An effective restructuring process will need to apply in all relevant jurisdictions where creditors may seek to enforce their debts against the company.
There are often choices for the best implementation mechanism for a cross-border restructuring, which will need to take into account the global footprint and capital structure of each business. Frequently a bespoke solution involving procedures under multiple jurisdictions may be required.
Flexible English law restructuring processes, principally Part 26 schemes of arrangement and recently introduced Part 26A restructuring plans (RPs), continue to provide reliable and effective tools to assist restructuring and recapitalisation of businesses in the Asia Pacific region.
English processes are particularly important where a company has English law governed debt obligations that may not be effectively compromised under local procedures.
Why might an English scheme or RP be needed?
As a matter of English law, debt obligations governed by English law cannot be discharged by foreign law proceedings, unless the creditor agrees to the foreign law discharge of the obligations owed to them. This is known as the rule in Gibbs (see Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399). The ongoing importance of the rule in Gibbs was recently reaffirmed by the English Court of Appeal in Bakhshiyeva v Sberbank of Russia [2018] EWCA Civ 2802.
The rationale for the Gibbs principle is that creditors who advance money under English law contracts enter into the bargain against the backdrop of the well-established protections from which they stand to benefit in any English process effecting a compromise.
The practical effect of the rule is that where a company has English law debt but some or all of its assets are located outside of the UK, (in most cases) only an English law restructuring process (potentially in parallel with other steps in relevant jurisdictions) is likely to offer a comprehensive solution.[1]
Importantly for businesses in the Asia Pacific region, the English Court is willing to accept jurisdiction for non-English restructurings subject to certain broad tests. This includes being prepared to accept the creation of artificial structures used solely to engage the English jurisdiction. This includes the creation of a new English incorporated entity that assumes co-liability to creditors under a deed poll structure, as occurred in the recent case of Gategroup Guarantee Ltd [2021] EWHC 304 (Ch).
Submission to local proceedings
An important point to note, for sponsors, debtors and creditors seeking to improve their positions is that the rule in Gibbs ceases to apply when a creditor submits as a matter of English law to a process outside of the UK.
Inadvertently submitting to the jurisdiction, potentially at an early stage, can therefore result in important rights being waived as a matter of English law.
What can English schemes and RPs do?
English law schemes of arrangement and RPs offer companies the ability to agree a compromise with a class of creditors without requiring unanimous consent - provided 75% by value of each class present and voting approves the proposal (and, in a scheme, a majority in number).
An RP offers a further ability to impose a compromise on “out of the money” stakeholders without their consent – subject to certain statutory protections. This is referred to as ‘cross-class cram down’.
Schemes and, since their introduction in 2020, RPs are now commonly used in complex financial restructurings, particularly for companies incorporated outside of the UK. Schemes and RPs work best as a part of a holistic restructuring of a balance sheet.
Practical examples of the type of commercial compromises implemented using these mechanisms include:
- amending and extending financing arrangements with a lower consent threshold than under the documentation;
- effecting a debt for equity swap (potentially in parallel with other steps);
- compromising liabilities to facilitate a more efficient wind down; and
- compromising liabilities under English law aircraft leases.
A tried and tested pathway
Over the last two years, a number of high profile and legally significant challenges have been brought in the English courts contesting restructuring processes. Whilst according to Debtwire only 20% of challenges are successful, with the rest either being dropped or failing at trial, these challenges are invariably costly and high stakes.
The willingness of parties (frequently funds) to challenge processes means that certain jurisdictional aspects have now been tested thoroughly and highlights the importance of getting the cross-border analysis right.
Hong Kong considerations
The rule in Gibbs applies in Hong Kong, such that an English scheme or RP likely cannot compromise debt governed by Hong Kong law (unless Hong Kong-law creditors submit to the English process). A Hong Kong scheme of arrangement (which is similar to UK schemes) is therefore frequently used to compromise Hong Kong law debt.
However, English schemes of arrangement remain an important tool for Hong Kong companies dealing with liabilities governed by English law.
There is growing Hong Kong jurisprudence on common law recognition relating to overseas insolvency processes. In some cases it may be appropriate to undertake parallel schemes of arrangement under both UK and Hong Kong law (for example where there are debts to be compromised that are governed by both English law and Hong Kong law.
However, it should be noted that the practice of undertaking parallel schemes of arrangement where there is no strict legal necessity to do so has been frowned upon by the Hong Kong courts– as demonstrated recently in several cases including Re China Oil Gangran Energy Group Holdings Ltd [2021] HKCFI 1592.
Recent lessons from Singapore
English schemes of arrangement also remain important for Singapore companies undertaking cross-border restructurings.
This has been underlined by the Scottish Court of Session’s decision earlier this month in Re Prosafe SE [2021] CSOH 94 in which it declined to recognise a Singaporean law moratorium designed to facilitate the implementation of a Singapore scheme. The Scottish Court’s refusal in that case was based on the fact that the objecting creditor’s liabilities against the Prosafe entities were governed by English law, and as a matter of English law those liabilities fell outside the operation of the Singapore schemes by virtue of the rule in Gibbs.
This decision paves the way for the objecting creditor to enforce debts owed by Prosafe in relation to assets in UK territorial waters notwithstanding provisions to the contrary in a Singapore scheme.
Interestingly, the Singapore Court has indicated that it supports moving away from the rule in Gibbs, as noted in the case of Pacific Andes Resources Development Ltd [2016] SGHC 210. This raises the possibility that an English scheme of arrangement or RP might be effective to compromise liabilities governed by Singapore law where the scheme company has sufficient connection to the United Kingdom.
Australian developments
Similar to the position in Hong Kong, it appears likely that the rule in Gibbs also applies in Australia (although there is no recent decision that addresses the point definitively). Accordingly, it is doubtful that an English scheme or RP will be able to compromise Australian law governed debt (in the absence of submission).
However, English schemes or RPs will continue to be of relevance where Australian companies are dealing with English law governed debt (it being noted that Australian companies typically have fewer facilities governed by English law than in some other jurisdictions).
That being said, several recent Australian restructuring undertaken by way of Australian schemes of arrangement have managed to effectively compromise English law debt, circumventing the English rule in Gibbs. This has been achieved either where all the relevant creditors consented to the Australian scheme or submitted to Australian jurisdiction (as in Re Tiger Resources Ltd [2020] FCA 266) or the creditors changing the governing law of the debt to Australian law for the purposes of the scheme (as in Re Wollongong Coal Ltd [2020] NSWSC 73).
Such approaches require careful consideration, and will not be feasible in all cases.
Local knowledge essential in Indonesia
Indonesian courts will likely accept proceedings concerning Indonesian debtors regardless of any arguments that those proceedings cannot properly compromise English law liabilities.
This is less of a concern for secured creditors looking to enforce security over assets located in Indonesia. However, for unsecured creditors looking to recover against assets located in Indonesia it may mean that they are unable to rely effectively on their English law rights.
Conclusion
English law restructuring tools are flexible and effective mechanisms with a track record of solving issues for businesses in the Asia Pacific region.
However, crafting a proposal that will be effective in all relevant jurisdictions will always depend on the position of the individual company and the debts to be restructured. Where companies have debt obligations governed by English law, this may require a blend of applying the English law framework to ensure an effective discharge of the English law debt, while also adopting local processes to the extent required in other jurisdictions.
[1] Unless the relevant creditors submit or agree to be bound by the foreign restructuring or insolvency process.
[show_profile name="Adrian" surname="Cheng" jobtitle="Partner, Singapore" phone="+65 6868 8029]
