What Is the Future Allure of the English Part 26A Restructuring Plan for European Debtors?

Executive Summary

If the recent decision¹ by the Regional Court in Frankfurt declining recognition of an English court’s sanction of a Restructuring Plan (RP) is upheld on appeal, it will undoubtedly call into question the RP’s continued appeal to European debtors—at least initially. 

But once the dust has settled, what will be the lasting consequences? As is often the case, the legal detail may be less dramatic than the headlines at first suggest. Our analysis is that, in many cases, a work-around will be possible, but, at the same time, we query the extent of European companies’ appetites to do so, given the ongoing development of convenient European processes facilitated by the EU Preventive Restructuring Directive (the PRD). 

This alert is of interest to European companies considering restructuring their financial indebtedness pursuant to an RP as well as to their creditors.

Background

The Elements of Aggregate’s RP and its Connections to Germany, the United Kingdom, and Luxembourg

Aggregate’s RP Terms

The RP restructured three tranches of German law governed debt. For these purposes, it is relevant to know that the senior secured class approved the RP. The subordinated class and the junior class each dissented.

The Plan Company and Its Assets

Aggregate was registered in Luxembourg and shifted its Centre of Main Interests (COMI) from Luxembourg to England specifically for the purpose of promulgating the RP. The collateral securing the debt comprised real estate assets in Germany and shares in the Luxembourg debtors.

The English Court's Ruling

In exercising its discretion to cram down the dissenting classes, the English court sanctioned the RP. 

Of more relevance for this alert is the threshold decision by the court that it had jurisdiction to hear the case on the basis that (a) the COMI shift meant there was the requisite ‘sufficient connection to the United Kingdom, and (b) the expert evidence suggested that the requisite ‘reasonable prospect’ of the RP being recognised in Luxembourg and Germany was also met. 

This latter ruling was made despite evidence being presented by a dissenting creditor to the contrary. The court mentioned as a relevant factor the overwhelming support of the senior creditors and the fact that 97% of that class had submitted to the jurisdiction of the English court pursuant to a restructuring support agreement.

The Frankfurt Court’s Decision

Fast forward 18 months, and the English court’s finding that the RP had reasonable prospects of recognition in Germany was put to the test on the application of a dissenting creditor. The Regional court in Frankfurt refused recognition. Its decision has, at once, limited and yet far-reaching commercial consequence for the parties. The consequences are limited because the decision applies only to the petitioning creditor. The consequences are far-reaching because the decision means that the compromises sanctioned by the English court will not bind the petitioning creditor in Germany. Thus, the plan company will be bound to perform its obligations to the creditor as per the original agreements, without regard to the compromises sanctioned under the RP. 

More importantly perhaps, the decision has significant consequences for the future of the RP’s appeal to European companies. The Frankfurt court explored and rejected the potential avenues for recognition on the following grounds:

RP Was Not a ‘Foreign Insolvency Proceeding’

Automatic recognition pursuant to the German Insolvency Code did not apply because the RP did not apply to all of Aggregate’s creditors.

Not a ‘Foreign Judgment’

The RP did not fall within s.328 of the German Code of Civil Procedure regarding recognition of foreign judgments, because the Regional Court held that reciprocity was not guaranteed. Specifically, the court was not satisfied that the English court would recognize and enforce a corresponding German judgment if the shoe were on the other foot. 

No Recognition Under Brussels I Regulation (Recast)

Following Brexit, this regulation ceased to apply to England and Wales, so recognition under it was not available.

The Frankfurt court’s decision was issued in a preliminary hearing in which only documentary evidence was considered. The case will now advance to a full hearing, and, at the same time, the judgment itself is probably being appealed.

The Luxembourg Court Decision

Luxembourg subordinated creditors sought to restrain the implementation of the RP in Luxembourg unless and until it was formally recognised through a Luxembourg exequatur procedure. The Luxembourg court² disagreed on the basis that, since the RP related to private, consensual acts, recognition was automatic. Formal exequatur procedure would only be required if a party sought measures of forced execution in Luxembourg (e.g., seizures, auctions) (actes matérielles d’exécution) engaging the monopoly of state coercion (article 678 Luxembourg new civil procedure code).

Two additional clarifications are of interest:

• Luxembourg law governed pledges subject to the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, are accessory in nature—when the secured claim is released by the plan, the pledge falls with it; releasing such a pledge is not an act of public force.
• The court did not rule on the substantive validity of the RP under Luxembourg public policy—those issues could arise, if at all, in an exequatur or enforcement context.

Spotlight on the English Court’s Jurisdiction Over Foreign Companies

As alluded to above, there are two touchstones for the English court accepting jurisdiction over a foreign company. It is the second touchstone on which the Frankfurt decision has shone a spotlight:

• Firstly, the company must have a ‘sufficient connection’ to England and Wales. This is an English law-oriented test and so the Frankfurt and Luxembourg court decisions will not directly affect the English court’s approach to this touchstone. 
• Secondly, the court must be satisfied that there is a ‘reasonable prospect’ that the RP will be recognised and enforced in the jurisdiction(s) where it needs to be recognised—e.g. in the jurisdiction(s) where the company has assets or operations. In this case, the jurisdictions are Luxembourg and Germany.

As regards this second touchstone, the practice has developed whereby the court accepts expert witness evidence on the question and, in the event of differing evidence, forms a view as to whether the requisite ‘reasonable prospect’ threshold has been met. 

In the past, the threshold has been met on the basis of expert opinion alone—without necessarily having the benefit of a local court ruling on the point. If the Frankfurt court’s decision is upheld (and in view of the definitive Luxembourg judgment), the English court (and the experts providing their opinions) will now have the benefit of the actual local court’s decisions to inform the threshold test. It may be that these decisions have persuasive relevance for other European courts also.

Practical Implications for European Companies Considering a Plan

If the Frankfurt court’s decision is upheld on appeal, a European incorporated company wishing to pursue an RP will be well advised to seek an amendment to the governing law of its debt documents to English law. This obviously adds another hurdle, particularly if local banks or a wide diaspora of creditors are involved. 

Practical takeaways for deals involving Luxembourg or German elements:

For Luxembourg Law

• Map “public force” vs “private act” early: plan the implementation so that Luxembourg steps stay on the private side (no seizures or bailiff-involved enforcement).
• Align pledge mechanics with the plan: once subordinated debt is released, prepare immediate releases of any accessory Luxembourg law pledges and ensure corporate registers are updated promptly.

For German Law

There remains a high degree of uncertainty as to whether proceedings under English law will be sufficient to restructure German law indebtedness. If the German Court of Appeal upholds the decision of the Frankfurt court, the company will probably have to file for insolvency, rendering the English proceedings ineffective.

Therefore, at present and in the event that the Frankfurt Court of Appeal does not uphold the RP, it is important to achieve the highest possible level of legal certainty for a debtor company.

Direction of Travel for European Companies

German or Luxembourg debtor companies should bear in mind the following points:

• If it has creditors from EU member states, proceedings under the German StaRUG or the Luxembourg law dated 7 August 2023 on the preservation of businesses would be recommended since these processes bind creditors in each EU member state via the provisions of the European Insolvency Regulation. It is also worth noting that, compared to the RP, fees for German or Luxembourg proceedings are relatively low.
• A ‘parallel’ RP in England will be required if the debtor has English law debt documents that, for whatever reason, cannot be amended to German law. Such a parallel process may seem costly in individual cases, but if both proceedings are linked by conditions, the outcome should be satisfactory for all parties involved. 

Closing thoughts

This is a complex area of the law, and the commercial considerations are often nuanced and complex also. It may be that, by virtue of the PRD, European companies naturally choose to restructure in their home jurisdiction in any event. The firm has restructuring experience across European jurisdictions, so, to ensure all options are canvassed, be sure to speak to your contact early.