Shearman And Sterling

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February 18, 2021

Restructuring Plans are insolvency proceedings


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Restructuring Plans are insolvency proceedings

Very interesting judgment yesterday from Zacaroli J in "gategroup Guarantee Limited" (with a small g) that Part 26A plans are insolvency proceedings and therefore fall outside European civil and commercial jurisdictional rules. Pre-Brexit case law tells us that Part 26 schemes are probably not insolvency proceedings and are therefore capable of falling within those rules. Zacaroli J found that the "financial difficulties" threshold conditions to Part 26A plans (which do not exist for Part 26 schemes) made a significant difference. 

Post-Brexit, the European civil and commercial jurisdictional rules no longer apply to the UK (for post-Brexit cases), so both Part 26 schemes and Part 26A plans are not constrained by such jurisdictional rules (for example, rules preventing a court hearing a case in breach of an exclusive jurisdiction clause in favour of another country) but equally they do not benefit from the recognition of any judgment under those rules. However, the UK may at some point accede to a form of those European civil and commercial jurisdictional rules (the Lugano Convention, very similar to the Brussels Regulation). This means we could see a very different outcome, with Part 26 schemes being subject to those rules and Part 26A plans falling outside them. This will raise some interesting additional considerations in deciding which process to use (where there is a choice) and may add flexibility to our UK restructuring procedures.

The court also addressed the co-obligor structure in a very detailed analysis of the case law in this area. This is where a new company is incorporated (or an existing non-obligor is found in the group) which then (i) assumes the original debt obligation as a co-obligor, (ii) uses a scheme or plan to compromise that debt with relevant creditors and (iii) uses a third party release mechanic/covenant to allow the original obligor to benefit from the compromise. This is often done to avoid triggering a default or cross-default in the group's debt. The court held that this structure did not create a jurisdictional impediment but whether it should prevent the court sanctioning the Plan on discretionary grounds should be determined at the sanction hearing. It will be interesting to see the outcome at sanction. This may also result in guarantor led schemes requiring careful thought (although this raises slightly different issues, the issue of necessity required to justify a third party release is of relevance to that analysis too).

If the UK accedes to the Lugano Convention, we may have different jurisdictional (and recognition) rules for Part 26A plans on the one hand and Part 26 schemes on the other.

Authors and Contributors

Alexander Wood

Of Counsel

Financial Restructuring & Insolvency

+44 20 7655 5935

+44 20 7655 5935