the English Court would look for expert evidence which demonstrated alternative bases, indeed Norris J notes that  “English Courts have … never regarded the Judgments Regulation alone as a sufficient ground upon which to assess international effectiveness: and the fact that it is no longer available has not transformed the landscape” [paragraph 31].  Such alternative bases include Rome I and private international law.

Rome I

After hearing evidence both from DTEK Finance PLC and Gazprombank’s experts on whether the Bank Scheme would be recognised in Cyprus under Rome I, the Court concluded that it did not agree with Gazprombank’s argument that Rome I covers only purely consensual variations or extinguishments of contractual rights.  It  was satisfied that there was a reasonable prospect that the Bank Scheme would be substantially effective in Cyprus.

Certainty under Foreign Law

On recognition in the Netherlands. the Court confirmed that the it cannot decide between rival expert reports on foreign law matters and focussed instead on the question of whether there was a reasonable prospect of the scheme having substantial effect in key jurisdictions. It concluded that it was satisfied that there was a reasonable prospect of the Bank Scheme having substantial effect in the Netherlands, both as regards the bank creditors who approved the Bank Scheme and as against Gazprombank.

Solid Support

It was noted that the English court will regard a scheme as substantially effective if it has “very solid support” amongst scheme creditors, as was the case in respect of both the Bank Scheme and Note Scheme.

The judgment in respect of the sanction hearing was published on 8 June 2021 and can be found here.

Hogan Lovells advised the ad hoc group of lenders, click here to read our announcement following the sanction of the schemes (Hogan Lovells advises ad hoc group of lenders on DTEK's successful schemes of arrangement).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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