Class and jurisdictional issues in schemes of arrangement (Re New Look Secured Issuer plc and another)

Charlotte Cooke, barrister at South Square, examines the High Court’s decision in Re New Look Secured Issuer plc and another to grant applications by two companies for orders pursuant to section 896 of the Companies Act 2006 (CA 2006) to convene meetings of their creditors to consider proposed schemes of arrangement.

Re New Look Secured Issuer plc and another [2019] EWHC 960 (Ch), [2019] All ER (D) 91 (Apr)  

What are the practical implications of the judgment?

Building on previous cases, the decision in Re New Look Secured Issuer plc and another will inform practitioners as to how to approach jurisdictional issues relating to schemes of arrangement and as to proper class composition.

What was the background?

The companies’ group had experienced liquidity issues, as a result of a range of internal and external factors. Among other things, the fashion retail sector in the UK has faced a decline in footfall on the high street, requiring more costly promotional efforts to stimulate trade.

Against this background, the group’s level of debt was considered unsustainable. The restructuring, of which the schemes form part, is intended to provide the group with a deleveraged balance sheet, with lower overall gross debt.

Unless the restructuring was implemented, a bridge facility would terminate on 30 June 2019, with the group unlikely to be able to repay it, which would likely result in filing for insolvency proceedings.

The scheme companies obtained opinions which showed that the outcome from scheme creditors would be better in the event the schemes (and the restructuring more generally) were implemented, as compared with insolvency proceedings. It was therefore considered that the restructuring and the schemes were in the best interests of the group’s stakeholders, including in particular, the scheme creditors. The companies therefore applied to convene meetings of creditors to vote on the proposed schemes and later, if they had been approved by the requisite majority of creditors, to sanction the schemes.

What did the High Court decide?

Smith J addressed jurisdictional issues before going on to consider the proposed meetings.

Jurisdictional issues

There were three issues:

  • whether the court had jurisdiction over the scheme companies 
  • whether the court had jurisdiction over the scheme creditors  
  • whether, if approved, the schemes would be likely to have a substantial effect

Smith J took each of those issues in turn. He found that the scheme companies were companies incorporated in England and Wales and therefore were ‘companies’ within the meaning of CA 2006, Part 26. The fact that the scheme companies were incorporated in England and Wales also meant that there was a sufficient connection with the jurisdiction. In addition, a revolving credit facility, with which one of the schemes was concerned, was governed by English law. While the notes which were the subject of the other scheme were governed by New York law, this was no bar to them being the subject of a scheme, so long as the scheme company otherwise had a sufficient connection to the jurisdiction (eg Magyar Telecom BV, Re [2013] EWHC 3800 (Ch), [2013] All ER 20 (Dec). Smith J therefore held that the court had jurisdiction over the scheme companies.

In order to avoid having to decide whether the recast Regulation (EU) 1215/2012 (Brussels I (recast)) applies to schemes, the courts have generally adopted the practice of considering whether jurisdiction to sanction the scheme would exist on the assumption that it did apply.

Smith J adopted the same approach, noting that Article 8 of Brussels I (recast) is potentially engaged as an exception to the normal rule that defendants must be sued in the place of their domicile (eg Re Global Garden Products Italy SPA [2016] EWHC 1884 (Ch)). Article 8(1) of Brussels I (recast) enables a person domiciled in a Member State to be sued, where he is one of a number of defendants, in the courts for the place where any of the defendants is domiciled, provided that the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.

Smith J further noted that the approach which had been taken in the majority of cases was that, provided that one scheme creditor was domiciled in the UK, then Article 8 of Brussels I (recast) would be engaged and it would be expedient to hear the application for the scheme as regards other creditors. In some cases, it has been suggested that it might not be enough to identify a single creditor domiciled in the UK, and that the court should consider whether the number and size of creditors in the UK were sufficiently large. On the facts, there was no need to decide this point, in light of the extent to which scheme creditors were domiciled in the jurisdiction. However, Smith J did observe that other cases (notably competition cases) dealing with ‘anchor’ defendants strongly suggested the first, more liberal, approach was the better one.

Substantial effect

Smith J reached no concluded view as evidence of the US position was yet to be adduced, but he was satisfied that there was no obvious jurisdictional impediment. US expert evidence would be produced at the later sanction hearing, when the schemes were sanctioned by the court.

Classes

Smith J addressed the proposed scheme meetings, in particular the proposed classes. He accepted the scheme companies’ proposal that each should convene one meeting of their respective scheme creditors for the purposes of voting on their respective schemes. Their rights were sufficiently similar so as not to make it impossible for them to consult together with a view to a common interest. In particular, differences in currency and interest rate did not affect this conclusion, as insolvency was the appropriate comparator. It was also relevant that all scheme creditors had the opportunity to accede to a lock-up agreement and that the size of any additional payment under that agreement was sufficiently small that it would not materially affect the creditors’ decision whether to vote for the scheme.

Charlotte Cooke appeared with William Trower QC for the applicant companies in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

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