Schemes of arrangement remain a popular tool for companies to reach a compromise with their creditors and effect complex multi-jurisdictional restructurings. In this article, we highlight a number of recent judicial decisions which show that the courts are continuing to adopt a commercial, pragmatic approach when considering schemes.
Majority in number test: In Re Dee Valley Group (2017), the English High Court upheld a scheme chairman’s decision to reject the votes of 434 shareholders who had each received one share from a dissenting Dee Valley employee. The Court was satisfied that in voting to reject the scheme, the 434 shareholders had not acted bona fide in the interests of the scheme class as a whole.
Although Dee Valley goes some way to alleviate concerns that dissenting parties may split their shareholdings to seek to use the majority in number test to defeat a scheme, it is important not to overstate its significance. A chairman will only be entitled to reject votes that are motivated by an abusive or improper purpose which is not in the interests of the scheme class as a whole. It should also be noted that whilst Dee Valley concerned a shareholder scheme, the ruling applies equally to debt splitting in creditor schemes.
Jurisdiction of UK courts over non-UK EU based creditors: In Re DTEK Finance plc (2017) and Re Global Garden Products Italy SpA (2016) the English High Court considered what constitutes sufficient connection between an overseas scheme creditor and a UK scheme for the purposes of an exception to the general rule in the Brussels Regulation that a person based in one EU Member State must be sued in that member state. The exception (Article 8 of Chapter II of the Brussels Regulation) provides that an EU entity can be sued in another EU Member State where it is not based when it forms part of a group including entities based in that other EU Member State and that the group’s claims are so closely connected that it is expedient to hear and determine them together to avoid irreconcilable judgments resulting from separate proceedings.
In Re DTEK it was held that even a single UK based scheme creditor is sufficient for the Article 8 exception to apply and for a UK scheme involving creditors in other EU Member States to be sanctioned. This is on the proviso that the scheme also meets the expediency test and avoids the risk of irreconcilable judgments in domestic courts of the different scheme creditors. By contrast, in Global Garden, the court required specific evidence to show the number and value of scheme creditors based in the UK before it would accept that the scheme had sufficient connection to the UK to fall within the Article 8 exception.
Whilst the court’s commercial approach in Re DTEK should reassure companies seeking to carry out schemes with EU scheme creditors based outside of the UK, Global Garden shows that companies should also be prepared to provide evidence showing scheme creditors’ connection with the UK. Depending on the specific factual circumstances surrounding the scheme, a court may insist on a close examination of the constitution of the scheme creditor group.
Class constitution: In First Pacific Advisers LLC v Boart-Longyear Ltd (2017), the New South Wales Court of Appeal upheld a decision that holders of certain term loans and senior secured noteholders should constitute a single class for the purposes of voting on a scheme of arrangement. This was despite the fact that the term loans and notes had different security packages, interest rates and maturities and, most significantly, the term lender would receive an increased equity stake in the company as a result of the scheme. Applying the principle first established in the English case Sovereign Life Assurance Company v Dodd (1892), the Court of Appeal held that there was sufficient common interest (including the risks on insolvency and dealing with security interests) between the term loan lender and noteholders that they could consult one another in relation to the scheme and so should form a single class.
Subsequently, a substantially amended scheme has been approved by the Supreme Court of New South Wales. The amendment followed earlier indications from the Court that, without alteration, the scheme may not have been approved on fairness grounds. Subsequently, a New York bankruptcy court has granted Chapter 15 recognition of Boart-Longyear schemes.
The decision is significant, particularly on the question of class composition where certain groups of creditors hold or, as a result of the scheme, will receive an equity position in the company. The decision serves to highlight that it is not obvious that creditors in this position will necessarily constitute a separate class for the purposes of voting on a scheme.
