High Court: Restructuring Proposals are 'Insolvency Procedures'

High Court: Restructuring Proposals are 'Insolvency Procedures'

A new ruling of the High Court on the legal standing of the UK statutory reform programme could have an effect on the way these cases are treated by the European courts after Brexit.

The Court ruled that the consolidation proposals adopted by the 2020 Corporate Insolvency and Governance Act (CIGA) were 'insolvency procedures' for the purposes of the Lugano Convention. As the plan falls beyond the scope of the insolvency exemption in the Convention, the United Kingdom court had jurisdiction in violation of an exclusive jurisdiction provision in favor of the Swiss courts.

1. Restructuring efforts fell under the limits of the bankruptcy exclusion of the Lugano Convention, but recognition beyond the United Kingdom would need to be obtained by more difficult methods, such as an appeal to the appropriate international court.
2. Disstressed organizations should closely examine questions of authority and acceptance before implementing an effective restructuring tool.
3. Gategroup Assurance Ltd [2021] EWHC 304 (Ch)

The opinion of the High Court differs from the prior case law on arrangements where it has traditionally been held that they are not insolvency proceedings. However, the key distinction between the two processes in terms of eligibility is that a corporation may have financial problems in proposing a turnaround proposal.

Although this judgment is superseded or reversed, it will render it more challenging to recognize post-Brexit restructuring efforts in Europe. If the United Kingdom succeeds in re-adhering to the Lugano Convention, potential UK restructuring efforts would not be able to depend on it for legitimacy in the same manner as conventional agreements have been made, which ensures that recognition is likely to be a matter for the appropriate international court.

In view of the value of acceptance in ensuring that restructuring is binding on all stakeholders, troubled firms should carefully address those concerns before evaluating the implementation of an effective restructuring method.

The strategy for reform

The firm, gategroup Guarantee Limited ('the company'), is an SPV incorporated on 8 December 2020 and a wholly-owned affiliate of its Swiss parent company, gategroup Holding AG ('the parent'). The group, made up of its parent and more than 200 branches ('the business'), is the world's leading supplier of airline catering services. Its industry suffered greatly as a consequence of the downturn in air travel triggered by the Covid-19 pandemic.

The corporation proposed a turnaround strategy as part of a broader restructuring to solve the issues caused by the pandemic. The bill aimed to change the terms of its English law governing senior debt and the Swiss law governing bonds; and to increase the maturity period of each bond by five years.

Proposing a redemption scheme may have been a case of default under notes, which would have triggered cross-defaults if the owner of the bonds had done so. In order to avert this possibly fatal default, the corporation entered into an act of indemnity and contribution in which it assumed the obligations of the holders under the senior debt and the notes. It also entered into a donation payment arrangement whereby the creditors must finance the corporation and make contributions on the basis of the act of indemnity and obligation, since the company had just newly formed and had no assets of its own.

The effect of this system is to establish an agreement where all representations are made by a single party, who would then negotiate a consensus on the claims. This system was used in a variety of arrangements and was again endorsed in this case, despite what the court regarded as the "artificiality" of the framework.

Jurisdiction problems

Since the corporation is established in England and Wales, the bonds are subject to an exclusive authority provision in support of the Zurich courts. First, the English High Court had to determine whether it had jurisdiction under the Lugano Convention, which seeks to specify which national courts have jurisdiction in cross-border civil and commercial matters. The United Kingdom ceased to be a party to the Lugano Convention on 1 January 2021. However, the claim type in this case was released on 30 December 2020, indicating that the Lugano Convention was valid and continued to apply.

If the Lugano Convention were to apply to the merger arrangements of Part 26A of the Companies Act, the English court will have no authority to approve such a scheme to reform Swiss law bonds. As such, the corporation argued that the Lugano Convention has no application for a lawsuit under Part 26A because it was not a "civil and economic issue." Instead, the corporation pleaded that the scheme falls under the scope of the exemption provided for in the Lugano Convention on "bankruptcy, winding-up procedures for insolvent corporations or other legal entities, judicial arrangements, compositions and similar proceedings."

The Court ruled that consolidation proposals did not come under the scope of this exception.

Decision of the court

The court found that, on its face, the term "judiciary agreements, compositions and related cases" was adequately large to encompass the restructuring scheme of Section 26A. It nevertheless tried to interpret the wording, taking into account the applicable pre-legislative content.

The exclusion from bankruptcy of the Lugano Convention is similar to that of the Brussels Convention of 1968 and the Brussels Recast Regulation. The Court relied on this in accordance with the 'dovetailing' concept, which specifies that there should be no difference or overlap between the Brussels Recast Legislation and the EU Insolvency Procedures Regulation ('Insolvency Regulation'). The court considered that settlement arrangements fulfilled the elements of insolvency proceedings as specified in the Insolvency Regulation: joint proceedings; which are focused on insolvency and rescue rules, debt adjustment, reorganization or liquidation as their purpose; and which are controlled by the court.

Interested parties will also decide on the turnaround proposal of the corporation until a penalty proceeding before the judge. While the corporation wanted to convene a single board of stakeholders to decide on the turnaround agreement, the court ordered special meetings for senior shareholders and bondholders, since their interests under the plan were materially different.