Alex Rogan Partner
Another milestone in the development of the English scheme as the international restructuring tool of choice
The English scheme of arrangement sits alongside the US Chapter 11 as the ‘go to’ international restructuring tool of choice. Like Chapter 11, it is used to implement financial restructurings for overly-leveraged companies (where local restructuring processes are not able to deliver the restructuring). The English scheme, like its US cousin, has extremely permissive jurisdictional requirements. This has allowed a plethora of non-English companies to benefit from it. US-centric international groups, however, have tended to rely upon Chapter 11 as their restructuring tool of choice. This potentially changed on 10 September 2019, when the English court sanctioned a scheme for Syncreon, a US-headquartered group. This restructuring brings into sharp relief some of the perceived advantages of the English scheme - particularly regarding the relative costs of the two processes – and is a reminder to the energy sector to consider the benefits of implementing financial restructurings by means of the English scheme.
Overview of the English scheme
The English scheme, set out in the Companies Act 2006, Part 26, is a very flexible restructuring tool, which is an effective means of implementing a restructuring and avoiding the negative impact of an insolvency process. In brief, it provides for a scheme company to agree an arrangement with its creditors, provided the requisite majorities of each class of creditors and/or members affected by the scheme votes in favour of it. There are few limits as to the scope of such arrangement. Provided an arrangement is capable of being agreed on a consensual contractual basis, it is likely capable of being implemented through a scheme. An important element in relation to the flexibility of the scheme is that the scheme company is largely free to choose which creditors are subject to the scheme. In practice, this means that schemes are often used to compromise the claims of secured financial creditors while leaving trade creditors whole, allowing the scheme company to maximise value by protecting its business operations while right-sizing its capital structure.
Scheme process - convening hearing
The court oversees the scheme process at two separate scheme hearings. At the first hearing, known as the convening hearing, the court considers the proposed formulation of the classes of creditors and whether the relevant scheme jurisdictional requirements are capable of being satisfied. It does this before ordering the convening of scheme meetings of the relevant classes of creditors.
Scheme creditors are notified in advance of the convening hearing and are ordinarily expected to bring any challenge to the formulation of the scheme classes at this stage. Scheme creditors are classed together on the basis that their rights against the scheme company are sufficiently similar that they can consult together with a view to their common interest. This involves a comparison of their ‘rights in’ - the return a scheme creditor could expect if the scheme is not implemented - and their ‘rights out’ - the return a scheme creditor could expect in the event the scheme is implemented.
In a situation where the scheme company is a foreign company, the court will need to carefully consider whether it has scheme jurisdiction. There are a number of factors that it will consider (which are beyond the scope of this note), but the key point is that it is necessary to demonstrate that the scheme company has a ‘sufficient connection’ with England. These jurisdictional requirements are very permissive, allowing for scheme jurisdiction where the scheme company has no connection save for English law-governed finance documents. Frequently, and as was the case with the Syncreon scheme, the governing law is amended from its original foreign law to English law prior to the scheme, pursuant to the majority amendment provisions under the relevant documents, to allow the scheme company to establish a “sufficient connection” and scheme jurisdiction.
Integral to the question of ‘sufficient connection’ is the question of whether the restructuring implemented by means of the scheme is likely to be recognised in the home jurisdiction of the scheme company and will therefore have a substantial effect. This can generally be shown to be the case where the scheme is being used to vary English law-governed rights.
Scheme process - scheme meeting(s)
The scheme must be approved by the requisite majority at separate scheme meetings of each class of scheme creditor. A scheme requires approval by at least 75% in value of each class of the creditors who vote on the scheme, being also at least a majority in number of each class. This means the scheme is an effective implementation tool when the equivalent amendment provisions under the financing documents exceed this scheme approval threshold. This is generally the case for the type of material amendments that are required to implement a balance sheet restructuring.
Scheme process - sanction hearing
At the second hearing, known as the sanction or fairness hearing, the court considers whether the statutory requirements have been followed in the holding of the scheme meetings and any issues related to the fairness of the proposed scheme. Provided there has been no oppression of the minority, scheme creditors are not voting for a collateral purpose and all relevant issues have been disclosed so that the scheme creditors are in a position to make an informed decision on the merits of the scheme proposal, then the court will not second guess the commercial rationale of the scheme. The court accepts that the scheme creditors are better placed than it to determine the merits of the economics of the scheme proposal.
The restructuring of Syncreon, a US-headquartered group, pursuant to an English scheme represents a substantial development in terms of the scheme competing as the restructuring implementation tool of choice for a US headquartered business, and in part reflects the growing concerns around the cost of Chapter 11, which can be very expensive. The scheme of arrangement is an ever-evolving tool which has been around for over 150 years. Its development in the last decade as the international restructuring tool of choice has been quite remarkable as a series of decisions have led to permissive jurisdictional requirements which have turned it into a truly international restructuring tool that has an important role to play in the energy sector. Chapter 11 is also a very effective restructuring tool, and the scheme versus Chapter 11 implementation decision is important to consider carefully in the context of international restructurings in order to ensure that stakeholder value is optimised when the relevant local restructuring processes do not have the necessary tools.
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