Restructuring Tools in the UK and Europe: Choosing the Optimal Forum for Creditor and Shareholder Repression | Latham & Watkins LLP
Debtors and investors have more choice of where to restructure as the EU Restructuring Directive rolls out in member states
A number of key European jurisdictions have now implemented the EU Preventive Restructuring Directive, the overall aim of which is to introduce harmonized out-of-court restructuring procedures across all Member States to resolve financial difficulties at an early stage. of distress. These measures include the introduction of a cross-class (including shareholder) crackdown and a moratorium to give a debtor breathing space to propose restructuring. Germany (StaRUG) and the Netherlands (WHOA) were the first to intervene, with each procedure coming into force in early 2021. The revised French conciliation and accelerated safeguard procedure came into force in October 2021. Italy and Spain should implement and/or consolidate their equivalent procedures to meet the extended deadline of July 2022, but other Member States may need further extensions. Although no longer required to do so, the UK enacted its own cross-class enforcement and stand-alone moratorium tools in 2020. As a result, there are now real choices for debtors, and healthy competition is emerging. between the different regimes.
Domestic appetites will increase
The new procedures have been tested over the last 15 months in a number of national situations and with mainly small and medium-sized enterprises. Although European schemes gain automatic recognition across the EU, the experience so far in Germany and the Netherlands is that the vast majority of cases have been domestic (using the ‘private’ version of each procedure) without the need for cross-border recognition. . While we have not yet seen a StaRUG or a WHOA used to implement a cross-border restructuring of a large group, their architects have clearly designed the procedures with this in mind and with the express aim of challenging the primacy of the English restructuring scheme and plan.
An English solution to an English problem
An English scheme or restructuring plan no longer enjoys automatic recognition in the EU. However, European restructuring schemes will encounter difficulties of recognition in the United Kingdom where the law governing the debt is English law. This is due to the so-called rule in Gibbs, derived from an old Victorian case which held that in English law only the law applicable to a contract can vary or void it. It therefore follows that in the absence of the agreement of the creditor (by its submission to the court in question or its participation in the foreign proceedings), only a procedure under English law can amend or discharge the debts governed by the English law. Any purported amendment or discharge via a non-English insolvency or restructuring process (such as a StaRUG or WHOA) may not be recognized by the English court if the creditor brings proceedings in England for repayment under the non-English terms. Modified from the Facility Agreement. This has been an important factor in influencing debtors’ use of the Scheme or Arrangement or the English Restructuring Plan as their election procedure. If instead a foreign procedure were used, it would be necessary to use a parallel English system or other English process to provide legal certainty in relation to the compromise or performance of any obligation governed by English law. Since the governing law of choice for the majority of large cross-border financings remains either English law or New York law, the rule in Gibbs looms large, and any compromise of English debt governed by New York law is generally dependent on obtaining recognition in the United States under Chapter 15 of the Bankruptcy Code.
What this means in practice
Our recent experience suggests that, even with large groups in predominantly nationally oriented EU jurisdictions, favorable creditors have encouraged the debtor group to pursue an English restructuring scheme or plan as a fallback rather than a tool. alternative domestic restructuring. Investors’ risk appetite naturally leans toward greater certainty of outcomes. The UK government is considering introducing legislation that would make it easier to recognize insolvency-related overseas court judgments, but it remains unclear to what extent this will erode the rule in Gibbs and allow recognition of foreign processes amending English law debt. For the foreseeable future, it is safe to assume that any non-English restructuring proceedings will hit a snag if the debtor has credit facilities governed by English law.