Zlomrex International Finance SA

This is an application inviting the court to convene a meeting of one class of creditors of this company, the company being Zlomrex International Finance SA. There is a heavy international, or cross-border, element involved. I deliver a short judgment to deal with a few of the issues arising. It is not intended to deal at any length with most of the detailed matters which counsel relied on establishing the jurisdiction of the court and the propriety of convening a meeting in the present circumstances. I have been much assisted by the extremely helpful skeleton of Mr. Bayfield, a model of its kind, and his even clearer oral submissions.

The company is part of a Polish group which trades in scrap metal. The position of the company within the group is that it is the finance company. It issued the Loan Notes involved in the Scheme and on-lent into the group. Its function was essentially the raiser of funds and the channelling of funds. As such it did not have need of office staff to conduct its day-to-day activities. The rights of repayment in respect of loans on-lent within the group are its principal asset.

The Loan Notes in question in this case, which are to be the subject of the Scheme, secure payment of €118 million. The Notes are repayable on 1st February, 2014. They are subject to New York Law and the non-exclusive jurisdiction of the New York courts. The Notes have a single trustee or note-holder. The beneficiaries of the Notes trade their interests on various trading registers and exchanges. Under certain circumstances the beneficial owners of the Notes may be able to, or may be required to, take over the Notes themselves, and that makes them contingent creditors. That has a significance to the structure of the Scheme.

The company itself is a French-registered company. As I have indicated, it does not need to conduct a lot of activity a lot of the time, but until recently all such activities as it had to conduct took place essentially in France. It will be apparent that so far there is not a very great connection with this jurisdiction.

However, circumstances have recently changed. In August the company moved its principal place of business and its principal office to London. The avowed intention behind that move was to give the company a close connection with this jurisdiction and, so far as necessary, to move its centre of main interest ("COMI") here. The concept of COMI is conceivably, but not necessarily, significant for the purposes of the Insolvency Regulation and to jurisdiction and, potentially, to certain interests that might arise in New York if the Scheme itself be approved. In that context the company took on phone lines; it acquired English premises. It acquired two English directors. It opened a bank account here and transferred its

The purpose of this move was to establish jurisdiction to order the Scheme, whose meeting I am now asked to consider. No attempt has been made to hide that motivation. Had it not been for the desire to have an English Scheme the move would no doubt not have taken place. An English Scheme is preferred over alternatives. A French re-structuring would be likely to trigger an event of default with further cross-defaults within the Group which would lead to worse recoveries for creditors than they currently hope to get out of the Scheme. Indeed, there would be worse recoveries for other creditors as well. Restructuring in New York is said to be more expensive to the extent of being prohibitive, or almost prohibitive, with the possibility of difficulties being caused by non-consensual releases which are part of the Scheme. There are said to be more uncertainties arising in that context than arise in this jurisdiction and that those uncertainties could only be avoided in New York by promoting additional Schemes elsewhere in the group with the concomitant additional costs and the negative effect on relationships with customers and suppliers of the group. In all those circumstances an English Scheme is perceived as being the most cost-effective and clearest way of restructuring the debts of the company. A full-restructuring in the sense of acquiring additional replacement funding is thought to be not possible in the current commercial climate.

My attention has been drawn to authorities on COMI - how COMI is established and, to a degree, the extent to which it can be changed. So far as is relevant and necessary for the purpose of this application, I am satisfied on the facts and the law that for the purposes of the Insolvency Regulation the company's COMI is now in England and Wales so far as that matters and it was in England and Wales at the commencement of these proceedings.

The company is insolvent. It will not be able to repay the Notes in full at their due date. If nothing is done, then some form of insolvency proceedings will be likely, if not inevitable. The Scheme of Arrangement which is proposed is intended to avoid that. It affects only the Notes to which I have referred. That is the vast bulk of the debt of the company. Under the Scheme, the beneficial owners - and not the single technical note-holder - will be treated as the creditors. They are, as I have indicated, contingent creditors and they will be voting in that capacity. The note trustee will not vote under the proposed scheme. The scheme involves the substitution of debts due in the future for the present debts. The amounts payable on the Notes, which would otherwise be payable on 1st February next year, will become repayable under two separate Notes, either in 2020 or in 2021. The aggregate of those separate Notes is the same as the amount due under the current Notes. The debtor will be replaced as well. A new English company, constituted for the purpose, will replace the company as the debtor under the new Notes. There will be one or two new guarantors and the release of at least one existing guarantor. I do not need to go into any further details of the proposed Scheme.

The Scheme proceedings are to run parallel with other proposals, potentially taking effect independently of a Companies Act Scheme and which it is hoped will engage a sufficient body of the beneficial holders of the Notes to make a Scheme unnecessary in the end. However, there is no time to try that first and then, if it fails, to put a Scheme in place because of the proximity of the date on which the Note will fall due. I accept that in those circumstances it is appropriate to do what the company is seeking to do - that is to say, to run the proposed statutory Scheme proceedings and the contractual Scheme in parallel.

Despite the fact that this is a French-registered company I am satisfied at the moment that there is jurisdiction to make orders in anticipation of a sanctioning of the scheme and, if appropriate, to sanction the Scheme.

The Scheme is proposed, as they all are, under s.895 of the Companies Act 2006. Sub-section (1) provides as follows:

its creditors, or any class of them, or

its members, or any class of them".

If these proceedings were familiar insolvency proceedings in the form of winding- up of proceedings or proceedings for an administration order the appropriate test for establishing jurisdiction would be where the company's COMI is for the purposes of Article 3.1 of the Insolvency Regulation, but, as Mr. Bayfield points out, the test for the purposes of schemes under s.895 is, in fact, the older English law requiring a sufficient connection with this jurisdiction. That is the test that should be applied. He relied in this context on the decision of Briggs, J. in Re. Rodenstock Ltd. [2012] BCC 459, especially at paras. 54 to 56. I accept his submissions on this. So, the initial jurisdictional question is whether there is "a sufficiently close connection with England usually, but not invariably, in the form of assets within the jurisdiction" (the test approved by the Court of Appeal in Re. Latreefers Inc. [2001] BCC, 174).

I am satisfied that the facts that I have identified above, and which have taken place in and since August of this year, bring the case within that test. But, even though those facts were brought about specifically for the purpose of establishing jurisdiction, if in fact that test for jurisdiction is wrong and somehow COMI has relevance, as if it were an application within the Insolvency Regulation, I also find that the company's COMI within the meaning of that Regulation has been moved to this jurisdiction and was here at the commencement of these proceedings. I am therefore satisfied that there is jurisdiction to order a Scheme if all the other factors justify making such an Order.

I am further satisfied that subject to the points that I am about to make it would be appropriate to order the convening of the meeting of the beneficial owners of the Notes. I am satisfied that the class of creditors has been properly constituted and it is unnecessary to break them down into any further classes or to create any further classes. The scheme seems to me to be a proper one to put before the creditors and I have myself identified nothing wrong with the documentation.

So far as it is necessary to consider the effect of the Judgments Regulation then I am satisfied that if, contrary to the apparent provisional views taken by some of my brethren in other cases, it were necessary to bring these proceedings within that Regulation, then Article 6 would apply because at least one of the beneficial noteholders is domiciled in this jurisdiction. I need not develop that further.

However, I need to consider one or two other factors arising out of the international Order. In order for this Scheme to work it would have to be effective in New York, bearing in mind the proper law point and the ability to sue there, and possibly in Poland. Clear advice has been obtained from a Polish law expert as to the likelihood of the Polish courts giving effect to the Scheme so far as may be necessary. No procedural steps would be necessary to procure recognition and the expert has opined that it would be recognised as a foreign judgment there, if ordered, though he accepts that there is an element of discretion which prevents there being absolute certainty on the point.

A greater practical, and perhaps legal, problem is presented by New York which is where the problem is perhaps more likely to arise, bearing in mind the fact that New York law applies to the Notes and the courts there have jurisdiction. The company has sought to address the obvious issues which arise. Would the Scheme affect New York law-governed Notes and what would the attitude of the New York courts be likely to be if faced with the claim under the original Notes to which the Scheme would be raised as a defence? Would the Scheme be recognised?

The company propounding the Scheme has sought to meet this point in two ways. First, it has obtained the opinion of a New York lawyer, namely, Mr. Richard Graham of White & Case. White & Case are the solicitors acting for the company, but I am satisfied that although he would not normally qualify as a fully independent expert, he has approached this job with a sufficient awareness of the requirements for an English law expert and has expressed a view conscientiously and with a sufficient degree of dispassion. In his closely argued opinion, running to some twenty-four pages, he sets out, with the benefit of a number of authorities, how the Scheme would, or might, be viewed by the New York courts and the history of the New York courts in considering Schemes made under foreign law jurisdictions. He concludes, at p.23 as follows,

It in fact proposes a second way of dealing with the matter in the Scheme itself. It is possible to apply for recognition of the Scheme under Chapter 15 of the US Bankruptcy Code. The full implementation of the Scheme makes it subject to various conditions, one of which is obtaining an appropriate level of recognition under Chapter 15 so as to prevent any beneficial note-holder from being able to enforce the terms of the original Scheme in New York. That would be a neat and clear way of achieving clarity. If the appropriate degree of recognition is obtained, then the Scheme can take full effect and cannot be side-stepped in New York. If the recognition cannot be obtained then the Scheme fails and never takes effect. There is never any question of conflict.

However, there is a tweak introduced as to that. That particular condition can be waived by the company, albeit only with the consent of the trustee of the Notes. There is therefore, under the Scheme as currently formulated, the possibility that the chosen method of obtaining clarity will never be adopted and therefore there will remain a level of uncertainty, with the Scheme actually taking effect with the possibility that it will be in conflict with New York law - or at least not given effect to by New York law. During the course of the hearing that caused me concerns. Mr. Bayfield suggested that there were good reasons for allowing the waiver.

There seems to me to be no problem in seeking recognition of the Scheme. In fact, it seems like a positively good idea. The problem comes in relation to the waiver. Mr. Bayfield's suggestion was that the waiver might, by way of example, be appropriate if, to take his extreme example, there is just one beneficial note-holder with only a very small proportion of the value of the Notes vested in him, and who simply does not participate in the process at all. That would leave, on his hypothetical example, 99.95 percent of the noteholders in favour of the Scheme and, because of other aspects of the Scheme documentation. bound not to sue in New York. In those circumstances he says that the company may wish to take the risk of not bothering to apply to get recognition in New York, believing that the single non-joining note-holder will not be bothering to challenge it there in any event. The requirement that the trustees consent to a waiver of the condition safeguards the position of creditors. If there is a legitimate creditor interest in not having the condition waived, then the trustee would - Mr. Bayfield would suggest - not consent to the waiver and an application for recognition would have to be made for the scheme to have full effect.

I confess I am not entirely satisfied by that. There might be a case for removing the right to waive. Were that to be done, this court could be satisfied that in sanctioning the Scheme it would not be giving rise to any litigation or difficulties, or giving the impression of blithely overriding New York law rights and any legitimate interests of the New York court. This court is, of course, doing no such thing. Ultimately, this court acts in accordance with its own principles, fully expecting the New York courts to act in accordance with theirs, even if that were to mean that the Scheme is ultimately ineffective. The proposed mechanism of getting recognition and making that a condition of the Scheme is a very good way of reconciling the two jurisdictions. A right to waive that might be said to be inconsistent with that aim. Furthermore, the right to waive might turn out to be academic, either in the sense that there is sufficient voting to make it unnecessary to apply at all because of all the noteholders joining the Scheme or because the level of non-support for the Scheme means that in practice an application for recognition is going to have to be made anyway.

All these matters are best judged and, if necessary, further elaborated on at the next stage of the process. I accept Mr. Bayfield's suggestion that I should not insist on an amendment at this stage to take out the waiver and should leave the court, if any, asked to sanction the Scheme to deal with the matter at the further hearing that will have to take place in order to obtain the sanction if the voting goes the right way. As he observed, that will give some opportunity to address what he says is the practical need for the waiver in evidence, if that seems appropriate to anyone, particularly in the light of my observations at this hearing. Accordingly, I shall not reflect my misgivings about the existence of the waiver by requiring the removal of it at this stage. The Scheme may, as far as I am concerned, go forward with the provision for waiver within it.

The other matter which has arisen is one point on the form of default. There is nothing remarkable or objectionable about the proposed form of order, save for para. 7. Paragraph 7 is introduced by the words, "It is ordered and directed that -- " and itself goes on,