Magyar Telecom B.V.Magyar Telecom B.V., Re

This is an application by Magyar Telecom B.V. (the company) for an order sanctioning a scheme of arrangement proposed by it pursuant to Part 26 of the Companies Act 2006. At a hearing on 29 November 2013, I sanctioned the scheme and I now set out in writing my reasons for doing so.

The company was incorporated and is registered in the Netherlands. The company is a member of a group, whose principal business is the operation of telecommunication services in Hungary. The main operating company is a Hungarian company called Invitel Távközlési Zrt (Invitel). All but a very small proportion of the share capital of Invitel is owned by the company, which also acts as the principal financing vehicle for the group. The ultimate parent of the group is Hungarian Telecom LP, a private investment firm incorporated in Guernsey and managed primarily by Mid Europa Partners Limited, which has its headquarters in London and is authorised and regulated by the Financial Conduct Authority.

The principal liabilities of the company arise under an issue of €345 million 9.5% Notes due 2016 (the Notes) which were issued pursuant to an indenture dated 16 December 2009. The Notes are governed by the law of the State of New York and are subject to the non-exclusive jurisdiction of the Courts of that state in favour of noteholders. The company’s obligations under the Notes are guaranteed by Invitel and other companies in the group. The Notes are secured by a pledge over shares in the company and over the shares held by the company in Invitel and by other liens on substantially all the assets of the group.

Interests in the Notes are traded through Euroclear and Clearstream. The Notes are held in global form through the Bank of New York Depository (Nominees) Limited as common depository for Euroclear and Clearstream.

The scheme is proposed to be made with the persons described in the scheme as the Note Creditors. They are defined as the persons with a beneficial interest as principal in the Notes, excluding the company itself as owner of Notes with a principal value of €21.041 million. The Note Creditors are not strictly speaking creditors of the company unless and until Notes are registered in their names. There are, however, under the indenture circumstances in which Notes may be registered in their names, and they are accordingly contingent creditors of the company and thus “creditors” for the purposes of section 899 of the Companies Act 2006.

The scheme is proposed as part of a financial restructuring of the group. The company is presently unable to service its obligations under the Notes, having defaulted in the payment of half-yearly interest of over €15.6 million due in June 2013, and the group is unable to provide the necessary funds from its revenues or otherwise. The directors of the company believe that if the restructuring is not implemented, and in the absence of some other restructuring, it is likely that the company and other companies in the group will be forced to enter formal insolvency proceedings. Such a step would be likely to result in a significant destruction of value in the group, and recoveries for holders of the Notes would be likely to be significantly less than if the restructuring proceeds.

Under the proposed scheme, the Note Creditors will give up their rights under the Notes, including their rights against the guarantors of the Notes, in exchange for (i) new notes to be issued by the company with an aggregate nominal value of €155 million and (ii) a 100% equity interest in a new company which will hold 49% of the share capital of the company, thereby giving an indirect interest of almost 49% in Invitel.

By an order made on 28 October 2013 by Arnold J, the company was directed to convene a meeting of the Note Creditors to be held on 27 November 2013 for the purpose of considering and, if thought fit, approving the scheme. The order contained detailed directions as to the steps to be taken to convene and hold the meeting. The evidence filed in support of the present application shows that those directions were followed.

The meeting was duly held and the scheme was approved by very substantial majorities. Section 899(1) of the Companies Act 2006 requires a scheme to be approved by a majority in number representing 75% in value of the creditors present and voting in person or by proxy at the meeting. This scheme was approved by a majority of more than 97% in number representing more than 99% in value of those voting on the scheme. There was a very high turn-out at the meeting. 326 Note Creditors entitled in aggregate to almost 90% by value of the Notes attended and voted.

Before the court can exercise its power to sanction a scheme of arrangement, it must be satisfied that the company proposing the scheme is a “company” for the purposes of Part 26 and that the class or classes of creditors were properly constituted for the purposes of the scheme. The practice of the court is to address these issues at the earlier stage of the application to convene the meeting or meetings. This was the course followed in this case and Arnold J was satisfied on both counts.

The only jurisdictional requirement for a “company” is that it should be liable to be wound up under the Insolvency Act 1986: section 895(2). A foreign-incorporated company is so liable, even if its circumstances at the time of the application to the court are such that the English court would not at that time exercise its jurisdiction to wind up the company: Re Drax Holdings Ltd [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049, Re DAP Holding NV [2005] EWHC 2092 (Ch), [2006] BCC 48, and Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus LR 1245. The company in this case therefore satisfies that requirement.

As to the composition of the class of creditors, the rights conferred by the Notes and the rights to be received in exchange for the Notes under the scheme are identical as regards all Note Creditors. The only distinction between them is that some 70% of Note Creditors signed a restructuring agreement, committing them to vote in favour of the scheme and not to take any action in the meantime to enforce rights under the Notes. Under that agreement, a consent fee is payable to all creditors who signed it, in an amount which is small when compared to the claims of creditors. The opportunity to enter into the restructuring agreement and become entitled to payment of the fee was available to all Note Creditors. In these circumstances Arnold J was satisfied that it was proper to convene a meeting of a single class of the Note Creditors. No Note Creditor has appeared on this hearing to raise any contrary submissions and there is no basis for departing from the decision of Arnold J on that issue.

Because the company is registered in the Netherlands and because the Notes are governed by New York law, serious issues arise as to whether this Court would consider it appropriate to sanction the scheme. Although not going to jurisdiction, they are sufficiently fundamental to an exercise of the Court’s power under Part 26 that the Court might decline jurisdiction even if there were no opposition from any creditors to the scheme. Accordingly, they were properly raised before Arnold J on the application to convene the scheme meeting and were the subject of detailed submissions to him by Mr Bayfield on behalf of the company, as they have been before me.

The fact that a foreign company would not be wound up by the English court in the circumstances prevailing at the time of the scheme is not a bar to the court sanctioning the scheme, provided that there is a sufficient connection with this jurisdiction. In Re Drax Holdings Ltd, Lawrence Collins J said at [29]:

“That the companies fall within the definition of companies for the purpose of section 425 [of the Companies Act 1985, now section 899 of the Companies Act 2006] does not, of course, mean that there are no limitations to the exercise of jurisdiction under section 425. The court should not, and will not, exercise its jurisdiction unless a sufficient connection with England is shown.”

In that case, Lawrence Collins J found that there were many factors which pointed to the exercise of the jurisdiction being both legitimate and appropriate. Foremost among them was that the claims of creditors falling within the relevant class were governed by English law and were subject to a non-exclusive submission to the jurisdiction of the English court, as were the associated security documents, and that the security included very substantial assets within England.

In a number of recent cases, a sufficient connection has been found solely or principally in the fact that the rights of the relevant creditors were governed by English law and that the English Courts have an exclusive or non-exclusive jurisdiction in respect of disputes: see, among others, Re Rodenstock GmbH, Re Primacom Holdings GmbH (No.1) and (No.2) [2011] EWHC 3746 (Ch) and [2012] EWHC 164 (Ch), [2013] BCC 201, and Re Vietnam Shipbuilding Industry Group [2013] EWHC 2476 (Ch). Under generally accepted principles of private international law, a variation or discharge of contractual rights in accordance with the governing law of the contract will usually be given effect in other countries. This is also the effect of the Rome Convention, and of Council Regulation (EC) 593/2008 (the Rome I Regulation) which applies to contracts concluded as from 17 December 2009, the day after the date of the indenture in this case.

In this case, however, not only is the company registered in the Netherlands but the Notes are governed not by English law but by New York law. The purpose of this scheme is to affect the rights enjoyed by the Note Creditors under New York law by exchanging the existing notes for new notes and equity. The court will not generally make any order which has no substantial effect and, before the court will sanction a scheme, it will need to be satisfied that the scheme will achieve its purpose: Sompo Japan Insurance Inc v Transfercom Ltd [2007] EWHC 146 (Ch), Re Rodenstock GmbH at [73]-[77].

The case made by the company on the present application is that the requirements for a sufficient connection with the jurisdiction and for the scheme achieving its purpose can be satisfied.

Steps were taken from mid-August 2013, some time before the application to convene the meeting of creditors was issued, but in anticipation of it, to move the centre of main interests (COMI) of the company from the Netherlands to England. Detailed evidence has been provided to the Court that as at the date of the application and for some time before then, the COMI was located in England for the purposes of Council Regulation (EC) No 1346/2000 (the Insolvency Regulation), as interpreted by decisions of the European Court of Justice in Re Eurofood IFSC Ltd (Case C-341/04) [2006] Ch 503 and Interedil Srl v Fallimento Interedil Srl (Case C-396/09) [2012] Bus LR 1582. On the application before him, Arnold J was satisfied that the COMI of the company was indeed in England and it is clear that it remains so. As the only practical alternative to the restructuring proposed in the scheme or some other restructuring would be a formal insolvency process for the company, it follows that the insolvency would proceed under English law and in the English Courts.

The detailed expert evidence of US law establishes that it is likely that the US Courts would, under Chapter 15 of the US Bankruptcy Code which gives effect to the UNCITRAL Model Law on Cross-Border Insolvency, recognise and give effect to the scheme, notwithstanding that it alters and replaces rights governed by New York law. This evidence deals at some length both with the approach of the US courts to questions of COMI under Chapter 15 and to the recognition of non-US plans of reorganisation, and in particular schemes of arrangement under English law. It is not entirely clear to me from this evidence whether the move of the COMI of the company to England is relevant to the issue of recognition of the scheme under Chapter 15. In circumstances where the practical alternative to the scheme is an insolvency process in, say, England, there is an obvious logic in treating a scheme approved under English law as effective to alter the rights of creditors, even though those rights are governed by the law of a different country. In the event of an insolvency process, the rights of the creditors to recover against the assets of the company would be governed by the insolvency law and recognition would be likely given to a scheme approved in the course of the insolvency process just as it would be given to the insolvency process itself. It may, however, be that in other appropriate circumstances the US courts would be prepared to recognise and give effect to schemes altering such rights. Either way, the expert evidence is clear that it is reasonably likely that the US court would recognise the present scheme and give effect to it.

Similarly, there is expert evidence that the courts of the Netherlands would recognise and give effect to the scheme, as would the courts of Hungary where some of the guaranteeing companies and secured assets are located.

I am inclined to the view that the requirement to show a connection with England and the need to show that the scheme, if approved, will have a substantial effect are not wholly separate questions but, if not aspects of the same question, at least closely related. In applying the requirement for a sufficient connection with England to the exercise of the court’s jurisdiction to sanction a scheme, Lawrence Collins J in Re Drax Holdings Ltd was applying the requirement that, before the court would make a winding up order, there must be a sufficient connection with England. This may, but does not necessarily have to, consist of assets within the jurisdiction. The reason for such connection in the context of winding up is not the product of abstract theory but the need for the winding up order to have a practical effect: see, for example, Re Compania Merabello San Nicholas SA [1973] Ch 75 at 86 G-H per Megarry J. Although in theory a winding up order against a foreign company has as a matter of English law worldwide effect, the courts have always recognised that in practice its effect will be confined to the United Kingdom. (I leave aside here the effect of the Insolvency Regulation and the UNCITRAL Model Law.) The presence of assets within the jurisdiction is but the most obvious example of a connection which will give practical effect to a winding up order.

Likewise, the presence in England of substantial assets belonging to a company proposing a scheme with its creditors could in an appropriate case provide the requisite connection, because the scheme if sanctioned would have the practical affect of preventing execution by the relevant creditors against those assets, save in accordance with the terms of the scheme. The presence of a sufficient number of creditors in England subject to the personal jurisdiction of the court might also supply the necessary connection, as those creditors would be bound to act in accordance with the scheme, both within and outside the jurisdiction. The importance of the connection provided in cases where the rights of creditors are governed by English law lies in the effect which foreign courts may be expected to give to an alteration of those rights in accordance with English law.

In the present case, the significance of moving the COMI of the company to England again lies not so much in the establishment in the abstract of a connection between the company and England but, on the basis that any insolvency process for the company would be undertaken under English law in England, providing a solid basis and background for a scheme under English law which altered contractual rights governed by a foreign law.

Of course, it may be that expert evidence of US law would show that the US courts would give effect to an English scheme which altered the rights of the Note Creditors governed by New York law even though the COMI of the company had not been moved to England and therefore there was no basis for contending that an English insolvency process was in fact the alternative to the scheme. I do not have to decide on this application whether, if that were the case, it would provide a sufficient basis for the court to exercise its jurisdiction to sanction a scheme under section 899.

On any footing, the circumstances of this case and the evidence filed in support of the application establish that there exists a sufficient connection with England and that the scheme will substantially achieve its purpose.

The scheme provides that it will not become effective, unless the company obtains an order of the US Bankruptcy Court for the recognition of the scheme under Chapter 15 of the US Bankruptcy Code. The scheme further provides that this condition may be waived by the company with the prior written consent of the trustee under the indenture. The company has filed a petition for recognition of the scheme which is due for hearing by the US Bankruptcy Court for the Southern District of New York on 3 December 2013. The company nonetheless wishes to preserve this right of waiver in the particular circumstances of this case. Even if an order for recognition is not obtained, the level of support for the scheme and the very high percentage of Note Creditors who have signed the securities confirmation form as a necessary precondition to receiving their entitlements under the scheme, including all of the nine Note Creditors who voted against the scheme, indicate that the scheme will very largely achieve its purpose. All Note Creditors who voted in favour of the scheme did so on the basis that it contained this right of waiver. In these circumstances, I do not consider it necessary to require the deletion of the right of waiver.

There is one point of practice in relation to the expert evidence of foreign law filed by the company in this case. The evidence of US law and Hungarian law was given by partners in White & Case in New York and Hungary respectively. White & Case, acting by their London office, are the solicitors acting for the company. While I am satisfied that the reports provided on US and Hungarian law have been expertly and conscientiously prepared, I consider that the important feature of independence would be enhanced if such reports were provided by experts unconnected with law firms professionally engaged in the scheme. This consideration is all the more important in cases where there is no opposition to the application.

It did not appear to Arnold J, and it does not appear to me, that any issue arises under Council Regulation (EC) No 44/2001 (the Judgments Regulation). In my judgment an application to sanction a scheme of arrangement is a civil and commercial matter for the purposes of article 1.1 and, at least in the absence of formal insolvency proceedings, does not fall within the exclusion contained in article 1.2(b). On the scope of article 1.1, I agree with the conclusion reached by Briggs J in Re Rodenstock GmbH at [47]-[51].

As to the exclusion in article 1.2(b), Briggs J left open at [51] the question whether schemes in relation to insolvent companies are within the scope of the Judgments Regulation, even if they are not made as part of insolvency proceedings. As schemes of arrangements are not insolvency proceedings falling within the Insolvency Regulation and as it is generally accepted that the purpose of article 1.2(b) is to enable the Judgments Regulation and the Insolvency Regulation to dovetail almost completely with each other (see the Schlosser Report cited by Briggs J at [47]), it logically follows that the exclusion in article 1.2(b) does not extend to a scheme of arrangement involving an insolvent company, at least unless the company is the subject of an insolvency proceeding falling within the Insolvency Regulation. In other words, an order sanctioning a scheme between an insolvent company and creditors is subject to the Judgments Regulation, at least if the company is not subject to insolvency proceedings to which the Insolvency Regulation applies. For these purposes, insolvency proceedings are those listed in Annex A to the Insolvency Regulation. Although it may well be that a scheme of arrangement proposed by a company which is subject to such insolvency proceedings falls within the exclusion in article 1.2(b) of the Judgments Regulation, it does not necessarily follow, given that a scheme of arrangement under the Companies Act 2006 is not an insolvency proceeding to which the Insolvency Regulation applies. It could still be that an order sanctioning a scheme of arrangement in those circumstances is entitled to recognition under the Judgments Regulation. This is not an issue which arises for decision on this application.

The evidence on the financial position of the company in the present case demonstrates that it is insolvent and will only cease to be so if the scheme is sanctioned or another restructuring is agreed. For the reasons given above, the order sanctioning the scheme will nonetheless be entitled to recognition and enforcement under chapter III of the Judgments Regulation.

There remains the issue whether chapter II of the Judgments Regulation applies and, if so, whether the present application falls within one of the exceptions to the general rule stated in article 2.1. Whether chapter II applies depends on whether an application to sanction a scheme involves persons domiciled in a member state being “sued”. That may fairly be described at present as an open question, but even if it does, the company relies on the exception contained in article 6, enabling a person domiciled in a member state to be sued, where he is one of a number of defendants, in the courts for the place where any of the defendants is domiciled, provided that the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings. A number of the Note Creditors are domiciled in England and therefore, if chapter II applies, Note Creditors domiciled in other member states may be “sued” in this jurisdiction.

As far as the merits of the scheme are concerned, there is nothing in the proposals or in the material put to creditors and before the court which would suggest that the court should differ from the assessment of the commercial interests of the Note Creditors evidenced by the very high voting figures in favour of the scheme. The high turn-out of creditors voting on the scheme assures the court that the class was well represented at the meeting.

As well as affecting the rights of the Note Creditors against the company itself, the scheme releases their rights against a number of guarantor companies. This is not an extraneous feature but is a commercially important part of the proposals and indeed is integral to them. There would be little point in proceeding with the proposed exchange of the existing Notes for new Notes and equity, while leaving the guarantees in place. The authorities establish that the variation or release of rights against third parties can properly form part of, or even in the right circumstances constitute, the proposals embodied in a scheme: see re T&N Ltd (No.4) [2006] EWHC 1447 (Ch), [2007] Bus LR 1411, Re Lehman Brothers International (Europe) (No.2) [2009] EWCA Civ 1161, [2010] Bus LR 489.

I am accordingly satisfied that the Court should sanction this scheme and I therefore do so.