The insolvency boom year of 2008 did not see any major developments on the use of schemes of arrangement as a restructuring tool. But the law on scheme of arrangement is probably unlikely to remain stagnant for long. Now contained in Pt 26 of the Companies Act 2006 (‘CA 2006’), the scheme of arrangement provisions are virtually unchanged from the former Part XIII of the Companies Act 1985. It is high time to review the court’s jurisdiction to sanction a scheme.

Jurisdiction to sanction a scheme is dependent on winding up jurisdiction

Section 899(1) of CA 2006 provides that if a majority in number representing 75 per cent in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the relevant meeting, agree a compromise or arrangement, ‘the court’ (as defined in s 1156) may sanction the compromise or arrangement.

Only the scheme of a company within the meaning of s 895 of CA 2006 may be sanctioned. Other than in the case of reconstruction or amalgamation, s 895(2)(b) provides that ‘company’ means any company liable to be wound up under the Insolvency Act 1986 (‘IA 1986’).

The court’s jurisdiction to wind up the company in question is essential. This is made clear in the definition of ‘the court’ in s 1156. In England, ‘the court’ means the High Court or a county court, subject to the proviso in s 1156(2) in these terms: ‘The provisions of the Companies Acts conferring jurisdiction on “the court” … have effect subject to any enactment or rule of law relating to the allocation of jurisdiction or distribution of business between courts in any part of the United Kingdom.’ The significance of the proviso in s 1156(2) in this context becomes apparent when one takes account of ss 117 and 120 of IA 1986. Sections 117 and 120 provide that only English courts may wind up English registered companies and only Scottish courts may wind up Scottish registered companies. In relation to foreign companies, the English court’s winding up jurisdiction is to be found in s 221(1) of IA 1986.

The court’s jurisdiction to sanction a scheme hinges on its jurisdiction to wind up the scheme company in question. Thus an English court may not sanction a scheme of arrangement proposed by a Scottish registered company.

The impact of EU/EEA legislations on the English court’s winding up jurisdiction

The English court’s winding up jurisdiction under IA 1986 has to be considered in conjunction with panoply of EU/EEA measures, in particular the following:

·          Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (‘Judgments Regulation’).

·          Council Regulation (EC) 1346/2000 on insolvency proceedings (‘EU Insolvency Regulation’).

·          Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings (‘Insurers Directive’).

·          Directive 2001/24/EC on the reorganisation and winding up of credit institutions (‘Credit Institutions Directive’).

The Judgments Regulation is relevant only if one is concerned with a solvent winding up. The unanimous voice of authorities is that solvent liquidation is within art 22(2) of the Judgments Regulation which provides that, ‘in proceedings which have as their object … the dissolution of companies …, the courts of the Member State in which the company … has its seat’ shall have exclusive jurisdiction.

Article 22(2) of the Judgments Regulation thus conditions the English court’s jurisdiction over a solvent winding up and by extension the English court’s jurisdiction over a solvent scheme of arrangement. For a detailed review of the impact of art 22(2) of the Judgments Regulation on solvent schemes promoted by EEA insurers, see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145. This same analysis applies to companies subject to the Brussels and Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.

The English court’s winding up jurisdiction to wind up an insolvent company and hence to sanction a scheme promoted by an insolvent company is as follows.

Companies subject to the EU Insolvency Regulation

To fall within the scope of the EU Insolvency Regulation, the company in question must have its centre of main interests (‘COMI’) within the EU (apart from Denmark) and must be not be a credit institution, an insurance undertaking, an investment undertaking holding funds or securities for third parties, or a collective investment undertaking. Where the EU Insolvency Regulation applies, the English court has jurisdiction under IA 1986 to wind up a company only if the company has its COMI or establishment (as defined in the EU Insolvency Regulation) in the UK.

Accordingly, the English court has jurisdiction to sanction only a scheme promoted by a company having either its COMI or an establishment in the UK.

Admittedly, the above proposition does not sit well with the decision in Re DAP Holding [2005] EWHC 2092 (Ch); [2006] BCC 48. However, the reasoning in DAP is most suspect: it appears inconsistent with a prior decision in Re Drax Holdings [2003] EWHC 2743 (Ch); [2004] 1 WLR 1049 and has been apparently repudiated by a subsequent decision in Re Sovereign Marine & General Insurance [2006] EWHC 1335 (Ch); [2007] 1 BCLC 228. For a detailed explanation, see L C Ho, ‘Schemes for foreign insurers – how the court got it so wrong: Re DAP Holding NV’ (2005) 21 IL&P 171, and L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Insurers Directive

The Insurers Directive was implemented in the UK via the Insurers (Reorganisation and Winding Up) Regulations 2004 (‘Insurers Regulations’).

Article 8(1) of the Insurers Directive provides that ‘[o]nly the competent authorities of the home Member State [are] entitled to take a decision concerning the opening of winding-up proceedings with regard to an insurance undertaking, including its branches in other Member States’. Accordingly, reg 4(1)(a) of the Insurers Regulations provides that ‘a court in the United Kingdom may not, in relation to an EEA insurer or any branch of an EEA insurer, make a winding up order pursuant to s 221 of [IA] 1986’.

However, reg 5 of the Insurers Regulations provides that ‘[f]or the purposes of s 425(6)(a) of the Companies Act 1985 …, an EEA insurer or a branch of an EEA insurer is to be treated as a company liable to be wound up under [IA] 1986 … if it would be liable to be wound up under that Act … but for the prohibition in reg 4(1)(a)’. Although reg 5 has not been updated to reflect CA 2006, its intention is to ensure that the Directive would not prevent EEA insurers from promoting an English scheme of arrangement. While reg 5 does not prescribe the jurisdictional basis for winding up an insolvent EEA insurer, the court’s winding up jurisdiction is to be found in s 221 of IA 1986.

Therefore, the English court should have jurisdiction to sanction a scheme promoted by an insolvent EEA insurer, provided reg 5 of the Insurers Regulations is not ultra vires the Insurers Directive. The court in Re Sovereign Marine & General Insurance wrongly refused to rule on this vires issue: see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Credit Institutions Directive

The Credit Institutions Directive was implemented in the UK via the Credit Institutions (Reorganisation and Winding up) Regulations 2004 (‘Credit Institutions Regulations’). What is said above about the Insurers Directive and the Insurers Regulations applies mutatis mutandis here. Therefore, the English court has jurisdiction to sanction a scheme promoted by an insolvent EEA credit institution, subject to possible ultra vires challenges.

The court’s jurisdiction to sanction a scheme against a dissenting class of stakeholders

Section 899(3)(a) of CA 2006 provides that ‘[a] compromise or agreement [sic] sanctioned by the court is binding on all creditors or the class of creditors or on the members or class of members (as the case may be)’. Some argue that the effect of s 899 is that the court may never sanction a scheme compromising the rights of a dissenting class of stakeholders.

However, case-law suggests that the court may indeed sanction a compromise even if a class of creditors or shareholders vote against the compromise, provided the dissenting class of stakeholders have no economic interest in the company.

One begins with the decision in Re Tea Corporation [1904] 1 Ch 12. There a scheme was proposed in a liquidation whereby the ordinary shareholders were to be given shares in a new company in place of their existing shares. The shareholders as a class voted against the scheme; the other stakeholders voted for it. As the financial state of the company was that the ordinary shareholders had no economic interest in the company’s assets, the court held that the shareholders’ dissent could be disregarded when sanctioning the scheme. The decision seems to contain two strands of reasoning.

Lord Justice Romer and Lord Justice Stirling appeared to rest their reasoning on treating the scheme as only an arrangement as between the company, the creditors and the preference shareholders such that the new shares offered to the ordinary shareholders were in the nature of a gift of which the ordinary shareholders could not complain. However, when dealing with the argument that the scheme was rendered defective by the ordinary shareholders’ dissent, Lord Justice Vaughan Williams held that ‘if you have the assent to the scheme of all those classes who have an interest in the matter, you ought not to consider the votes of those classes who have really no interest at all’ ([1904] 1 Ch 12, 23).

Some have argued that Tea Corporation does not stand for the proposition that a scheme may modify the rights of a dissenting class of creditors or members even if they have no economic interest in the company’s assets. This argument is most probably wrong in light of recent case-law. Instead of viewing the shareholders in Tea Corporation as having been given a gift, the first instance judge in Re Mytravel Group [2004] EWHC 2741 (Ch); [2005] 1 WLR 2365 at [46] held that the shareholders ‘were affected by the scheme’.

In Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26; [2007] 1 AC 508, a group of insolvent Isle of Man companies went into voluntary Chapter 11 proceedings in the USA. The Chapter 11 plan of reorganisation provided for the group’s assets to be transferred to the creditors. As these assets were ultimately owned by a Manx parent company, the Chapter 11 plan purported to vest the shares in the Manx parent in the creditors’ representatives. The Privy Council agreed to assist the US Bankruptcy Court by giving effect to the Chapter 11 plan, reasoning that because the shareholder had no economic interest in the company’s assets, the court could sanction a scheme of arrangement which leaves them with nothing. Despite the shareholders’ dissent, the scheme wouldbe by virtue of legislation ‘binding upon the shareholders when it receives the sanction of the court’ (at [26]).

Author: Look Chan Ho, MA, BCL (Oxon), LLM (Cantab), LLM (NYU), Attorney-at-Law and Solicitor, is a member of the Restructuring and Insolvency Group at Freshfields Bruckhaus Deringer LLP, based in London. He is also a co-editor of Corporate Rescue and Insolvency. Email: lookchan.ho@freshfields.com 

Contributed by: LexisNexis – Originally published in Corporate Rescue and Insolvency www.insolvencylawforum.co.uk