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Cross Border Restructuring and Insolvency Update - August 2014

The Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014

New legislation relating to entry rules for the Pension Protection Fund allows the Olympic Airlines pension scheme retrospective entry into the Pension Protection Fund.

The Court of Appeal's judgment in The Trustees of the Olympic Airlines SA Pension & Life Insurance Scheme v Olympic Airlines SA[2013] EWCA Civ 643 held that Olympic Airlines, a Greek registered company, could not open insolvency proceedings in England as they did not have an establishment in the UK and an insolvency event within the meaning of section 121 Pensions Act 2004 had not therefore occurred. This meant that the pension scheme was not eligible to enter the Pension Protection Fund ("PFF"), despite them having paid the relevant entry levies.

The Pension Protection Fund is a statutory fund created by the Pensions Act 2004. It provides compensation to members of eligible pension schemes when there is a qualifying insolvency event and where there are insufficient assets in the pension scheme.

Following the Olympic Airlines decision, the Secretary of State for Work and Pensions has reviewed the PPF entry rules, leading to new regulations being issued. The Pension Protection Fund (Entry  Rules) (Amendment) Regulations 2014 (the "Amendment Regulations") published in June 2014 provide that from 21 July 2014 to 21 July 2017, an additional ‘European insolvency event’ will trigger entry into the PPF if:

  • On 20 July 2014, the scheme employer, who has its Centre of Main Interests in an EEA state, was subject to insolvency action in an EEA state other than the UK which has not come to an end;
  • A winding up order in respect of the scheme employer was granted by a UK court, but was set aside due to lack of jurisdiction because the employer did not have an establishment in the UK; and
  • A PPF assessment period would have been triggered, were it not for the winding up order being set aside.

The Amendment Regulations retrospectively create a European insolvency event for the pension fund of Olympic Airlines, allowing them entry into the PPF.

At first glance it appears as though the amendments to the Regulations significantly widen the reach of the Pension Protection Fund; however, on closer inspection it appears that the narrow drafting of conditions and the limited time period for which they are in effect may well mean that the Olympic Airline pension scheme will be the only beneficiary of these amendments.

Lehman Brothers Finance AG v Klaus Tschira Stiftung GmbH [2014] EWHC 2782 (Ch)

A recent decision has reinforced the scope of the application of articles 27 and 30 of the Lugano Convention, concerning a stay of proceedings where proceedings in a Court in a different jurisdiction have been commenced.

The dispute arose between Lehman Brothers Finances AG ("Lehman") and Klaus Tschira Stiftung GmbH ("Klaus") following the liquidation of the former's parent company. Each party alleged that sums were owed to it by the other. Lehman sent a letter of claim to Klaus, causing Klaus to apply to the Zurich Court for conciliation proceedings, which are an integral and mandatory initial step in the resolution of civil and commercial disputes under Swiss procedure law. Following its letter of claim, Lehman commenced a claim in the English Court.

Articles 27 and 30 of the Lugano Convention provide that where there are two sets of proceedings involving the same cause of action between the same parties, whichever proceedings instituted first in time would continue and the second proceedings would be stayed. The question arose as to which proceedings had been initiated first. Lehman submitted that the Swiss conciliation proceedings, which are a necessary step litigants are required to take prior to filing and complaint for adjudicative relief, did not amount to "instituting proceedings".

It was held that while the letter of claim was not sufficient to institute proceedings, on the basis that it was not a document which instituted proceedings by its lodgement with the Court, an application to the conciliation authority in Zurich by document requesting conciliation did amount to proceedings within the meaning of article 30. The Judge paid particular attention to the fact that, under Swiss law, the commencement of the conciliation procedure resulted in a case being pending, or a lis pendens, pursuant to article 27. Moreover, he considered that the exclusion of conciliation proceedings would not be consistent with the purpose of the Lugano Convention, which had been designed to avoid parallel proceedings with potentially inconsistent outcomes. Consequently the application for conciliation was the first proceedings in time to be commenced and the claim before the English Court should have been stayed. However, in the meantime, the conciliation proceedings before the Zurich Court had in fact been dismissed and, as a result, no stay was appropriate.

This case highlights the significance of the date on which proceedings in different jurisdictions are formally commenced for the purpose of the Lugano Convention. "Commencement" is lodging documents which institute proceedings at Court, and not merely expressing an intention to commence proceedings.

Short Stories

4.4 billion euros being left behind in Banco Espirito Santo

Novo Banco, the reincarnation of troubled Portuguese lender Banco Espirito Santo, has started with assets of 59.6 billion euros. This suggests that 4.4 billion euros are being left behind in BES. The returns to shareholders and bondholders of BES will therefore depend on the recovery of loans that the bank has made to the Espirito Santo family.

The decision to split BES was announced by the Portuguese government, who intended to split the bank into a "good" bank - Novo Banco - and a "bad" bank - BES. This was done as part of an urgent need to protect bank deposits and to support the economy. It was felt that if investors were to withdraw their money and place it elsewhere it would spell bad news for an already fragile economy.

The European financial community will be waiting with baited breath to discover to what extent the money invested in BES is able to be recovered and whether Novo Banco achieves the desired aim of providing security to investors and preventing them placing their funds elsewhere.

EU Commission introduces new guidelines to encourage the use of state aid only as a last resort

As part of the State Aid Modernisation programme, new guidelines were introduced on 1 August 2014, with a view to incorporating existing schemes by 1 February 2015.

The review of the 2004 guidelines is intended to help Member States avoid the granting of state funding to struggling companies that would otherwise leave the market, and make way for newer companies that would encourage economic growth.

Changes to the 2004 guidelines include:

  • Rules for providing simpler aid - for example in the form of loans rather than grants;
  • Requirements that the result of state funding further a common interest - for example to reduce unemployment rates; and
  • "Burden sharing" to encourage company investors to bare the company's costs first, prior to the introduction of state aid.

Some aspects of the 2004 guidelines have not changed, namely the six-month limit of temporary aid to companies to enable restructuring, such as loan guarantees, and that companies only be approved for restructuring aid once, and for a maximum period of ten years. It is important to note that the guidelines do not apply to companies in the first three years of trading or to those in the coal and steel industry.

Call for evidence on current UK bankruptcy threshold and Debt Relief Orders

Earlier this month, the Insolvency Service and Business Minister, Jo Swinson MP, issued a call for evidence on increasing the bankruptcy debt threshold, which was set at £750 almost thirty years ago. The consultation also seeks views on how debt relief orders, an administrative rather than a court based procedure, introduced five years ago for those with debts below £15,000 with no means of repaying, could be improved. In particular, views are sought on whether the existing limits on assets (under £300) liabilities (less than £15,000) and surplus income (less than £50 pm) are appropriate and, if not, what the levels should be set at.

The Minister has said that the current £750 bankruptcy threshold, which has been in place for almost 30 years, is "no longer fair or reasonable". According to the Insolvency Service, if the threshold had risen in line with inflation it would now be £1,700. The consultation will close on 9 October 2014.

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