Cross Border Restructuring and Insolvency Update - December 2015

Edgeworth Capital Luxembourg Sarl (2) Aabar Block Sarl V Glenn Maud [2015] EWHC 3464 (Comm)

The High Court in England has ruled on whether Spanish Law has the effect of extinguishing third party guarantees when the beneficiary of the guaranteed liabilities enters into insolvency proceedings in Spain.

The Defendant, Glenn Maud, was a co-Guarantor of a junior loan agreement between RBS and a Dutch Company, Ramblas Investments B.V. Inc. ("Ramblas") which had its Centre of Main Interests ("COMI") in Spain. The Guarantee, which was governed by English Law and contained an exclusive jurisdiction clause, was subject to a cap of €40,000,000. The Defendant and co-Guarantor also entered into a personal loan agreement with RBS. Subsequently the Claimants, Edworth Capital Luxembourg SARL and AABAR Block SARL, acquired all present and future rights under the junior loan agreement, personal loan agreement and the Guarantee pursuant to a transfer and assignment.

A default in the personal loan agreement triggered cross default provisions in the junior loan agreement and the Claimants issued a notice demanding all sums owing under the junior loan agreement. When the Defendant failed to pay, the Claimants issued proceedings in the High Court. The proceedings resulted in an Order for the Defendant to pay the sums due, plus interest, under the junior loan agreement.

Subsequently, Ramblas entered into a Spanish voluntary insolvency proceedings known as concurso, and the Insolvency Administrator classified the Claimants' claims as subordinated. A challenge to the classification is ongoing in Spain.

RBS, acting on the instructions of the Claimants, sent a demand letter to the Defendant on 7 October 2014 demanding payment of €40,000,000 under the Guarantee. Payment was not forthcoming and the Claimants commenced proceedings in the High Court in England.

The issue for the Court was whether Article 97.2 of the Spanish Act 22/2003, which provides for extinguishment of "collateral of any kind" from a "creditor specially related to the debtor", operated to extinguish the Defendant's liability under the Guarantee. The Claimants' position was that Article 97.2 only operates to extinguish Guarantees granted by a debtor who is the subject of the concurso, and guarantees committing property of the insolvent debtor. It did not, they contended, extinguish a guarantee granted by a third party such as the Defendant.

The Court looked extensively at the construction of Article 97.2 and considered the advice of experts, taking into account Article 3.1 of the Spanish Civil Code which provides that legal precepts must be interpreted in "the true sense of their words in view of their context, historical legislative history and social reality..." and in view of their "spirit and purpose".

The Court considered that the framework of Article 97.2 contained no suggestion as to why it should extend to third party guarantees.

Despite contrary advice from experts, who said on a literal wording, Article 97.2 could extend to a third party guarantee, it was notable that there was no Spanish authority interpreting Article 97.2 in this way. The Court therefore held that Article 97.2 did not operate to extinguish the Guarantee and therefore the Claimants were entitled to Judgment in the sum of €40,000,000 and the Defendant was jointly and severally liable with the co-Guarantor under the Guarantee.

In the matter of the Public Joint-Stock Company Commercial Bank "Privatbank" [2015] EWHC 3299 (Ch)

The High Court has sanctioned a Scheme of Arrangement of a Ukrainian bank where the only realistic alternative was insolvency.

Public Joint-Stock Company Commercial Bank "Privatbank" ("the Bank") applied for sanction of the Court in relation to a Scheme of Arrangement under s.899 Companies Act 2006 with creditors in respect of two series of subordinated loan notes, with an aggregate nominal value of US $220 million.

The Bank is Ukraine's largest bank in terms of assets, loans and deposits, and has branches and subsidiaries in several countries, including an administrative office in the UK.

In June 2015 the Bank attempted to extend the maturity of a series of subordinated loan notes, ("the 2016 Notes"), but was unable to obtain the required 75% consent of Noteholders. In October 2015 the Bank raised a further $70 million from the issue of subordinated notes maturing in 2021 ("the 2021 Notes"). The 2021 Notes were issued to one shareholder on materially the same terms of the 2016 Notes, save the maturity date.

The Court was asked to sanction a scheme of arrangement to discharge, release and cancel both sets of Notes and replace them with new Notes issued by a special purpose vehicle incorporated in England. The scheme had overwhelming support of creditors at the creditors' meeting, in excess of 98% both in terms of number and value of the Notes. The proposed restructuring of the Notes would materially assist the financial position of the Bank and it was anticipated that the replacement Notes, with a maturity date in 2021, would be repaid in full.

The Court considered whether it had jurisdiction to sanction the scheme. All of the agreements and trust deeds connected with the 2016 and 2021 Notes were governed by English law, and all contained either clauses giving jurisdiction to the English courts or clauses submitting disputes to arbitration with a London seat. Expert evidence was provided that the scheme would be recognised in Ukraine. It was also noted that the Bank had an administrative office in the UK. Furthermore Notes representing 12% by value of the two classes of Noteholders were held by persons domiciled in the UK. The Court found that there was a sufficient connection with England to give the Court jurisdiction to consider and, if appropriate, sanctioning the scheme.

The Judge was satisfied that if the scheme was not sanctioned it was highly likely that the Bank would be placed into temporary Administration in Ukraine, which would only terminate on the sale of the Bank or its assets and liabilities, or its nationalisation, or on its liquidation. In the event of liquidation, the claims of creditors in respect of the 2016 and 2021 Notes would rank pari passu and it is unlikely that the Bank would have sufficient assets to repay any part of them.

There was some argument as to whether the Noteholders were creditors of the Bank. In order to resolve this, the Bank entered into a deed poll in October 2015, agreeing that if it were to fail to make any payment of the loans it would be liable directly to the Noteholders as if they were the original principal obligor under the Notes and/or the Noteholders were the original counterparty under the subordinated loans. The Noteholders therefore effectively became contingent creditors of the Bank.

Creditors were offered a consent fee of 2% of the outstanding amount of their Notes if they voted in favour of the scheme but the court was satisfied that this did not render the scheme unfair.

The Court found that it was appropriate to sanction the scheme.

Short stories:

Ireland to reduce bankruptcy term to one year

Plans to reduce the term of bankruptcy in Ireland from three years to one year could signal an end to so called "bankruptcy tourism". The new legislation, proposed by Justice Minister Francis Fitzgerald, has been approved by Cabinet and could be enacted before the end of the year. The change comes relatively soon after a significant overhaul of the bankruptcy law in 2013 which saw the bankruptcy term reduced from twelve years to three years, and brings Ireland in line with its neighbours Britain and Northern Ireland. Other key amendments include a reduction in the term of Income Payments Orders, and a provision for the family home to pass back to the Bankrupt if the Official Assignee has not dealt with it within three years.

Australian Insolvency Law Reform Bill 2015

The Australian Insolvency Law Reform Bill was introduced to Parliament in early December as part of the Government's strategy to modernise and strengthen the nation's insolvency and corporate reorganisation framework. The Bill will amend the Corporations Act 2001, the Bankruptcy Act 1966 and the Australian Securities and Investments Commission Act 2001. The Bill will create common rules to reduce cost, increase efficiency and encourage competition in the practice and regulation of administrations. The reforms, if passed into law in their present form, will be wide ranging and will have important consequences for all insolvency practitioners and underwriters of professional indemnity policies covering insolvency practitioners.

New Saudi Insolvency Law in 2016

A wide ranging insolvency reform is anticipated to take effect in Saudi Arabia in 2016, bringing increased certainty in the outcome of insolvencies will benefit both Saudi businesses and domestic and foreign creditors alike. The reforms are expected to introduce several changes, including a settlement regime similar to conciliation and a rehabilitation procedure similar to administration, which will allow the cancellation of debt, debt for equity swaps, disposal of assets and the rescheduling of debts.

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