Scheme used to restructure Ukraine's largest bank—Re Public Joint-Stock Company Commercial Bank 'Privatbank'

Scheme used to restructure Ukraine's largest bank—Re Public Joint-Stock Company Commercial Bank 'Privatbank'

When can an English scheme be used to restructure foreign banks? In Re Public Joint-Stock Compant Commercial Bank ‘Privatbank’, the court considered an innovative use of an English scheme of arrangement to restructure a Ukrainian bank.

Original news

Re Public Joint-Stock Company Commercial Bank 'Privatbank' [2015] EWHC 3299 (Ch)

Public Joint-Stock Company Commercial Bank 'Privatbank' (the bank) applied for the sanction of the court to a scheme of arrangement under section 899 of the Companies Act 2006 (CA 2006) with creditors in respect of two series of subordinated loan notes (the 2016 Notes and the 2021 Notes), having an aggregate nominal value of US$220m. Mr Justice David Richards approved the scheme.

What are the key take-aways?

The key points to note from this case are:

  • an English scheme can be used to restructure a foreign bank, if (as here) there is a sufficient connection with England
  • in practice, holders of a global note can definitise their notes by entering into a deed poll before the scheme takes effect
  • jurisdiction was established under article 8 of Regulation (EU) 1215/2012 (Brussels I (recast)) as 12% by value of the two classes of notes were held by persons domiciled in the UK

How did the issues arise?

The bank was the largest bank in Ukraine by assets loans and deposits with a market share of roughly 34% of all retail deposits. The English scheme proposed to extend and amend the terms of the 2016 Notes and 2021 Notes. The bank had the following jurisdictional connections:

  • Ukraine—place of the bank's incorporation plus location of 30 branches and 2,881 outlets. The bank operated under a license from the National Bank of Ukraine
  • Cyprus—location of one branch
  • Latvia—location of one subsidiary
  • China—location of representative office performing purely administrative functions
  • UK—location of representative office performing purely administrative functions. 2016 Notes and 2021 Notes and related subordinated loans expressly governed by English law and either gave jurisdiction to the English courts or contained clauses submitting disputes to arbitration with a seat in London

Were the noteholders (as holders of a global note) creditors for the purposes of a scheme?

One potential problem was the fact that the 2016 and 2021 Notes were held in global note form meaning that the rights of the noteholders were recorded through the EuroClear and Clearsteam systems (ie technically the depository was the creditor).

Here, there was concern that the noteholders weren't creditors of the bank, although they would have a right of direct recourse against the bank under the terms of the security arrangements in the event that the security trustee, having become bound to proceed against the bank, failed to do so within a reasonable time.

To resolve any difficulties regarding the noteholder's status as creditors, the bank entered a deed poll agreeing that if it failed to make any payment under the subordinated loans it would be liable directly to the noteholders as if it were the original principal obligor under the notes and/or the noteholders were the original counterparty under the subordinated loans. Effectively under the deed poll, the noteholders became contingent creditors of the bank (contingent creditors are creditors for the purposes of CA 2006, ss 895–899) so definitising their notes.

If Brussels I (recast) applies, does the court have jurisdiction to sanction the scheme?

Richards J noted that Asplin J had addressed this issue at the earlier convening hearing. Richards J agreed with her conclusion that if Brussels I (recast) applied to applications to sanction a scheme of arrangement, then the court had jurisdiction under Brussels I (recast), art 8 the evidence established that notes representing 12% by value of the two classes of notes were held by persons domiciled in the UK. In all the circumstances, including the fact that the claims were all subject to English law, Asplin J decided that it was expedient that the English court should assume jurisdiction under Brussels I (recast), art 8. Interestingly, there was no discussion on whether the court would alternatively have jurisdiction under Brussels I (recast), art 25 (1).

What other factors did the judge consider?

Richards J considered the following factors before deciding to sanction the scheme:

  • liquidation alternative—the judge was satisfied with the evidence that if the scheme wasn't sanctioned, it was likely that the bank would be put into temporary administration in Ukraine, which would terminate either on the sale of the bank or its assets and liabilities or its nationalisation or its liquidation. In the event of a liquidation in Ukraine, it was unlikely that the bank would have sufficient assets to pay any part of the deeply subordinated 2016 Notes and 2021 Notes
  • overwhelming support by creditors—scheme was approved by 98.26% in number and 98.95% in value of the notes at the creditors' meeting
  • company liable to be wound up—Richards J noted the earlier decision of Asplin J at the convening hearing that the bank (a Public Joint-Stock Company Commercial Bank) was a company liable to be wound up as an unregistered company under section 221 of the Insolvency Act 1986 (IA 1986)
  • expert evidence—the judge was satisfied with the expert evidence of Ukrainian law that the English scheme would be recognised in Ukraine
  • sufficient connection with England—based on the English governing law and jurisdiction clauses in the 2016 Notes and the 2020 Notes. Additionally the bank had a representative office and assets in England, so that in the event of insolvency it was a real possibility that the bank could be wound up in England, albeit as an ancillary liquidation to Ukrainian insolvency process
  • classes—although the rights (before implementation of the scheme) attached to the two series of notes were significantly different in terms of their maturity dates, the realistic alternative to a scheme was a Ukrainian insolvency procedure. On insolvency, the noteholders would rank pari passu. The rights under the scheme didn't differentiate between the two series of notes. Looking at the rights of the creditors both before and after the scheme, they were in substance the same and in any event sufficiently similar that they could properly constitute a single class
  • exercise of discretion—Richards J paid close attention to the chronology: the 2021 Notes were issued after an unsuccessful attempt to obtain a consensual restructuring of the 2016 Notes and only shortly before the commencement of the scheme proceedings. While the 2016 noteholders would see a significant extension of their maturity date, the same was not true of the 2021 noteholders. Further, as there was only one holder of the 2021 Notes, their restructuring could be effected simply with the agreement of that single noteholder without the need for a scheme. He queried whether the terms attached to the 2021 Notes were structured in such a way to enable them to constitute a single class with the 2016 Notes and to increase the prospects of reaching the requisite statutory majority to approve the scheme at a single meeting of creditors. Although these would have been relevant matters to consider if there had been significant opposition to the scheme (particularly if the requisite majority could only be achieved by reason of the votes of the 2021 noteholder), that was not the case here. Here, there was an overwhelming majority in favour of the scheme, even if the 2021 noteholder's votes were ignored. He also noted that the noteholders who had opposed the earlier restructuring of the 2016 Notes did not oppose the current scheme (one of the previous objectors was satisfied that shareholder capital had now been injected through the issue of the 2021 Notes and the other had failed to make any contact with the bank)
  • consent fee and fairness—all noteholders were offered a consent fee of 2% of the outstanding amount of principal of their notes if they agreed to vote in favour of the scheme. This offer was available until only five days before the creditors' meeting. Richards J was satisfied that as it was offered to all noteholders, the consent fee did not render the scheme unfair. In particular, he noted that the offer was available to all creditors until a very late stage and there was no material change in the circumstances making the scheme less favourable between the dates when the agreements were made and the date of the creditors' meeting. Although the proponents of the scheme accepted that it might be more appropriate to judge the materiality of the consent fee by reference to the actual price paid by the noteholder (ie for notes acquired at a substantial discount price of 25 cents per US$1 nominal of notes, a 2% consent fee might well be considered material), Richards J did not need to explore this further given the factors referred to above

What does this mean in practice for those seeking to use an English scheme to restructure a foreign company or bank?

This is a welcome decision from Richards J and is useful clarification that a scheme can even be used to restructure a foreign bank, as well as a foreign company. Those proposing schemes of foreign companies should still bear in mind the guidance given by Snowden J in Re Van Gansewinkel Groep BV [2015] EWHC 2151 (Ch), [2015] All ER (D) 241 (Jul) (see blog post: Jurisdiction in cross-border schemes) and it is interesting to note the careful attention Richards J pays here to some of those points, including proper evidence on the alternative to the scheme (here, temporary administration in Ukraine, followed by the sale of the bank or its assets and liabilities or its nationalisation or its liquidation). However, it is reassuring to see the courts are still willing to adopt a pragmatic and constructive approach in appropriate cases.

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

Further Reading

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Benefits of a scheme of arrangement compared to other processes

Schemes of arrangement—process and statutory framework

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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.