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Hopes for recognition in the EU dashed? Restructuring Plans under Part 26A of the Companies Act 2006 are insolvency proceedings under the Lugano Convention

A recent judgment in Re Gategroup Guarantee Limited (“Gategroup”) held that arrangements under Part 26A of the Companies Act 2006 (“Restructuring Plans”) are not enforceable under the Lugano Convention. This is a significant judgment post-Brexit and this article by Emma Burroughs briefly summarises the judgment and the issues arising from it.

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Restructuring Plans

Restructuring Plans were inserted into the Companies Act 2006 last year by the Corporate Insolvency and Governance Act 2020. They are based on schemes of arrangement (under Part 26 of the Companies Act), which were already in existence. In essence, Restructuring Plans can be used where:

  1. the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and
  2. a compromise or arrangement is proposed between the company and the creditors or members and the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties mentioned in a) (together the “Financial Difficulty Requirements”).

In contrast, schemes of arrangement do not have Financial Difficulty Requirements. Additionally, the directors only require approval from a 75% majority in value of each voting class, without the additional requirement of a simple majority in number of creditors, as required in schemes of arrangement. A significant difference between the two procedures is the “cross-class cram down” provision of Restructuring Plans, which means that the plan can be approved by the court even where only one class has voted in favour of it, provided it can be shown that the dissenting classes of creditors will be no worse off than if the next best alternative were to occur.

Gategroup

Gategroup is the world’s largest provider of onboard catering in the aviation sector and supplies many major airlines. With the aviation sector hard hit by the Covid-19 pandemic and restrictions on international travel, the group saw a massive decline in business and that led them to encounter serious financial difficulties. As a result, the group is undergoing restructuring and as part of that sought to amend and extend its bond liabilities.

The bonds had an exclusive jurisdiction clause in favour of the courts of Zurich. It therefore fell to the English court to decide whether it had jurisdiction by way of the Lugano Convention. Under the Lugano Convention, the courts of member countries have jurisdiction to settle all proceedings relating to particular matters, unless the parties agree otherwise. One of the matters that are excluded from the Lugano Convention are bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings” (the “Exception”) (Article 1(2)(b)). If the court found that the Lugano Convention applied to Restructuring Plans, then it would not have jurisdiction, as the exclusive jurisdiction clause would bite.

The Judgment

In a surprising decision, the judge found that the Restructuring Plan fell within the Exception to the Lugano Convention.  Schemes of arrangement had previously been held to fall outside of the Exception. However, the judge found that Restructuring Plans were insolvency proceedings partly by virtue of the Financial Difficulty Requirements which applied to them.   Since Restructuring Plans were within the Exception, the English court had jurisdiction, despite the exclusive jurisdiction clause in favour of Switzerland.

However, this decision has wider ramifications.  Having found that the Restructuring Plan was an insolvency proceeding, that meant that it also fell within the identically worded insolvency exception in the Recast Brussels Regulation (the EU regulation on jurisdiction and the recognition and enforcement of judgments).  That in turn meant that Restructuring Plans fell within the EU Insolvency Regulation.

What is the significance of the judgment?

In this case, the Lugano Convention still applied as the proceedings commenced before the UK left the Convention on 1 January 2021 as a result of Brexit.  Although the UK has applied to re-join the Convention, it is not yet clear whether the EU will permit the UK to re-join.  If it does re-join, the Lugano Convention had been touted as a means by which schemes of arrangement and Restructuring Plans could be recognised in EU Member States post-Brexit but this judgment would prevent this as far as Restructuring Plans are concerned. This means that the recognition of Restructuring Plans in other European countries may now depend on national rules and will not have automatic effect across the EU.

Debtors will now need to take this judgment into account in considering which restructuring procedure they should use and it is just one example of how the consequences of Brexit will complicate the insolvency landscape for years to come.

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Emma Burroughs

Trainee Solicitor

emma.burroughs@collyerbristow.com