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6 October 2010
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Current legal practice – Germany and Europe
This newsletter focuses on the legal practice concerning the English “scheme of arrangement”. To begin with, a decision by the English High Court of Justice who has commented on the competence of English courts concerning “scheme of arrangement” with impact on a foreign company, is of great interest for German companies. Additionally, a German court has dealt with the controversial question regarding the acknowledgement of a scheme in Germany, anew.

Dr. Christoph von Wilcken
Attorney at Law (Germany)

Dr. Christoph von Wilcken
The “Scheme of Arrangement” in English law
The English legal concept “scheme of arrangement” is an action under corporate law, which is now defined by part 26 of the English Company Act 2006 and which permits flexible agreements between companies and their creditors in the context of company restructuring. One of its characteristic traits is that no unanimous decision of the creditors is necessary for its acceptance, but that it can be achieved by way of a majority decision. If a majority of the creditors in number, representing at least 75 percent of the sum of the claims consent to the scheme, the other creditors who have not consented to the plan are also bound to it. The effectiveness of such an agreement is established by judicial approval.  Due to the majority principle and the broad freedom of design, this instrument for reorganisation of continental European companies, too, has gained attractiveness.
High Court of Justice – When are English courts competent?
In the matter “La Seda de Barcelona SA”, the English High Court of Justice decided on the international competence of English courts for the implementation of a “scheme of arrangement” with respect to multinational or foreign companies. The question had arisen, if Scheme proceedings according to English law can be applied on a company which was founded according to Spanish law.

The decision concerned a Spanish holding company which also has subsidiaries in Great Britain. The company had been going through a crisis and intended to obtain new capital by way of restructuring. Therefore, the court was asked for approval of a scheme with which by way of new subscriptions on the one hand, and by novation of existing claims on the other hand, an increased liquidity could be achieved. Before approving of this agreement, the English court first had to assess its international competence in this matter. This was not an easy undertaking in the case of the Spanish holding company.

In the end, this question was answered with the help of three criteria on the basis of para. 221 Insolvency Act 1986 : the adequate connection of the company to England and Wales, the favourite effects to be reasonably expected for applicants and the international competency of the English courts for at least one of the persons who were interested in the allocation of the company’s assets. The court regarded all three conditions as fulfilled. The underlying loan agreements were subject to English law, at the same time England had been determined as place of venue. Many of the loaners of the company had their seat in England and could hope to profit from the proceedings. In the end, the adequate connection of the Spanish holding company to England was seen in the fact, that it had subsidiaries, a branch office and an employee in Great Britain.

Thus, the international competency of the court was not examined by consulting Regulation (EG) no. 1346/2000 of the council of 29 May 2000 concerning insolvency proceedings, the so-called Insolvency Regulation. The regulation determines the competence in insolvency proceedings by deciding where a company has its centre of main interest (COMI). In this case the court decided according to case law, stating that Insolvency Regulation could not be applied. An established jurisdiction would exist concerning the local competence for the “scheme of arrangement” proceedings which would not be replaced by the Insolvency Regulation in that aspect, because the scheme proceedings are not listed under the proceedings according to annex A of the Regulation. 

This sheds new light on prospects of success and preconditions regarding such proceedings for German companies who are looking for a way into Great Britain and into English scheme proceedings for restructuring. Not definitely resolved, however, is still the question if such proceedings will be accepted by German courts.
Acceptation of scheme by German courts
In the course of several decisions German courts have pondered this question. The decisions were based on lawsuits of different national insurance holders against one and the same British insurance company who had implemented scheme proceedings. The company claims to have reached an ultimately binding understanding with its insurance holders.

Due to the specialties in insurance law, the already mentioned Insolvency Regulation is not applicable. Thus, the courts did not have to deal directly with the Regulation when considering the acknowledgement of scheme proceedings in Germany. Nonetheless, the reasons for the judgment are revealing. A uniform approach cannot be observed, even though the same facts were present to the courts. The courts are of highly different opinions regarding essential legal issues. While the Local Court Rottweil basically wants to accept the effect of the “scheme of arrangement” and had already rejected the suit as inadmissible, this was considered differently by the Higher Regional Court Celle and the Local Court of Potsdam, and the suits were, however, rejected due to different reasons. The decision of the Higher Regional Court Celle is pending for appeal with the Federal Court of Justice, which might possibly clarify the matter.

The latest decision comes from the Local Court Rottweil. With its decision of 17 May 2010 – 3 O 2/08 it explained that a “scheme of arrangement” has to be accepted inland under special conditions and is opposed to a suit in the same matter in German courts. The judicial decision in England to accept the agreement is about to enter into effect also in Germany which is why it cannot be decided anew by the courts. As the Insolvency Regulation could not be applied, the facts were reexamined by the Local Court on the basis of national insolvency law with the result that the “scheme of arrangement” proceedings are very similar to the proceedings according to chapter 11 of the US bankruptcy code regarding company restructuring. These proceedings were recently assessed by the Federal Court of Justice as “insolvency proceedings” which must be accepted according to the German bankruptcy code (cp. BGH, order of 13 October 2009 – X ZR 76/06, NZI 2009, 859). This should also apply for the scheme as the proceedings are only slightly different. A result which is at least surprising, as chapter-11 proceedings aim for the reorganisation and restructuring of a tarnished company.  A scheme, however, is not from the first related to an insolvency or a crisis and does not forcibly comprise the total assets of the debtor.

In its order of 8 September 2009, however, the Higher Regional Court Celle rejected the acceptability (we informed you, info letter Berlin, restructuring & insolvency II/2010, p. 6 f.). Concerning this case, the Higher Regional Court neither regarded the creditors of the insurance company in their entirety as comprised by the Scheme nor had the company been insolvent, so that proceedings comparable with German insolvency proceedings cannot have been present. Regulation (EG) No. 44/2001 of the council of 22 December 2000 concerning the competent jurisdiction and the acceptation and enforcement in civil and commercial matters does equally not lead to an approval as this would require a “decision” in contradictory proceedings which would exactly not be the case in a scheme of arrangement. In the end, in such proceedings the court would rather have a supervisory function than it is a decision-making body and the Scheme would primarily have the function of a settlement between company and creditors. For the same reasons an acceptation according to German civil procedure law is out of the question as well.

In its order of 22 October 2008 – 2 O 501/07, the Local Court Potsdam argued along the same lines as the Higher Regional Court Celle concerning the rejection of Scheme as insolvency proceedings. Unlike the Higher Regional Court Celle, however, the Local Court Potsdam assumes that the judicial acceptance in Scheme proceedings are a “decision” in the sense of Regulation (EG) No. 44/2001 which are therefore basically to be accepted. In the case at hand, however, it lacks the required agreement on jurisdiction for the High Court in London, so that the Scheme has no effect insofar for inland claimants.

A clarification in this aspect seems highly necessary. The practical meaning of a flexible instrument with which a company in dire straits can rearrange the dependency on its creditors on the basis of a majority decision is still high. For this reason, the German lawmaker would be well advised to create a similarly flexible instrument in order to make reorganisation easier for inland companies.

Dr. Christoph von Wilcken, Attorney at Law (Germany)

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