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company had successfully moved its COMI to England because, among other things, the company’s head offices were now in London, it had registered at Companies House as a foreign company and all negotiations with creditors were held in London. However, a Russian company may not want to shift COMI as there might be tax and reputational benefits associated with having its COMI in Russia. Fortunately, the English courts’ continuously flexible approach to company restructurings through the use of schemes of arrangement has minimised the importance of COMI shifting. Schemes of Arrangement A scheme of arrangement is a statutory procedure, governed by Part 26 of the Companies Act 2006, which allows a company to enter into an arrangement or compromise with its creditors or shareholders (or any class of them). Schemes of arrangement fall outside the scope of the EU Regulation
and, consequently, companies with their COMI and establishment outside England can still use schemes of arrangement. Schemes of arrangement appeal to companies wishing to avoid the stigma of insolvency but are nevertheless in need of restructuring. Further, a scheme can be used even when insolvency is not in prospect. A proposed scheme is approved when more than 50% in number and 75% by value of each class approve it. The court then has discretion whether to approve a proposed scheme. Once a scheme is approved by the court, it binds all creditors and shareholders to which it applies. Essentially, the scheme allows a majority of the shareholders or creditors in each class to bind the minority in that class. English courts are willing to approve a scheme in respect of a foreign company as long as there is a “sufficiently close connection
with England and Wales which may, but does not necessarily have to, consist of assets within the jurisdiction” as per Knox J in Re Real Estate Development Co [1991]. The courts have taken a liberal view as to what constitutes a sufficient connection. The courts (in cases including Bluecrest Mercantile BV and another v Vietnam Shipbuilding Industry Group and others [2013]) have been able to establish jurisdiction on the basis that the loans that needed to be restructured under a proposed scheme were governed by English law. The difficulty for a Russian company trying to implement an English scheme of arrangement arises where it has Russian creditors who refuse to be bound by the proposed scheme and reject the English court’s jurisdiction. There is no treaty or reciprocity agreement between Russia and England requiring Russian courts to recognise and enforce English judgements. The Russian courts would have discretion to recognise the scheme or continue with the
insolvency proceedings. An English scheme of arrangement is, therefore, best used by a Russian company in agreement with all of its creditors or with creditors unlikely to reject the English court’s jurisdiction through the Russian courts. It can also be applied in circumstances where Russian corporates structures contain offshore holding companies located in jurisdictions which recognise English court judgments. Whether it is through shifting their COMI or establishing a sufficient connection to England for the purposes of a scheme of arrangement, it is evident that Russian companies could potentially benefit from the flexibility of English insolvency laws. If sanctions remain in effect for a sustained period and/or access to the debt markets remains constrained, Russian corporates may need to explore such options to restructure their debt portfolios. Amanda Jennings is a partner in the London Business & Finance Practice of global law firm Morgan Lewis
Oct - Dec 2014 International Finance Magazine
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