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A scheme binding creditors of Spanish finance group Codere, sanctioned in the High Court on 17 December 2015, was followed up by a Chapter 15 recognition order by the US courts. Martin Ouwehand, barrister at Radcliffe Chambers, explores the issues in Re Codere Finance (UK) Ltd.
Re Codere Finance (UK) Ltd  EWHC 3778,  All ER (D) 27 (Jan)
Codere Finance (UK) Ltd applied for an order sanctioning a scheme of arrangement, under Part 26 of the Companies Act 2006 (CA 2006). Codere Finance (UK) Ltd was an English incorporated subsidiary of Codere SA, a Spanish company. Codere SA was the ultimate parent of a group of companies. Negotiations with a view to achieving a restructuring had begun more than two years prior to the present proceedings. The view was taken that the best course was to seek to use the scheme jurisdiction that existed in England and Wales. Codere Finance (UK) Ltd was acquired to that end. It fell to be determined whether the scheme should be sanctioned. Particular consideration was given to the fact that the group had acquired Codere Finance (UK) Ltd only quite recently and with a view to using the present court's scheme jurisdiction.
Codere SA, is a Spanish company which is the ultimate parent of a group which carries on business in Spain, Italy and Latin America. The group had been financed to a substantial extent by the issue of notes by a Luxembourg subsidiary, Codere Finance (Luxembourg) SA, which were guaranteed by Codere SA and other companies in the group. The notes were governed by New York law and subject to an intercreditor agreement governed by English law.
The jurisdictional issues arose out of the fact that Codere Finance (UK) Ltd, the English subsidiary seeking the sanction of a scheme of arrangement (the scheme) under CA 2006, had only been acquired by the group relatively recently and specifically for the purpose of having the benefit of the English court’s jurisdiction in restructuring the group’s liabilities under the notes.
The implementation of the scheme, and the restructuring as a whole, had been the subject of a strategy put in place over about two years in consultation with the group’s creditors. The case for the scheme was based on the estimate that noteholders would recover at least 47% of their liabilities under the scheme. Whereas they could recover nothing if there was no scheme and the group had to enter an insolvency proceeding.
At the scheme meeting on 14 December 2015, all of the creditors present and voting approved the scheme and their claims represented 98% of the total indebtedness under the notes. That level of support, and the dramatically favourable estimated outcome under the scheme, was obviously a key consideration when it came to the legal issues which the court had to address.
The group’s liabilities under the notes pre-dated Codere Finance (UK) Ltd, but the company voluntarily assumed joint and several liability for them for the purpose of the restructuring. This was done upon the instruction of its shareholder, Codere SA, and with the agreement of almost all of the noteholders.
As a result of the debtor company being an English company, the court did not have to have resort to the ‘sufficient connection’ test which is relevant to the discretion to exercise jurisdiction to sanction a scheme in respect of a foreign company. This is because an English company is plainly subject to the scheme jurisdiction under CA 2006.
Once the usual hurdles for sanction of a scheme were met, the other relevant jurisdictional requirement was that in accordance with Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I) there were sufficient scheme creditors domiciled in England against whom the order sanctioning the scheme was effectively being made. This is upon the assumption that Brussels I applies and is liable to deprive the English court of jurisdiction.
When the matter came before Mr Justice Nugee at the convening hearing, he expressed concern that the case was an ‘extreme form of forum shopping’.
‘Forum shopping’ has been a controversial issue in the context of Council Regulation (EC) 1346/2000 on insolvency proceedings (the Insolvency Regulation) and also in the context of the United Nations Commission on International Trade Law (UNCITRAL) Model Law cross-border insolvency regimes which are in place in various jurisdictions. For example, changes have been made to certain provisions of the Insolvency Regulation to prevent ‘bankruptcy tourism’ whereby debtors from other parts of the EU attempt to move their place of domicile or residence to England in order to take advantage of what is perceived to be a comparatively favourable bankruptcy regime. There has also been controversy about the shifting of a company’s centre of main interests (COMI) in order for a foreign representative to obtain ‘foreign main proceeding’ recognition under Chapter 15 of the US Bankruptcy Code which enacts the UNCITRAL Model Law in the US.
However, at the sanction hearing, Mr Justice Newey heard submissions on the authorities which approved the exercise of the scheme jurisdiction in relation to companies which have not had longstanding connections with the English jurisdiction. He concluded that forum shopping can be undesirable where it is directed to evading debts but that if it is directed to achieving the best possible outcome for creditors then ‘there can sometimes be good forum shopping’.
The judgment refers to the group and its creditors considering restructuring mechanisms in other jurisdictions, but the available options involved insolvency proceedings which would have diminished the value of the group’s assets.
The existing notes would be cancelled in exchange for shares and other notes. There would be an injection of €400m, the hive down of Codere SA’s assets to a new Spanish company and the interposition of Luxembourg entities in the new structure.
The grant of recognition pursuant to the US Bankruptcy Code, Ch 15 was a non-waivable condition precedent of the scheme. The US Bankruptcy Code, Ch 15 enacts the cross-border regime provided for in the UNCITRAL Model Law on cross-border insolvency in the US. It provides for the recognition of foreign proceedings and allows a representative of those proceedings to have access to the US courts for the purpose of obtaining relief to assist the foreign proceedings. This is important so that the administration of the debtors’ affairs is not undermined by actions taken by creditors in the US who are not subject to the jurisdiction of the foreign proceedings. Unlike the UK’s version of that cross-border regime (under the Cross Border Insolvency Regulations 2006, SI 2006/1030), the definition of ‘foreign proceedings’ in the US Bankruptcy Code, Ch 15 is wide enough to include a scheme of arrangement entered into outside of insolvency proceedings. This means that despite there being no liquidation of the English company, the scheme could be made effective in the US.
This was important for two reasons, firstly because an insolvency proceeding may have terminated licences upon which the group’s businesses depend and thereby reduced the value of the group’s assets.
Secondly, one of the matters relevant to the question of whether to sanction a scheme is whether the scheme will be substantially effective in other relevant jurisdictions.
The driving consideration in applications for the sanction of schemes for the restructuring of debt is always the extent to which the outcome under the proposed scheme is estimated to be more beneficial to creditors than the alternative—usually being an insolvency proceeding in which creditors must incur the costs, delay and uncertainty of a liquidation with the prospect of only being paid a relatively low dividend. This commercial rationale for the scheme in turn permits the company to garner the support of a vast majority of creditors who will not only vote in favour of the scheme but whose support will influence the court when it comes to the exercise of its discretion.
This consideration may be used to justify forum shopping if there is a compelling case that a scheme will be more favourable than alternative restructuring regimes in foreign jurisdictions. The lesson for practitioners is that the court will permit the use of an English company solely to invoke English jurisdiction in those circumstances rather than having to attempt to move the COMI of one of the debtor companies or establish some ‘sufficient connection’ with England. There may be wider commercial reasons why moving the COMI or trying to establish more connections is unworkable or risky. Indeed, proceedings under the ‘sufficient connection’ basis allow someone objecting to the application the ability to argue that not enough has been done.
As a practical matter, the fact that such a strategy is ‘creditor driven’, substantially supported by creditors and that there are pre-existing connections with England will mitigate any concerns about the pre-meditation involved.
In addition, it would seem that it is equally important in cross-border reorganisations to make sure that the requirements of Brussels I can be satisfied in accordance with Re Van Gansewinkel Groep BVand others  EWHC 2151 (Ch),  All ER (D) 241 (Jul) (assuming Brussel I applies). There must be sufficient creditors who are domiciled in England unless they have contractually submitted to the English jurisdiction. If no creditors are domiciled in England, the court may regard itself as unable to sanction the scheme even if it was otherwise willing to do so.
The English courts have long shown a willingness to approve a scheme of a foreign company where there is a ‘sufficient connection’ with England. In this case, an English company was used but the use of an English company would have been unnecessary if there had been such a ‘sufficient connection’ with England or if the foreign debtors could have shifted their COMI to England.
As it was, the court still reassured itself that there was a ‘sufficient connection’ so that the strategic use of the English company was not the only reason that the group could take advantage of the English scheme of arrangement regime. Those connections were the English law governed intercreditor agreement, the domicile of 22% of the creditors in England and the administration of the notes by the note and security trustees from London.
Overall, the case is another example of where the English Courts are willing to take an expansive approach to their jurisdiction when it comes to restructuring foreign companies. It endorses the view that the very steps to seek the approval of a scheme can be relied upon to ensure that the English court is properly exercising its discretion. In other words, not only is ‘forum shopping’ permissible but, to an extent, so is ‘pulling oneself up by their boot-straps’.
The scheme meeting itself permitted the creation of further connections with England, namely, the English governed ‘lock-up agreement’ entered into to ensure support for the scheme and the act of voting by the creditors. The act of voting appears to have meant the creditors thereby submitted to the English jurisdiction.
When one sees this restructuring as essentially an exercise agreed by all of those with any interest in it (namely, the company, its group and the creditors) then it is not surprising that any legal impediments which might otherwise have existed fell away. Had an English company been formed for the purpose of issuing the notes in the first place there would have implicitly been an agreement by all of the creditors that the liabilities could be subject to an English scheme if the group approached insolvency. On one view, all that has occurred here is that the creditors’ agreement has taken place after the notes have been issued and insolvency was a real prospect. Conceptually, and commercially, the very same structural features exist and the outcome is the same. It is therefore hard to see why one means of reaching that result ought to fail where the other would succeed.
Had a large proportion of creditors alleged that they were being unfairly deprived of rights which they would have enjoyed in Luxembourg (or another jurisdiction) then the outcome may have been much less assured than if the English company had always been the issuer of the notes.
Martin Ouwehand, is a barrister at Radcliffe Chambers, London, and has extensive experience in relation to commercial litigation, insolvency, company and shareholder disputes and cross-border matters.
Interviewed by Lucy Karsten.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Schemes of arrangement—class issues
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First published on LexisPSL Restructuring and Insolvency
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