Singapore court’s cryptocurrency decision
Implications for cryptocurrency trading, smart contracts and AI
A scheme of arrangement is a procedure under the Companies Act 2006 (UK) enabling a company to make a compromise or arrangement with its creditors (or any class of them).
A scheme is not a formal insolvency process and can be used in both solvent and insolvent contexts. As long as a scheme involves a compromise, the company and the required majority of its creditors may agree a wide range of matters between themselves, binding minority dissenting creditors. A scheme must be approved by creditors constituting 75 percent by value as well as 50 percent by number in each affected class of creditors. For this purpose, creditors must be divided into classes of persons of similar rights who could consult together with a view to their common interest. The sanction of a scheme by the Court is also required once the relevant classes have approved the scheme before it becomes effective. However, unlike a Chapter 11 plan in the US, dissenting creditors cannot be crammed across classes.
Schemes allow the compromise of one (or more) classes of creditors, and so can be used to surgically cram dissenting creditors within a syndicated facility or within a class of notes or bonds while avoiding an all-encompassing insolvency proceeding. An English scheme of arrangement is a popular restructuring tool used to compromise creditor claims in large international work-outs. In this article we review the jurisdictional issues the English Courts have considered in crossborder schemes in the past 13 months. The six recent schemes covered provide an insight into the process the Court will go through in accepting jurisdiction in cases of foreign companies, debts and / or creditors.
An application for a scheme may be made by a “company”. The term “company” in this context means any company liable to be wound up under the Insolvency Act 1986 (UK), including a foreign company (which can be wound up on the basis that it is an unregistered company). In deciding whether to accept jurisdiction to sanction a scheme, the Court will consider: (i) whether the company has a “sufficient connection” with England; (ii) whether the scheme will achieve a substantial effect in the foreign jurisdictions in which the company conducts significant business; and (iii) where the company has creditors in the EU, whether the English Court’s jurisdiction to sanction the Scheme is limited by the EU Judgments Regulation. The location of a company’s “centre of main interests” (or COMI)—the touchstone for the allocation of jurisdiction for the opening of insolvency proceedings within the EU—forms no part of the jurisdictional test for the approval of a scheme (although see the comments below in relation to the Noble Group scheme).
In Re Stripes US Holdings Inc  EWHC 3098, the Court was asked to sanction a scheme in relation to a Delaware company, Stripes US Holdings Inc (SUSHI). SUSHI’s parent was Steinhoff Europe AG (part of the South African based global retail group), and its only significant asset was shares in Mattress Firm Holding Corp (the leading retailer of mattresses in the US). Prior to the launch of the scheme in the UK the Mattress Firm subsidiaries filed for protection under Chapter 11 of the US Bankruptcy Code with the intention of consummating a sale in a short timeframe (to take advantage of Black Friday sales). However, in order for Mattress Firm to raise new debt SUSHI needed to be cleansed of its existing indebtedness, including a US$200m credit facility governed by English law. The scheme proposed to swap the debt of SUSHI for new instruments issued by its parent, Steinhoff.
The scheme was approved by all lenders under the credit facility that were present and voting at the scheme meeting (representing by value 92.46 percent and by number 61.29 percent of all entitled creditors). The Court was asked to sanction the scheme on this basis.
SUSHI was a foreign (unregistered) company and therefore eligible to be wound up in England satisfying the first “hard” jurisdiction question.
The Court then turned to its jurisdiction over the scheme creditors, certain of which were incorporated in EU member states other than the UK. The EU Judgments Regulation provides a framework for the regulation of jurisdiction and the recognition of judgements in civil and commercial matters among EU member states. The default position under the Regulation is that defendants domiciled in an EU member state should be sued in that member state. There is considerable judicial uncertainty as to whether English schemes fall within the scope of the Regulation. If they do, an English scheme of arrangement amounts to the company suing its EU creditors in England. Rather than decide whether the Regulation applies to schemes, Courts have instead assumed that the Regulation will apply, and then considered the application of exceptions that would give English Courts the jurisdiction to sanction a scheme in relation to EU creditors. In Stripes US, the Court relied on the exception in Article 8 of the Regulations (commonly relied on in cross-border schemes), namely: where a foreign EU creditor is one of a number of creditor defendants within a class, in order to avoid risk of irreconcilable judgments in the case of closely connected claims, that foreign EU creditor may be sued in England where any one of the other creditor defendants is domiciled in England. Six of the 31 scheme creditors were domiciled in England and the Court accepted jurisdiction over the foreign EU creditors on this basis.
As a general principle of international law, a variation of contractual rights in accordance with the governing law of the contract done by the court of that law should be given effect in other countries. On that basis, Courts have held that if claims that are the subject of the scheme are governed by English law then this should satisfy the requirement for a “sufficient connection” with England. In Stripes US, the US$200m credit facility that was the subject of the scheme was governed by English law and accordingly the “sufficient connection” test was satisfied.
The final jurisdictional issue was whether, in sanctioning the scheme, the English Court would “affront comity” with Courts in the US or in some way cut across the jurisdiction under Chapter 15 of the US Bankruptcy Code. The Court referred to evidence from an expert in US law which considered that the scheme would likely be recognized and given effect in the courts of the United States in forming the view that it was not cutting across the jurisdiction of the American courts. Indeed, the US Court has on a number of other occasions recognized and given effect to English schemes of arrangement in respect of companies incorporated in the US where the debt is governed by English law.
SUSHI subsequently obtained an order under Chapter 15 in the US Bankruptcy Court for the District of Delaware recognizing the scheme as a foreign proceeding and granting related relief.
In Re Noble Group Ltd  EWHC 3092 the Court needed to consider whether it had jurisdiction to sanction a scheme proposed by a Bermudan company which had taken steps to transfer its COMI from Hong Kong to England. The Company also intended to seek recognition of the English scheme in the US under Chapter 15 of the US Bankruptcy Code. The debts the subject of the scheme included 2018 Notes, 2022 Notes and a revolving credit facility, all governed by English law, and 2020 Notes governed by New York law.
The scheme proposed the release of claims of the scheme creditors in return for new instruments to be issued by newly-incorporated related companies that would also take a transfer of the assets of the existing Noble group. The scheme was approved by the statutory majorities and so the Court was asked to sanction the scheme.
In considering the questions on jurisdiction, the Court distinguished the “sufficient connection” test from the issue of where the scheme company had its COMI, while at the same time recognizing that some of the same factors relevant to establishing the shift in COMI to England are likely to also be relevant to demonstrate a “sufficient connection” to that jurisdiction. This is particularly so given that “sufficient connection” is bound up with the question of whether the scheme is likely to be recognized in other relevant jurisdictions, which may depend on the view the recognizing Court takes of the location of the company’s COMI (e.g. where such Court is applying UNCITRAL Model Law principles). Accordingly, the Court relied on factors associated with the shift in COMI to England (including the shift of the head office and centre for restructuring negotiations to London), as well as the English governing law of the majority of the debts and the strong support for the scheme in finding that there was a sufficient connection with England to justify exercise of the scheme jurisdiction.
The Court then considered whether it could be satisfied that the scheme would achieve a “substantial effect” in the foreign jurisdictions and the Court would not be acting in vain in sanctioning the scheme. The Court noted (among other factors) that the vast majority of international creditors supported the scheme (so the likelihood of foreign challenge was slight), an identical scheme was being promoted in Bermuda, and Noble had sought recognition of the schemes under Chapter 15 of the US Bankruptcy Code and/or principles of comity. In that regard, the Court relied on expert evidence from a former judge of the US Bankruptcy Court for the Southern District of New York, expressing the clear view that a US Bankruptcy Court would enter an order granting effect to the scheme in the United States.
The Company adduced evidence that 13 noteholders (with claims between 18.2 percent and 22.5 percent of the total scheme claims) were domiciled in England and accordingly, consistent with the SUSHI scheme, Article 8 of the EU Judgments Regulation would be engaged and satisfied. The Court was therefore satisfied that it was appropriate in the international context to exercise its discretion to sanction the scheme.
Finally, the English Court recently sanctioned a scheme in respect of Agrokor d.d., a giant Croatian food conglomerate. The financial difficulties of the group were well-publicized and in 2017 the company commenced extraordinary administration (EA) proceedings in Croatia. These proceedings were not included in Annex A of the Recast EU Insolvency Regulation so did not receive automatic recognition in England. They were however recognized in England under the Cross Border Insolvency Regulations 2006 and in the US under Chapter 15 of the US Bankruptcy Code. The ultimate goal of the EA proceedings was to restructure the obligations owed by Agrokor to creditors through a settlement plan under the EA law. The settlement plan was approved by the Croatian Court in 2018. The plan required the novation and amendment of a €1bn term facilities agreement governed by English law. Unanimous consent to the novation and amendment was required but was not forthcoming. This posed an issue for Agrokor: an English Court would be likely to refuse to enforce the Croatian plan as it relates to English law debts on the basis of the “Gibbs rule” which requires English law-governed obligations to be varied or discharged in accordance with English law. Accordingly, the company proposed the novation and amendment be effected by way of an English scheme of arrangement.
99.9 percent by value and 97.92 percent by number of scheme creditors (being lenders in the relevant facilities) voted in favor of the scheme. The Court was then asked to sanction the scheme. Agrokor argued that the Court had jurisdiction for reasons similar to those considered in the SUSHI (and other) schemes, namely: (i) that the foreign (i.e. Croatian) company was eligible to be wound up in England as an unregistered company; (ii) the requirement that there be sufficient connection with England is satisfied by the fact that the facilities agreement is governed by English law; and (iii) that Article 8 of the EU Judgments Regulation can be relied on because there is at least one creditor domiciled in England and it is expedient that the claims be heard together. In order to show the scheme would be likely to have a substantial effect, Agrokor obtained expert evidence as to Croatian law which indicated that an order sanctioning the scheme would likely be recognized in Croatia, whether under the EU Judgements Regulation, the Rome I Regulation or under Croatian private international law. The Court sanctioned the scheme on 28 February 2019.
As alluded to in the context of the Noble scheme, the English Courts will sanction a scheme for foreign debts where the Court is comfortable that the scheme is likely to be given effect in the jurisdiction of the laws that govern the debts.
In Re Avanti Communications Group Plc  EWHC 653 (Ch) the applicant was an English-incorporated company which provided fixed-satellite services in Europe, the Middle East and Africa. The scheme proposed a debt-for-equity conversion of 2023 Notes. The notes were governed by New York law and, in their original form, included a US jurisdiction clause. In advance of the scheme, however, the holders of the notes were asked to consent to an amendment to the notes which provided that proceedings may be exclusively instituted in the Courts of England. The consent solicitation was successful and Avanti obtained an expert opinion to the effect that, as a matter of New York law, the amendment to the jurisdiction clause was effective to confer jurisdiction on the English court in relation to the scheme.
All scheme creditors present and voting at the scheme meeting approved the scheme (representing approximately 98.3% of all scheme creditors). Accordingly, the Court was asked to sanction the scheme. The company being incorporated in England meant the Court did not need to consider whether the company was capable of being wound up in England, or whether there was a sufficient connection with the jurisdiction. In considering the impact of the EU Judgments Regulation, an exception in Article 27 was relied on which allows for jurisdiction clauses to confer jurisdiction on the courts in a particular state (as had been amended
via the consent solicitation). The concern with the usual reliance on Article 8 was that the nature of the 2023 Notes was such that the company could not be exactly sure who held the debt at any given moment, and therefore whether there would be a creditor domiciled in England for the purpose of the exception. As it transpired, there were at least 3 UK domiciled creditors and so Avanti was able to rely on Article 8 (as occurred in SUSHI) and Article 27.
In order to satisfy the Court as to the effectiveness of the scheme in practice in binding opposing noteholders to the amended terms, Avanti made the scheme conditional upon Chapter 15 recognition in the US and presented an expert report that the scheme would likely be recognised and given effect in the US. The Court sanctioned the scheme on 26 March 2018.
A similar approach was taken in Re House of Fraser (Funding) Plc  EWHC 2663 (Ch). The case involved an English company with scheme debts governed by English and New York law. In advance of the commencement of the scheme process, the company amended the jurisdiction provisions in the debt documents to provide for submission by all of the parties to the jurisdiction of the English and Scottish Courts (in addition to US Courts). The scheme was approved by all creditors present at the meeting (representing 89 percent by value of all scheme creditors) and the Court sanctioned the scheme on 25 July 2018. Unfortunately, the group failed to secure required funds from prospective investors and consequently filed for administration on 10 August 2018, only to be acquired in a pre-packaged deal by discount sports retailer Sports Direct for £90m a few hours later.
In Re Lehman Brothers International (Europe) Ltd  EWHC 1980, the company’s joint administrators sought to bring outstanding litigation to an end and facilitate the distribution of a surplus in excess of £6bn by cramming down the minority of unsecured creditors who did not agree with their proposed method of distribution. The landmark judgment includes a useful review of the law relating to the composition of classes, in particular the distinction between differing rights (which could split a class) and differing interests (which should not). From a cross-border perspective, the Court considered two issues of interest: (i) the impact of the EU Judgments Regulation; and (ii) whether the scheme would be given and achieve substantial cross-border effect. In following the well-trodden path, the Court assumed (without deciding) that the Judgments Regulation applied and then turned to whether jurisdiction could be found within its provisions (i.e. through application of the relevant exclusions). Article 8 was again relied on because approximately 11 percent by number and 5 percent by value of the scheme creditors with admitted claims were domiciled in England. The Court also applied the exception in Article 26(1) of the Regulation, which provides that a court of a Member State before which a defendant enters an appearance shall have jurisdiction over the defendant. As a matter of English law, any scheme creditor who has lodged a proof of debt in the administration of LBIE has submitted to the jurisdiction of the English Court for all purposes relating to the administration. Any relevant creditors who had not lodged a proof in the administration were excluded from the scheme.
In considering whether the scheme would satisfy the “substantial effect” test, the Court noted that LBIE had applied to the US Bankruptcy Court for an order recognizing the Scheme under Chapter 15 of the US Bankruptcy Code. Regardless of the Chapter 15 recognition, the Court held that the scheme would plainly achieve a substantial effect on the basis that creditors should not be able to enforce their statutory interest entitlements in the English administration of an English company under English law in any jurisdiction other than England, with only a small proportion of the surplus situated outside of England. The Court sanctioned the scheme on 18 June 2019.
The cases in this article demonstrate the practical utility of English schemes of arrangement in large cross-border restructurings and insolvencies.
In particular, the English Courts have shown flexibility in exercising their jurisdiction to sanction foreign schemes—the barriers to entry for large foreign companies with sufficient connections to England and a diverse international creditor-base are relatively low. The English Court of Appeal’s recent decision in the OJSC Bank of Azerbaijan case (Bakhshiyeva v Sberbank of Russia  EWCA Civ 2802) upholding the Gibbs rule means that English schemes—perhaps used in parallel with foreign restructuring measures or plans—are likely to continue to remain a requirement for the compromise of English law debts of a foreign company. It remains to be seen whether the Gibbs rule—which has been heavily criticized among the international restructuring community as being at odds with the general global trend towards modified universalism—will ultimately be considered by the UK Supreme Court. If so, it will be interesting to see whether the UK’s highest court of appeal will uphold or overturn the Gibbs rule—or, even if it is minded to take the view that the rule is anachronistic and has no place in the modern world of large-scale multi-jurisdictional restructurings, whether it considers that the rule can only be abolished by the legislature.
It is not expected that Brexit will impact the attractiveness of English schemes of arrangement for foreign companies. Assuming that the Judgments Regulation will cease to apply to the UK following Brexit (which remains unresolved at the time of writing), however, the issues encountered to date in relation to the application of the Judgments Regulation will be put beyond doubt: the Judgments Regulation will not apply to schemes. In the case of schemes relating to foreign companies, difficult questions may then arise in relation to jurisdiction and the recognition of English court-sanctioned schemes. For those reasons, it may be that there will be heightened emphasis post-Brexit on the expert evidence adduced to the English Court in the course of the scheme approval process as to whether or not a scheme will be recognized in the jurisdiction of incorporation of the debtor (and potentially other key jurisdictions), as a matter of private international law. That said, the effectiveness of schemes to date typically has not been blighted by a lack of recognition in other jurisdictions and it is perhaps unrealistic to suggest that Brexit will make any difference in that respect.
Implications for cryptocurrency trading, smart contracts and AI
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