Posts Tagged Restructuring

International Bank of Azerbaijan: Principle or practice of ‘modified universalism’ in (cram-down resulting from) insolvency proceedings.

[2018] EWHC 59 (Ch) International Bank of Azerbaijan is an excellent illustration of the practicality v the doctrine of modified universalism in international insolvency law, as well as of the binding force of precedent even in a changing world. Hildyard J first summarises at 2 the question raised as ‘whether the Court has power to grant a permanent moratorium or stay to prevent a creditor exercising its rights under a contract governed by English law in order to prevent that creditor enforcing its rights contrary to the terms of the foreign insolvency proceeding by which all creditors were, under the relevant foreign law, intended to be bound. If it does, the second question is whether in its discretion the Court should exercise that power.’

IBA has fallen into financial difficulties, obliging it to enter into a restructuring proceeding under Azeri law. The Foreign Representative, Ms Gunel Bakhshiyeva (hence also giving her name to the official case-name) had the High Court issue an order  recognising the Restructuring Proceeding as a foreign main proceeding. That recognition order imposes a wide-ranging moratorium preventing creditors from commencing or continuing any action against IBA or its property without the permission of the Court.  The plan proposed by IBA pursuant to the restructuring proceeding has been approved by a substantial majority at a meeting of creditors in Azerbaijan, sanctioned by the relevant Azeri court, and as a matter of Azeri law, the plan is now binding on all affected creditors, including those who did not vote and those who voted against the Plan: a classic cram-down.

Respondents in the case contend that the plan cannot bind them. In each case their relationship as creditor with IBA is governed by English law. They rely on the (1890) rule in Gibbs, which states that a debt governed by English law cannot be discharged by a foreign insolvency proceeding. Reformulating the essential issues at 19, Hildyard J summarises them as

(1) Whether the Court has jurisdiction to extend a moratorium imposed under the CBIR without limit as to time, and in particular, beyond the date on which the foreign proceeding will terminate; and

(2) If so, whether the Court should refuse to lift the continuing moratorium in favour of a creditor whose debt is governed by English law, so as to prevent that creditor from achieving a better return than that enjoyed by all of the company’s other creditors under a restructuring plan promulgated in the jurisdiction in which the company is registered and has its centre of main interests (“COMI”).

At 44 ff Hildyard J excellently summarises the rule, and the critical reception of it in recent scholarship, the latter suggesting it is not just out of touch with a less anglo-centric view of the world, but also inconsistent with the English courts themselves expecting foreign recognition of schemes of arrangement (SAs being of a corporate, not lex concursus nature but nevertheless fishing in the same waters as insolvency proceedings) conducted in the English courts with English law as the lex causae.

Having summed up all the arguments against the rule and yet recent continued application of it, Hildyard J at 58 dryly notes that his place in the hierarchy means that he cannot simply swipe the rule aside: he must apply it and simply assess whether it applies in the current circumstances. More particularly, whether at one and the same time the ‘rule’ may formally be observed by accepting the continuation of the rights which English law confers, and yet also the principles of modified universalism which the UNCITRAL Model Law gives effect to.

Lengthy discussion then follows of the pros and contras, with the High Court eventually finding no persuasive argument to set aside the rule, particularly not by the English application of the UNCITRAL model law. Counsel had argued that qualifying the model law as procedural as opposed to substantive law, would enable the Court effectively to sidestep Gibbs as precedent. However Hildyard J prefered to accept the full force of precedent rather than sweeping it aside by the procedural pretext.

The substantive rule clearly is ripe for reconsideration by the Court of Appeal.

(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 5, Heading 5.1.


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KA Finanz. The CJEU finds it does not need to entertain the corporate exception in European PIL and turns to EU corporate law instead.

Thank you, Matthias Storme, for alerting me late last night that judgment was issued in Case C-483/13 KA Finanz AG. The CJEU is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35. I have a little more on the background in previous posting and I expressed my disappointment with Bot AG’s Opinion here.

The Court, like the AG, justifiably rejects a great deal of the questions as inadmissible, mainly due to the secondary law, interpretation of which is sought, not applying ratione temporis, to the facts at issue. It then in essence simply turns to European company law, in particular Directive 2005/56, to settle the issue. Why exhaust oneself with analysis of the corporate exception, if a different piece of EU law exhaustively regulates the issue? At 56 ff

It is stated in Article 2(2)(a) of Directive 2005/56 that a merger by acquisition is an operation whereby one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, namely the acquiring company.

As regards the effects of such an operation, it is stated in Article 14(2)(a) of Directive 2005/56 that a cross-border merger brings about, from the date when the merger takes effect, the transfer of all the assets and liabilities of the company being acquired to the acquiring company.A merger by acquisition therefore entails the acquisition by the acquiring company of the company being acquired in its entirety, without extinguishing the obligations that a winding-up would have brought about, and, without novation, has the effect of substituting the acquiring company for the company being acquired as party to all of the contracts concluded by the latter. Consequently, the law which was applicable to those contracts before the merger continues to be applicable after the merger. It follows that EU law must be interpreted as meaning that the law applicable following a cross-border merger by acquisition to the interpretation of a loan contract taken out by the acquired company, such as the loan contracts at issue in the main proceedings, to the performance of the obligations under the contract and to how those obligations are extinguished is the law which was applicable to that contract before the merger.

(here: German law).

I appreciate the narrow set of facts upon which the CJEU holds allows one to distinguish. The spirit of the Court’s judgment in my view must however be what I have advocated for some time. Other than for a narrow set of issues immediately surrounding the very creation, life and death of the merged company, for which lex societatis applies, European private international law upholds lex contractus (often: lex voluntatis: the law so chosen by the parties) for the considerable amount of contractual satellites involving a merger and similar operations. Rome I is fully engaged for these contracts, including its provisions on third party impact of a change in governing law (this is relevant where the parties to the merger, decide to amend applicable law of the inherited contracts).


 (Handbook of) EU private international law, 2nd ed. 2016, Chapter 2, Heading, Chapter 3, Heading 3.2.2 .

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Schemes of arrangement: No scheming, and no hastily arranging, please. The High Court adjourns hearing in Indah Kiat.

I have reported before on various schemes of arrangement which the English Courts gave the go-ahead even when they concerned non-English companies (I should flag that in two of those, Apcoa and Van Gansewinkel, I acted as expert). Thank you Arie van Hoe for bringing Indah Kiat to my attention some weeks ago.

Indah Kiat is a Dutch BV seeking an order convening a single meeting of its scheme creditors to consider and if thought fit approve a scheme of arrangement pursuant to Part 26 of the Companies Act 2006. The application is strenuously opposed by one of the Scheme Creditors, APP Investment Opportunity LLC (“APPIO”), which contests the jurisdiction of the court to entertain or sanction the Scheme. Such opposition is different from the other schemes which I mention in my previous postings.

In the first instance, APPIO simply seeks an adjournment of the Scheme Company’s application on the grounds that inadequate notice has been given to Scheme Creditors. However, it also raises a significant number of other issues concerning the adequacy of the evidence and disclosure by the Scheme Company, together with questions concerning the procedure and scope of the court’s jurisdiction to sanction creditor schemes for foreign companies in relation to debts governed by foreign law.

The Scheme Company is a special purpose vehicle which was incorporated for financing purposes in the Netherlands. It sought the COMI way to enable English courts to obtain jurisdiction over the scheme. English jurisdiction, required to carry out the Scheme, usually rests on either one of two legs: COMI, or making English law the governing law of the underlying credit agreements (if necessary by changing that governing law en route).

The COMI route to jurisdiction in many ways defies the proverbial impossibility of having one’s cake and eating it. For the establishment of a company’s centre of main interests, the courts and practice tend to refer to the EU’s Insolvency Regulation. Yet that schemes of arrangement do not fall under the Insolvency Regulation is a crucial part of the forum shopping involved in attracting restructuring advice to the English legal market. This is especially so for the aforementioned second route to jurisdiction (a change in governing law). however it is also true for the first form. Snowden J refers to that at para 85-86 of his judgment.

Indah Kiat has effected its change of COMI (rebutting the presumption of COMI being at its registered seat) by notifying its creditors via a number of clearing houses for the Notes concerned. APPIO contest that this notification sufficed for change in COMI. There are not enough relevant facts in the judgment to consider this objection thoroughly, however APPIO’s misgivings would not seem entirely implausible.

Snowden J notes that whilst protesting the jurisdiction, in the first instance APPIO simply seeks an adjournment of the convening hearing on the grounds that inadequate notice has been given of it to Scheme Creditors. It contends that given the complex nature of the Scheme and the factual background, there is no justification for an urgent hearing of the application. The Court agreed and the convening hearing (different from the sanction hearing, which follows later) was adjourned until 3 March. Snowden J further gave extensive argument obiter as to why the Scheme’s information was insufficient in the form as it stood at the hearing.

He then revisits (82 ff) the jurisdictional issue, which I have already signalled above: what role exactly COMI should play, how the Brussels I recast intervenes, what the impact is of likely recognition of the sanction (if any) in Indonesia, The Netherlands, and the US; and what if any role the relevant US judgments in the case should play: there will be plenty of points for discussion at the convening and sanction hearing. (I mentioned above that the convening hearing was scheduled around 3 March; I have not heard from the case since however if anyone has, please do let me know).

I do not think Indah Kiat has made the jurisdictional hurdle higher for Schemes of Arrangement involving foreign companies. Rather, the fierce opposition of an important creditor has brought jurisdictional issues into sharper perspective than had been the case before.


(Handbook of) EU Private International Law, Chapter 5, Heading 5.4.2).




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Winter has truly arrived. Bot AG skates around lex societatis issues in KA Finanz.

In Case C-483/13 KA Finanz AG, the CJEU is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35. I have a little more on the background in previous posting. The Opinion itself has a complete overview of the issues at stake.

I suggested in my previous posting that lest the complete file posted with the Court give more detail, quite a few of the preliminary questions might be considered inadmissible due to a lack of specification in the factual circumstances.

Bot AG, who opined yesterday (at the time of posting, the English version of the Opinion was not yet available), has considerably slimmed down the list of questions eligible for answer, due to the (non-) application ratione temporis of secondary EU law at issue: this includes the Rome I Regulation. However he also, more puzzlingly, skates around the question concerning the application of the corporate exception of the 1980 Rome Convention, despite the judgment which is being appealed with the referring court, having made that exception the corner piece of its conflicts analysis. In particular, it considered that the consequences of a merger are part of the corporate status of the company concerned and that the transfer of assets within the context of a merger consequently need to be assessed viz-a-viz the company’s lex societatis: Austrian law, and not, as suggested by claimants, German law as the lex contractus relevant to the assets concerned (bonds issued by the corporate predecessor of the new corporation).

The AG focuses his analysis entirely on the specific qualification of the contract at issue (conclusion: sui generis), and on Directive 2005/56. In paras 47-48, he suggests that contractual obligations of the bank’s predecessor, per Directive 2005/56, are transferred to the corporate successor, including the lex contractus of those agreements. One can build an assumption around those paras, that the AG suggests a narrow interpretation of the corporate exception to the Rome Convention, etc. However it is quite unusual for one to have to second-guess an AG’s Opinion. Judicial economy is usually the signature of the CJEU itself, not its Advocate Generals.

I am now quite curious what the CJEU will make of it all.


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KA Finanz: On the ‘corporate exception’ of European private international law

In Case C-483/13 KA Finanz AG, the ECJ is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35.

(Creditor protection, incidentally, was also addressed in C-557/13 Lutz, judgment held last week, within the context of insolvency proceedings. I shall have a posting on that case soon).

Reuters tells me ‘KA Finanz was split off from nationalised lender Kommunalkredit in an attempt to secure a sustainable future for the rest of the public sector finance specialist firm following the global financial crisis’. KA Finaz therefore is what is generally referred to as a ‘Bad Bank’.

The referring court, Austria’s Oberster Gerichtshof, would seem to be hedging its bets on whether the Rome Convention or the Regulation applies to the contract, and ditto for the 1978 Directive or the 2011 Directive aforementioned. The file may reveal more factual detail than the application as published, however the questions as phrased (namely quite speculatively rather than file related) probably will run into trouble on the admissability front, I imagine.

At the time of adoption of the convention, the Giuliano Lagarde Report went into a bit more detail as to what is and is not excluded:

Confirming this exclusion, the Group stated that it affects all the complex acts (contractual administrative, registration) which are necessary to the creation of a company or firm and to the regulation of its internal organization and winding up, i. e. acts which fall within the scope of company law. On the other hand, acts or preliminary contracts whose sole purpose is to create obligations between interested parties (promoters) with a view to forming a company or firm are not covered by the exclusion.

The subject may be a body with or without legal personality, profit-making or non-profit-making. Having regard to the differences which exist, it may be that certain relationships will be regarded as within the scope of company law or might be treated as being governed by that law (for example, societe de droit civil nicht-rechtsfahiger Verein, partnership, Vennootschap onder firma, etc.) in some countries but not in others. The rule has been made flexible in order to take account of the diversity of national laws.

Examples of ‘internal organization’ are: the calling of meetings, the right to vote, the necessary quorum, the appointment of officers of the company or firm, etc. ‘Winding-up’ would cover either the termination of the company or firm as provided by its constitution or by operation of law, or its disappearance by merger or other similar process.

At the request of the German delegation the Group extended the subparagraph (e) exclusion to the personal liability of members and organs, and also to the legal capacity of companies or firms. On the other hand the Group did not adopt the proposal that mergers and groupings should also be expressly mentioned, most of the delegations being of the opinion that mergers and groupings were already covered by the present wording.

This explanation does not necessarily of course clarify all. For instance, the Report would seem to suggest that ‘mergers and groupings’, at issue in KA Finanz, are covered by the exception. Presumably, given the nature of the remainder of the exception, this is limited to the actual final agreement creating the JV or merged company, and not to the complex set of agreements leading up to such creation, such as Memoranda of Understanding (MOUs), or non-disclosure agreements (NDAs). Along those lines and without at this time having revisited relevant scholarship outside my own, I would suggest creditor protection is not covered by the exception.

The Gerichtshof also seeks clarification on whether there areany requirements concerning the treatment of mergers in relation to conflict of laws to be inferred from European primary law such as the freedom of establishment under Article 49 TFEU, the freedom to provide services under Article 56 TFEU and the free movement of capital and payments under Article 63 TFEU, in particular as to whether the national law of the State of the outwardly merging company or the national law of the target company is to be applied?’ Again, without having seen more reference to fact in the actual referral, this question to me seems far too academic to prompt the ECJ into entertaining it.

The Court’s ledger shows the application as having been lodged on 31 October 2014. That means some movement on it ought to be expected soon.


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Apcoa scheme of arrangement: Convening hearing gives firm but considered go-ahead for English Scheme of Arrangement following change in governing law

Postscript January 2016 in Codere the High Court at an earlier stage had expressed its concern at the ‘extreme forum shopping going on (creating a special purpose vehicle with COMI in England but no prior connection to the territory) however for reasons expertly summarised by Iain White, Newey J eventually sanctioned. (The application was made by Codere Finance (UK) Ltd., an English incorporated subsidiary of Codere SA, a Spanish company. Codere SA is the ultimate parent of a group of companies that carries on business by way of gaming and similar activities in Latin America, Italy and Spain. Codere SA’s shares are listed on a number of Spanish stock exchanges).

Postscript July 2015 Forum shopping possibilities were further expanded in Van Gansewinkel, which had the additional peculiarity that the only territorial link with England was the establishment of (only) one creditor there.

Postcript 8 May 2015 in DTEK, a challenge was maded by one disgruntled creditor to the change of governing law from New York law to English law. However reportedly this challenge was withdrawn in the nick of time, leaving this point as far as I am aware at this stage unaddressed by the English courts. (Not that in my view that change ougt to be problematic). (Update 11 June: judgment is now available here).

Postscript 25 November 2014. Hildyard J’s judgment in both convening and sanction hearings was released 19 November 2014, with leave to appeal granted. (Hearing at the CA is scheduled for December 2014).

The title of this piece is as considered as Hildyard J’s approval of the application for an order to convene scheme meetings for the purpose of considering, and if thought fit approving, schemes of arrangement, nine in all, pursuant to Part 26 of the Companies Act 2006, in a scheme of arrangement relating to the Apcoa group of companies.

At the time of writing Bailii did not yet feature a transcript of the hearing however I have a copy for those interested. Hildyard J aptly lists the potential booby traps given the international context of the case (the Scheme Companies comprise two English incorporated companies, a holding company and another company incorporated in Germany, and five other subsidiaries incorporated elsewhere in Europe): jurisdiction under English private international law (not all companies having COMI in England); related to this, establishment of jurisdiction only following a change on governing law of the initial finance agreements, approved by a majority but not all creditors; and, as a related pre-condition to English approval, the likelihood of recognition and enforcement of the Scheme, once adopted, elsewhere in the EU.

The application to convene hearings was approved, justifiably. Schemes of arrangement are, arguably, excluded from the Insolvency Regulation. Recognition and enforcement much facilitated by the Brussels I Regulation. The one big sticky point in any future challenge is likely to be the change in governing law which enabled English jurisdiction in the first place. This was not sub judice in the current proceedings and the scheme at this stage is not opposed by any of the creditors.

Apcoa is not insolvent; it is being restructured. The case highlights the relevance of the ongoing amendments to the Insolvency Regulation. (At the time of writing waiting for first reading by Council; not likely to appear any time soon, given the European elections). The jury is out (and case-law increasing; see e.g. Zlomrex International) whether it would be better for Schemes of Arrangement to be included in the Annex to the Insolvency Regulation. In my view cover by Brussels I is much preferred.

No doubt to be continued.


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Get thee an amended Insolvency Regulation – The ECJ on restructuring in Bank Handlowy

In Bank Handlowy, The ECJ has arguably done the most it can for restructuring operations, within the constraints of the current Insolvency Regulation. The review of the Insolvency Regulation is in full swing, and the position of restructuring proceedings is but one of the many interesting challenges. From the very start of the negotiation of the Regulation (and its antecedents), the position of restructuring was discussed. Limiting the Regulation to winding-up proceedings would have had the distinct advantage of limiting the spread of opened procedures, ditto for applicable laws. It would however have cut out restructuring entirely from the Regulation, which would have been unacceptable given its large impact in practice. A ‘compromise’ was found in only allowing the Member State of the debtor’s COMI (Centre of Main Interests) to open main proceedings (which could be either restructuring or winding-up), and to limit proceedings in other Member States to winding-up proceedings vis-a-vis local assets.

The compromise works mathematically only, however: it may limit the amount of proceedings; it does nothing to address the complex overlap.

The EC has summarised the facts in Bank Handlowy as follows:  Christianapol is a Polish company specialised in the production of furniture. It is part of the Cauval Industries Group with its head office in France to which it supplies all its production. The group suffered from the recession and went into financial difficulties. In an attempt to rescue the group, several members, including Christianapol, filed for sauvegarde proceedings in France. These proceedings aim at permitting solvent companies to restructure themselves under court protection at a pre-insolvency stage. They are covered by the Regulation although concerns have been raised as to whether they comply with the definition One of the Polish creditors of Christianapol, Bank Handlowy, applied for secondary proceedings in Poland where the company’s furniture factory was located. The winding-up of the factory would have prevented the successful implementation of the restructuring plan elaborated in the French sauvegarde proceedings. This problem prompted the Polish court to seek a preliminary ruling from the CJEU.

Of note is that all of Christianopol’s assets are located in Poland; this does not prevent COMI from being in France.

The ECJ first of all confirms that the Member States master the inclusion, or not, of proceedings in the Regulation: when a procedure is included in the Annex, upon proposal by the Member State, the EU is not to second-guess whether these are ‘true’ insolvency proceedings. ‘Insolvency’ may be a substantial condition for the Regulation to apply, however it is not defined by it. Further, even if the main proceedings have a protective purpose (here: a procedure de ‘sauvegarde’), that in itself does not prevent the opening- of secondary, necessarily winding-up proceedings in another Member State. This may evidently sink the ‘restructuring’ operation in the Member State of COMI.  However – and this is where the Court pushes the boat out – the ECJ flags the various options available to the liquidator to influence the secondary procedure: at para 61 ff:

‘The liquidator in the main proceedings thus has certain prerogatives at his disposal which allow him to influence the secondary proceedings in such a way that the protective purpose of the main proceedings is not jeopardised. Under Article 33(1) of the Regulation, he may request an order for stay of the process of liquidation for up to three months, which may be continued or renewed for similar periods. Under Article 34(1) of the same regulation, the liquidator in the main proceedings may propose closing the secondary proceedings with a rescue plan, a composition or a comparable measure. Article 34(3) provides that, during the stay of the process of liquidation under Article 33(1) of the Regulation, only the liquidator in the main proceedings or the debtor, with the liquidator’s consent, may propose such measures. The principle of sincere cooperation laid down in Article 4(3) EU requires the court having jurisdiction to open secondary proceedings, in applying those provisions, to have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, which (…)  aims to ensure efficient and effective cross-border insolvency proceedings through mandatory coordination of the main and secondary proceedings guaranteeing the priority of the main proceedings.’

Any further than this and the Court would effectively be re-writing the Regulation. One of the main issues under consideration in the Insolvency package will be to what extent the EU wants to and can harmonise the lex concursus in itself.


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