Dutch company makes use of Apcoa ruling—Re DTEK Finance

Dutch company makes use of Apcoa ruling—Re DTEK Finance

Was a connection created by the governing law any less sufficient because it was made only shortly before the scheme sanction hearing?

Original news

Re DTEK Finance BV [2015] EWHC 1164 (Ch)

This case concerned an application by a Dutch company, DTEK Finance BV (DTEK), for an order under section 899 of the Companies Act 2006 (CA 2006) sanctioning a proposed scheme of arrangement between DTEK and holders of loan notes issued by DTEK.

How did the issue arise and what were the jurisdictional factors?

DTEK was incorporated in the Netherlands and was part of an energy group. Its function was to raise finance within the capital markets and distribute that finance to the group. The loan notes it issued in 2010 were governed by New York law, but following an exchange offer and consent solicitation, the governing law was changed to English law two weeks before the application to sanction the scheme. The relevant timeline is as follows:

  • 2010—loan notes issued by DTEK with New York governing law
  • 23 March 2015—exchange offer and consent solicitation launched by DTEK to agree a change of the governing law from New York to English law
  • 9 April 2015—the supplemental indenture changes the governing law to English law (according to DTEK as this is the date when over 50% of noteholders consented to the change—although there was some debate about whether New York law requires 50% or 90% approval to bind all noteholders, this was irrelevant as consent was in fact given by 91.1% of noteholders)
  • 14 April 2015—convening hearing in which the court gives permission to convene a single meeting of scheme creditors
  • 23 April 2015—creditors meeting held and approves the scheme by 91.1–92.2% (depending on whether the votes of affiliated companies are counted)
  • 24–27 April 2015—sanction hearing

Was there a sufficient connection?

Rose J considered whether there was a sufficient connection with England to justify an exercise of discretion to approve the scheme (applying Re Drax Holdings [2003] EWHC 2743 (Ch), [2004] 1 All ER 903). She referred to Re Primacom [2011] EWHC 3746 (Ch), Re Vietnam Shipbuilding [2013] EWHC 2476 (Ch) and Re Magyar Telecom [2013] EWHC 3800 (Ch) as authority that an English governing law clause is a sufficient connection for the purposes of establishing jurisdiction.

She then considered whether a connection created by the governing law was any less sufficient because it was made only shortly before the sanction hearing. She applied Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch) and found that a change of governing law to English law should be treated as a sufficient connection. The indenture governing the notes had always included a provision for the possible change of governing law and therefore this was part of the bargain that noteholders signed up to. She noted that legal experts on both sides agreed that it was possible under New York law to effect this change. Rose J was also satisfied that three other circumstances also provided a sufficient connection:

  • some of the guarantees given by Ukranian operating companies were (and always had been) governed by English law (and she noted that it was well established that a scheme can release guarantee obligations)
  • DTEK had moved its centre of main interests (COMI) to England, specifically by:
    • carrying out all of the company's functions from it's sole office in London
    • conducting day-to-day management through a London based company
    • holding two recent board meetings in London
    • holding its cash in a London-based bank account
  • DTEK had substantial assets in England (the cash in its London bank account)

Rose J noted that although the COMI shift to England was entirely motivated by a wish to establish COMI so that a scheme could be approved, she applied Re Magyar and found this did not prevent a sufficient connection from arising. Rose J was also satisfied that the scheme would have practical effect and noted the legal opinions which confirmed that the scheme would be effective in the Netherlands and other jurisdictions in which the guarantors were located. She also noted DTEK's intention to obtain subsequent recognition in the US under chapter 15 of the US Bankruptcy Code.

What guidance did the court give on fairness?

Given the very large majority voting in favour of the scheme (91.1%), Rose J was satisfied that the majority fairly represented the interests of the class. There was nothing to suggest that they were not acting bona fide or that they were coercing the minority to promote interests adverse to those of the class whom they purported to represent.

As regards overall fairness and the exercise of the court's discretion, Rose J noted that any potential opposition did not materialise:

  • Alden withdrew its opposition to the sanction hearing a few days beforehand
  • Callaway made serious allegations against DTEK saying it intended to raise objections at the sanction hearing on 27 April 2015. On 24 April 2015, DTEK's solicitors told Callaway that the sanction hearing was due to take place that afternoon and not on 27 April 2015. Rose J decided to hear the case but reserved judgment until 28 April 2015 in case they wanted to make representations. In the event, Callaway did not appear at the hearing

In the circumstances, Rose J was satisfied that there was nothing in this opposition and therefore no reason not to sanction the scheme.

What are the practical lessons for restructuring and insolvency professionals?

This is a welcome reinforcement of the principles in Apcoa. Here, even though the governing law was changed only two weeks before the sanction hearing, a sufficient connection did exist for the purposes of sanctioning the scheme. It is interesting to see that the company took note of the judge's comments in Apcoa and adopted a belt and braces approach of expressly telling the creditors that the change of law was to allow the scheme, changing COMI and making sure there were assets within the jurisdiction, as well as getting extensive expert evidence that the scheme would be effective in various key jurisdictions.

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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First published on LexisPSL Restructuring and Insolvency

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.