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"There can sometimes be good forum shopping"

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McEvoy Stacey
Stacey McEvoy

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29 February 2016

​In Re Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch), 17 December 2015, the English High Court sanctioned a scheme of arrangement involving an English company deliberately acquired by a foreign parent to attract the court's jurisdiction, and in doing so considered the application of the Recast Brussels Regulation. 

Codere SA (a Spanish company) was the ultimate parent of a group of gaming companies in Latin America, Italy and Spain. The group was materially financed by two series of notes (the Notes) issued by a Luxembourg incorporated subsidiary of Codere SA.

The group had approximately EUR 1.5 billion of debt, of which the Notes accounted for the vast majority, and was no longer in a position to meet all of its debts. However, insolvency proceedings may have jeopardised the gaming licences on which the group depended for its underlying business, and so the best restructuring option was an English scheme of arrangement.

Codere SA therefore specifically acquired an English company, Codere Finance (UK) Ltd (the Company), to assume a primary, joint and several obligation in respect of the Notes. The Company then applied to the English court for approval of the scheme of arrangement under Part 26 of the Companies Act 2006.

The proposed restructuring was complex. It included provision for cancellation of the Notes in exchange for shares and other notes; injection of EUR 400 million of new money; reallocation of assets; and interposition of additional companies. Implementation of the scheme was conditional on the grant of an order recognising the scheme and its effects under Chapter 15 of the U.S. Bankruptcy Code.

Ultimately, the scheme was expected to result in noteholders recovering at least 47% of liabilities, as opposed to a potential nil recovery, and the loss of EUR 600 million to scheme creditors. Naturally, the scheme was very well supported by noteholders: over 98% of creditors voted in favour, with the residual 2% reflecting unidentifiable noteholders.

Newey J considered the three usual precursors required to sanction a scheme to be satisfied in the circumstances: the relevant provisions of the Companies Act had been complied with, the voting creditors fairly represented those to be bound by the scheme and acted without coercion of a minority, and the scheme was one that an intelligent and honest person could reasonably approve.

The main issue was the relevance of the measures taken to attract the court's jurisdiction: the group had only recently acquired the Company (around 14 months before judgment, when the consideration of the company's restructuring had commenced some two years prior), and deliberately encumbered it with large liabilities, with a view to obtaining approval of such a scheme in England.

Newey J held that these factors should not stop him from exercising his discretion to sanction the scheme, which otherwise related to an English company with its centre of main interest in England. Rather, he found that "the authorities show that over recent years the English courts have become comfortable with exercising the scheme jurisdiction in relation to companies which have not had longstanding connections with this jurisdiction".

Newey J found that neither the Insolvency Regulation or Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast Brussels Regulation) presented an obstacle to making an order in England.

However, interestingly, he did consider, as a matter relevant to the exercise of his discretion from the perspective of the Judgements Regulation, both (a) the connection between the scheme and the English jurisdiction and (b) the likelihood that the scheme would achieve its purpose. He noted that 22% (by value) of scheme creditors were domiciled in England; the scheme was likely to be effective in other relevant jurisdictions (given the Chapter 15 proceedings in the U.S.); and the other connections with England on the part of the group (such as a 2005 intercreditor agreement and other agreements governed by English law and the location of the note trustee and security trustee in London).

As such, the court was satisfied that it was appropriate in the circumstances to exercise its discretion in favour of sanctioning the scheme.

Comment: Newey J knew that the Spanish company was clearly forum shopping: the debtors were deliberately seeking to take advantage of the English court's scheme jurisdiction. However, while recognising that forum shopping could be undesirable (such as where a debtor sought to move its centre of main interests to take advantage of a more favourable bankruptcy scheme), in the present case, the purpose of the forum shopping was to achieve the best possible outcome for creditors: Newey J observed that "there can sometimes be good forum shopping".

From a practice perspective, it demonstrates that even where the applicant company is incorporated in England, the court may under the Recast Brussels Regulation consider matters usually only relevant in schemes for foreign companies: that is, the connection between the scheme and the English jurisdiction and the likelihood that the scheme would achieve its purpose. It will be important to bear this in mind in the context of scheme documents and applications for approval of such schemes, particularly in circumstances such as the present which the court appeared to consider amounting to a foreign restructuring. 

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.