Factual and Procedural Background
This opinion concerns an application by Company A for an order sanctioning a scheme of arrangement under Part 26 of the Companies Act 2006. Company A, incorporated and registered in The State, is part of a group primarily operating telecommunication services in The State. The main operating company is a subsidiary, Company B, largely owned by Company A. The group’s ultimate parent is an investment firm incorporated in a jurisdiction outside The State and managed by an entity headquartered in The City.
Company A's principal liabilities arise from an issue of notes due in 2016, governed by the law of a foreign jurisdiction and subject to its courts’ jurisdiction. The notes are guaranteed by Company B and other group companies and secured by pledges over shares and other assets.
The scheme is proposed to restructure the group financially, as Company A is currently unable to meet its obligations under the notes, having defaulted on interest payments. The directors believe that without restructuring, insolvency proceedings are likely, which would significantly reduce recoveries for noteholders.
Under the scheme, noteholders (referred to as Note Creditors) would exchange their current rights for new notes and equity interests in a new company holding a substantial indirect interest in Company B.
Following an order by Judge Arnold, a meeting of Note Creditors was convened and approved the scheme by very large majorities, with high turnout. The court had previously considered and was satisfied with the classification of creditors and the status of Company A as a "company" under the relevant legislation.
Legal Issues Presented
- Whether the court has jurisdiction to sanction a scheme of arrangement proposed by a foreign company whose notes are governed by foreign law and subject to foreign jurisdiction.
- Whether the class of creditors (Note Creditors) was properly constituted for the purposes of the scheme.
- Whether the scheme has a sufficient connection with the jurisdiction to justify the court’s exercise of its power under Part 26.
- Whether the scheme will achieve its intended purpose of restructuring the company’s obligations effectively.
- Whether the scheme’s recognition and enforcement would be effective in relevant foreign jurisdictions, including the United States, The State, and Hungary.
- Issues relating to the application of the Judgments Regulation and its exclusions in the context of sanctioning the scheme.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Drax Holdings Ltd [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049 |
Foreign-incorporated companies are liable to be wound up under the Insolvency Act 1986 for the purposes of Part 26. |
Confirmed that Company A satisfies the jurisdictional requirement of being a "company" liable to be wound up. |
| Re DAP Holding NV [2005] EWHC 2092 (Ch), [2006] BCC 48 |
Similar principles on foreign company status and jurisdiction. |
Supported jurisdictional basis for sanctioning the scheme. |
| Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus LR 1245 |
Jurisdiction and recognition of schemes involving foreign companies. |
Used to illustrate sufficient connection and jurisdictional considerations. |
| Sompo Japan Insurance Inc v Transfercom Ltd [2007] EWHC 146 (Ch) |
Court will not sanction a scheme that has no substantial effect. |
Applied to ensure the scheme will achieve its purpose. |
| Re Eurofood IFSC Ltd (Case C-341/04) [2006] Ch 503 |
Interpretation of COMI under the Insolvency Regulation. |
Supported finding that Company A’s COMI was in England. |
| Interedil Srl v Fallimento Interedil Srl (Case C-396/09) [2012] Bus LR 1582 |
Further interpretation of COMI under the Insolvency Regulation. |
Reinforced the COMI determination for Company A. |
| Re Compania Merabello San Nicholas SA [1973] Ch 75 |
Practical effect required for winding up orders; connection with jurisdiction must be real. |
Explained the importance of a sufficient connection to England for practical effect. |
| Re T&N Ltd (No.4) [2006] EWHC 1447 (Ch), [2007] Bus LR 1411 |
Variation or release of rights against third parties can form part of a scheme. |
Supported inclusion of guarantee releases in the scheme. |
| Re Lehman Brothers International (Europe) (No.2) [2009] EWCA Civ 1161, [2010] Bus LR 489 |
Confirmed principles on variation of rights against third parties in schemes. |
Applied to confirm the scheme’s integral nature regarding guarantee releases. |
| Re Rodenstock GmbH [2011] EWHC 3746 (Ch), [2012] EWHC 164 (Ch), [2013] BCC 201 |
Jurisdiction and recognition of schemes involving foreign creditors. |
Referenced in relation to jurisdictional and recognition issues. |
Court's Reasoning and Analysis
The court began by confirming that Company A qualifies as a "company" under Part 26 of the Companies Act 2006, being liable to be wound up under the Insolvency Act 1986 despite foreign incorporation. The class of creditors, Note Creditors, was properly constituted as a single class, given the identical rights under the notes and the scheme, and the substantial majority support for the scheme at the creditor meeting.
The court addressed concerns arising from the foreign incorporation of Company A and the New York law governing the notes. It emphasized the necessity of a sufficient connection with England for the court to exercise its jurisdiction to sanction the scheme. This connection was established primarily by the relocation of the company's centre of main interests (COMI) to England, supported by detailed evidence and consistent with relevant European Court of Justice case law.
The court noted expert evidence indicating that the scheme would likely be recognized and given effect by courts in the United States under Chapter 15 of the US Bankruptcy Code, as well as by courts in the Netherlands and Hungary. This supported the conclusion that the scheme would have a substantial practical effect, satisfying a key requirement for sanction.
The court explained that the connection with England and the scheme’s ability to achieve its purpose are closely related considerations, both ensuring that the court’s jurisdiction is properly exercised and that the scheme is effective in restructuring the company’s obligations.
The court considered the application of the Judgments Regulation, concluding that sanctioning a scheme of arrangement is a civil and commercial matter within its scope, and that the scheme would be entitled to recognition and enforcement under the regulation.
On the merits, the court found no reason to depart from the commercial judgment of the Note Creditors, as evidenced by the high turnout and overwhelming approval of the scheme. The inclusion of releases of rights against guarantor companies was deemed an integral and commercially necessary part of the scheme.
The court also commented on the independence of expert evidence on foreign law, suggesting that greater independence would be preferable in future cases, though it was satisfied with the current evidence.
Ultimately, the court was satisfied that the scheme met all legal and jurisdictional requirements and would achieve its purpose.
Holding and Implications
The court’s final decision was to SANCTION THE SCHEME OF ARRANGEMENT proposed by Company A.
The direct effect of this decision is to authorize the restructuring of Company A’s obligations to the Note Creditors, replacing existing notes with new notes and equity interests, and releasing guarantees held by other group companies. This prevents immediate insolvency proceedings and aims to preserve value for creditors.
No new precedent was established by this decision; rather, it applied established principles concerning jurisdiction, creditor class composition, and scheme sanctioning in the context of a foreign-incorporated company with foreign-law governed debt instruments.