Which governing law? Restructuring Apcoa's debt

17 Apr 2014

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Europe’s largest car park operator, Apcoa, has won an extension to the maturity date of its senior debt through an English scheme of arrangement. Phillip Hertz and Jeanette Best of Clifford Chance LLP, who represent the parent company of the group, discuss the process.

Original news

Apcoa Parking (UK) Ltd & others [2014] EWHC 997 (Ch), [2014] All ER (D) 49 (Apr)

The Chancery Division granted application for an order to convene scheme meetings in respect of Apcoa Parking Holdings under the Companies Act 2006, Pt 26 (CA 2006).

What is the background to this case?

Jeanette Best (JB): APCOA’s principal jurisdictions of operation are in the UK, Austria, Denmark, Germany, Norway and Belgium. The group has a facilities agreement in place in the amount of €660m and £33.83m, which was originally due to mature on 25 April 2014. The group has been seeking to restructure its obligations under the facilities agreement over a period of time, and, while they’ve made significant progress in that endeavour, the process hasn't finished. Completion of the negotiations and implementation of the restructuring was not on course to be completed by 25 April 2014. As a result, the Group sought to implement schemes of arrangement in respect of each borrower under the facilities agreement to extend the maturity date to 25 July 2014. The terms of the schemes also include a mechanism by which the maturity date can be further extended to, but no later than, 25 October 2014.

A scheme of arrangement is a legislative process set out in CA 2006, Pt 26. The aim of the procedure is to implement an agreement without the need to obtain the consent of all of the parties you are seeking to bind into such agreement. In the present case, under the terms of the facilities agreement, the consent of all lenders would have been required to extend the maturity date beyond 25 April 2014. The scheme allowed Apcoa to pursue an extension without getting the consent of all lenders. Instead, it only needed to secure the consent of a majority in number and 75% in value of the lenders under the facilities agreement. Only those lenders who were present and voting at the meetings counted in determining the outcome of the vote. As such, lenders who had historically been apathetic to consent and waiver requests did not derail the process.

The scheme of arrangement process includes two court hearings. First, there is a hearing in order to obtain the court’s approval to convene meetings of affected creditors to consider and vote upon the proposed scheme. At that hearing, the court will consider whether creditors should be separated into classes for the purpose of conducting the vote and whether there is any obvious impediment to the proposed scheme ultimately being approved. The second hearing is to obtain the court’s approval of the proposed scheme. The court will consider whether it has jurisdiction to sanction the scheme and, if so, whether it is fair for it to actually do so.

What novel questions arose regarding cross-border schemes?

JB: Typically the court won’t exercise its authority in respect of a scheme being proposed by a company if it feels that the company isn't sufficiently connected with England. Apcoa had nine companies proposing schemes of arrangement, only two of which were incorporated in this jurisdiction. In respect of the foreign incorporated Apcoa companies, it was necessary to demonstrate a sufficient connection to the English jurisdiction by other means. Had Apcoa’s facilities agreement been governed by English law and subject to the jurisdiction of the English courts, then that should have been enough to satisfy the English court that the sufficient connection test had been satisfied. However, the novel issue arising in this case, was that the facilities agreement wasn't initially governed by English law. It had been governed by German law and subject to the jurisdiction of the German courts.

Phillip Hertz (PH): The governing law and jurisdiction clause in the facilities agreement was amended from German law to English law by majority lender consent. The question which arose was whether the change to English law and the English courts created a sufficient connection for the purposes of the proposed schemes thereby creating an additional ‘gateway’ to the scheme process. Previous scheme cases, like Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] All ER (D) 62 (May), Primacom Holding GmbH v a group of the senior lenders & Credit Agricole [2011] EWHC 3746 (Ch), Tele Columbus, SEAT, Vivacom etc were all able to demonstrate sufficient connection with England on the basis of documentation that had, from the beginning, been governed by English law.

What were the findings on classes?

JB: The facilities agreement included by a priority senior facility and a second lien facility in respect of the German parent company. We managed to persuade the court that the priority senior lenders and second lien lenders ought to vote together in the same class (notwithstanding their different ranking in the intercreditor agreement). This was unusual because different ranking creditors typically vote in separate classes. The court was persuaded on the argument for a couple of reasons. First, the nature of compromise proposed in the schemes affected both types of lender equally, and, second, due to the way German insolvency law works, German law wouldn’t have recognised the different ranking between the priority senior lenders and the second lien lenders. In the event of a failure of the proposed schemes, German insolvency would have been the alternative to the scheme for the German parent. The court’s determination on this matter is important because it shows that sometimes you can require lenders to vote together, even when, on first analysis, you might think that they ought to vote separately.

What trends are arising in this area of law?

PH: Practitioners in other jurisdictions are now looking at this process very closely. This judgment means that, if a foreign company wishes to implement an English scheme of arrangement, it does not need to move its jurisdiction of incorporation or centre of main interests to England. All it will need to do is change the governing law and jurisdiction applicable to the contract governing the obligations which are to be the subject of the scheme. However, this assumes that such change will be recognised in all relevant jurisdictions, in particular, in the jurisdiction originally incorporated into the contract.

What does this mean in practice for restructuring and insolvency professionals considering cross-border schemes?

PH: Ultimately, if you have the right advice, it is possible to use schemes in all sorts of circumstances. It is probably one of the most flexible tools in English law. Following this case, foreign companies can scheme obligations arising under contracts even where such contracts were not, at inception, governed by English law. This is new even by the standards of recent cases like Rodenstock.