Re Apcoa Parking Holdings GmbH

Introduction

Nine bodies corporate (each a “Scheme Company” and together “the Scheme Companies”) in a group called the Apcoa Group, a leading pan European car park operator with (as at the end of July 2014) some 5,000 employees, have applied to this court for the purposes of obtaining its sanction to schemes of arrangement to effect a restructuring which is considered essential to enable the Apcoa Group to avoid formal insolvencies and their associated value destruction for all creditors.

The applications are in the case of each Scheme Company made by a Claim Form issued on 18 September 2014 pursuant to CPR Part 49 and seeking (1) orders convening meetings of certain of its creditors for the purpose of considering and, if thought fit, approving a scheme of arrangement under Part 26 of the Companies Act 2006 (“Part 26”) and, if so approved, (2) the Court’s sanction of such scheme (together “the Schemes”) and further requisite directions.

The Schemes are inter-conditional: if one fails they all fail. Their sanction has throughout been presented as a matter of great urgency. The repayment date of the facilities sought to be reconstructed was 25 October 2014, and although a short extension was agreed when it became clear that the matter could not be concluded, it cannot be extended for long. Further, on 25 November 2014, the offer of new facilities on which the Apcoa Group reconstruction depends expires.

At each stage of the court process the Schemes have been opposed by an assignee of a creditor of the Scheme Companies under a facilities agreement originally dated 23 April 2007 and entered into by the Apcoa Group’s holding company, Apcoa Parking Holdings GmbH (“APHG”), Mizuho Bank, Ltd and Royal Bank of Canada as mandated lead arrangers, Mizuho Bank, Ltd as agent (“the Existing SFA Agent”) issuing bank and security trustee (“the Security Trustee”) and the lenders named therein (“the Existing SFA Lenders” as amended and/or restated from time to time (“the Existing SFA”)). The opposing creditor by assignment is FMS Wertmanagement Anstalt öffentlichen Rechts (“FMS”).

On 29 September 2014, after a contested hearing in the long vacation which lasted nearly three days, I made orders convening meetings of creditors in each case as proposed by the relevant Scheme Company. I gave a short ex tempore ruling. I indicated that I would amplify my reasons in a reserved judgment.

The class meetings convened and held pursuant to my order duly took place on 13 October 2014 and approved the Schemes by the requisite majorities.

The matters came back before the court on 20 October 2014 for the purpose of obtaining the court’s sanction for each Scheme. That contested hearing spanned four days, and included a day of cross-examination of two expert witnesses on German law for reasons I shall later explain.

By reference to commercial exigencies of which I was assured (but which were not explained) I was pressed to provide a determination on or before 29 October 2014, on the basis that if necessary my full reasons would be provided in a reserved judgment later. Accordingly, on 29 October 2014 I gave my determination. I declined to approve the Schemes in their then form, because of two features I considered beyond my jurisdiction to approve, and which in any event (if I was wrong about the extent of the court’s jurisdiction) I was not content to approve in the exercise of my discretion. However, I indicated that but for those two features I would sanction the Schemes.

On 30 October 2014, after amendments had been made to the proposed Schemes to address the two matters that had caused me to decline my sanction, I sanctioned all the Schemes. I indicated that I would provide my reasoned judgment explaining my decisions at each stage of the court process. In view of the continuing urgency the parties politely and understandably asked me to deliver it as soon as possible. This is my reasoned composite judgment.

Although I should acknowledge regret in my own case that pressures of time have probably led to an excessively long judgment, it will also be apparent from the length of the hearings (as well as the number of files, including four of authorities) that these Schemes raise issues of complexity and importance, and some novelty. There are issues raised which seem to me to go both to the root of the jurisdiction and its availability and exercise in a cross-border context.

It is unusual also that a scheme should be contested at every stage; and the adversarial process inevitably shines light on issues that in unopposed matters may not have been so sharply exposed. In refusing permission to appeal I do not wish to be understood to underestimate the importance of the points: I considered as a pragmatic matter that in the urgent circumstances the future conduct of the matter should be left to the Court of Appeal to determine.

Although I refused permission to appeal largely for pragmatic reasons (which I sought to explain in a separate ruling), I required the parties to develop mechanisms to ensure that any appeal would not be rendered nugatory, and that my decision to sanction, if found to be in error, could fully be reversed. I much appreciated their cooperation in this.

The Parties

The persons interested and represented in court were as follows.

The nine Scheme Companies who have sought to restructure their indebtedness under the Schemes and pursuant to Part 26 are:

The Scheme Companies have been represented throughout the court process by Mr William Trower QC and Mr Adam Goodison, instructed by Clifford Chance.

As well as FMS, another body corporate appeared at both stages of the court process, namely Centerbridge Partners (“Centerbridge”), which is the largest creditor of the Apcoa Group. Centerbridge appeared at the first stage of the court process by Mr David Allison QC, and at the second stage by Mr Jeremy Goldring QC, instructed by Kirkland & Ellis International LLP.

In contrast to FMS, Centerbridge has throughout been highly supportive of the Schemes. Indeed, FMS contends that Centerbridge is the real mastermind and driving force of the Schemes, and that it has contrived them and their urgency in pursuit of its own commercial objectives as a specialist in distressed debt investment with a “loan to own” strategy or model of buying distressed loans at a significant discount and then seeking to swap the debt for equity in a restructuring which enables a profit to be made on the exit from its equity investment. FMS depicts the reconstruction in this case as exemplifying that model.

FMS has been supported in its opposition to the Schemes by another Scheme Creditor, Litespeed Master Fund Limited (“Litespeed”). Litespeed did not appear at any stage; but it set out its position in a letter to the court dated 19 September 2014 which was written on its behalf by its manager, Litespeed Management LLC, based in New York. That letter is exhibited to evidence filed on behalf of FMS. In essence, Litespeed adopted the reasoning of FMS for opposing the Schemes.

The broader contest

As will be inferred and is later explained, FMS and Litespeed have an interest in common which is not shared by any of the other Scheme Creditors. It is the protection and vindication of this different interest which FMS (and Litespeed) contends required a separate class meeting (comprised only of those two).

Thus, those objecting to the Schemes present Centerbridge as a specialist in distressed debt pursuing a well-honed and self-interested “loan to own” strategy; whereas Centerbridge (and the Scheme Companies, who fear being shot dead in the cross-fire) depict FMS as a “hold-out” creditor wishing to exploit for its own advantage its leverage in a position where the borrowers are under pressure to extract improvements. The struggle in substance and name-calling is not unfamiliar.

What is clear is the jockeying for position, and that neither of the contestants is probably interested in long-term investment. I mention this as background, and to set the scene; but it is also relevant, to my mind, in reminding the court that (as I elaborate later) it must test class issues by reference to legal rights and legitimate interests, and what objectively should inform the discussions between persons with different interests acting reasonably.

The facilities and indebtedness sought to be restructured

The existing facilities comprise the following:

First in priority are lenders together referred to as “the Existing Priority Senior Lenders”, namely:-

lenders pursuant to a tranche A facility and a revolving credit facility (“the Non Guarantee Senior Facilities” and such lenders are referred to as “the Non Guarantee Lenders”); and

lenders pursuant to a bank guarantee facility (“the Bank Guarantee Facility”, and such lenders are referred to as “the Bank Guarantee Facility Lenders”);

Second in priority are lenders pursuant to a subordinated term loan facility (“the Second Lien Facility” and such lenders are referred to as “the Second Lien Lenders”).

The Security Trustee holds security over certain assets of the Apcoa Group for and on behalf of the Priority Senior Lenders and the Second Lien Lenders. Pursuant to clause 15 of the German law governed Intercreditor Agreement (“the Existing ICA”), dated 23 April 2007 (as amended and restated on 21 May 2008), the sums owed under the Second Lien Facility rank behind the sums owed under the Priority Senior Facilities.

In outline summary, the restructuring proposes that the Existing Priority Senior Lenders will be repaid or prepaid the amounts outstanding to them under the Existing SFA (i.e. €660m) by:-

The restructuring proposals also include:-

The “Implementation Documents”, which include a “Restructuring Deed” are authorised to be executed by clauses 7 and 8 of the proposed Schemes. Clause 6 of the Restructuring Deed then effects the various restructuring steps to achieve the overall restructuring.

It is the perception and avowed intention of the Scheme Companies that the restructuring proposals will have clear benefits for both the Scheme Companies and their Scheme Creditors. They will allow stabilisation of the business and, through a de-leveraging of debt, will enable the Scheme Companies to grow sales and improve EBITDA for the benefit of Scheme Creditors.

Commercial pressures and timing of the Schemes

As mentioned above, the immediate time pressures are (a) the maturity date for the existing facilities of 25 October 2014, which has been extended but only for a short time and (b) the fact that the offer of new facilities on which the Scheme Companies’ future depends expires on 25 November 2014.

Subject to paragraph [34] below, I think I can gratefully adopt for these purposes the description of the immediate background and context of the Schemes set out in the Scheme Companies’ skeleton argument for the second stage of the proceedings (the “Sanctions Stage”) and the circumstances in which the Schemes are considered necessary are as follows:

To this description I should add these reservations to capture the position of FMS. FMS considers and contends that (a) the imminence of insolvency is less immediate than the Scheme Companies have suggested; (b) the immediate threat of insolvency is being wielded in order to present the court with the starkest possible choice and the need to make it as matter of extreme urgency; that in truth (c) Centerbridge has driven the structure of the Schemes and contrived their presentation as the only realistic option, whereas in truth (d) there is no reason why the repayment date should not be extended to facilitate negotiation of fairer Schemes and their adjudication in less frantic circumstances.

Inevitably (given the opposing arguments) the protagonists have provided somewhat different accounts of the background to the Schemes and their immediate context. I take the following summary from FMS’s skeleton argument for the first hearing with the immediate caveat that I am not to be taken as agreeing with the descriptions of the motivation and objectives of the Scheme Companies and Centerbridge; it is simply a reasonably practical way, in urgent circumstances, of describing the perception of the battleground which has given rise to the objections with which I have been concerned:

Returning to the Turnover Agreement (again borrowing from FMS’s skeleton arguments and subject to the same caveats as before):

Instigation of the court process and the first stage

Part 26 sets out the conditions under which schemes of arrangement comprising some compromise or arrangement between a company and its shareholders or creditors may be promulgated and sanctioned and given effect by order of the court. A scheme may achieve anything that the creditors or shareholders, acting unanimously, could together agree by way of compromise or arrangement of their interests in the relevant capacity (that is, as shareholders, in a shareholders’ scheme, and as creditors in a creditors’ scheme, such as these schemes are).

There are three stages to such a scheme:

Function of court at Convening Hearing

That led in turn to a new Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345). That Practice Statement and the cases (especially In re Hawk) which prompted and then explained it make clear that the court’s function at the convening stage of proceedings for the approval and sanction of a scheme of arrangement is to deal with any questions of jurisdiction by then identified and to give appropriate directions for the convening of meetings. I shall call the hearing at which that is decided “the Convening Hearing”.

The principal jurisdiction question at the Convening Hearing is normally the identification of the appropriate classes for the purpose of convening meetings to vote upon the scheme proposals; but other matters going to the jurisdiction of the court may also be raised, and it is obviously optimal that any such matters be adjudicated, if possible, since if the court lacks jurisdiction there is no point in any class meetings at all.

It is, however, important to emphasise that the function of the court at the Convening Hearing is a limited one; and its decision, even on the question as to the composition of classes is not final, even though the court can be expected not to change its mind, of its own motion, at the third stage on matters it decided at the first stage (since to do so would tend to subvert the purpose of the revised practice).

Test for identifying classes

The test for identifying the appropriate classes has been stated in point of principle in the same way for many years; but its application has been much discussed in the authorities, and has been illuminated by a series of cases over the past few years after some uncertainty in the light of the decision in Re Hellenic & General Trust Ltd [1976] 1 WLR 123.

Distinguishing rights from interests

The difference between rights and interests both before and after the relevant scheme has sometimes given rise to confusion and difficulty. Indeed, I suspect that the now approved approach of strictly confining class composition issues to questions as to different rights against the company, and thus reserving other matters to discretion rather than jurisdiction, is a relatively modern refinement, even if it is a refinement which has been built and justified by reference to older cases (see below).

My own sense is that, although the difference (which is plain) between legal rights against the company and personal interests or objectives in the case of particular creditors has always been recognised and emphasised, the importance attached to the difference has somewhat varied over the years. A tendency that developed was to regard Bowen LJ’s classic test as to the meaning of the term “class” (see above) as connoting a single ultimate question, that is, whether the class constitution was such that any differences in the rights and the interests of the members of the proposed class were not such as to prevent them consulting together with a view to their common interests. Posed as a single question in that form, the test invites, indeed requires, consideration of interests.

The modern approach, which the practice established pursuant to re Hawk both reflects and requires, is to break the question into two parts, and ask first whether there is any difference between the creditors in point of strict legal right, and only to proceed to the second question, at the Convening stage, if there is; and if there is, to postulate, by reference to the alternative if the scheme were to fail, whether objectively there would be more to unite than divide the creditors in the proposed class, ignoring for that purpose any personal or extraneous interest or subjective motivation operating in the case of any particular creditor(s).

It is interesting to compare, for example, the focus in Eve J’s Practice Note on “interests” and the focus in the prevailing Practice Statement on “rights against the company” (see paragraph 2). As is also familiar, in Re Hellenic & General Trust Ltd [1976] 1 WLR 123, where a scheme of arrangement was used (as often it is) as a means of effecting a take-over, Templeman J’s decision that the court had no jurisdiction to sanction the scheme on the stated basis that the interests of one of the parties in a single class were different from the other shareholders may be explicable on this basis. Templeman J consistently referred to the parties’ respective “interests” rather than their “rights” as if the former were to be assessed in determining the composition of a class.

Some remaining confusion?

Be all this as it may, the confusion has largely been dispelled by a frank acknowledgment in later authorities that the language used had been “imprecise” (see, for example, per Lord Millett NPJ sitting in the Hong Kong Court of Final Appeal in Re UDL Holdings Ltd & Ors [2002] 1 HKC 172 at 182B) and a reinstatement of orthodoxy which has been established since Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213. There Bowen LJ made clear that the fact that a member of a class comprised of persons all with the same legal rights had a different interest did not preclude it from being included in and voting in that class, although that separate interest might lead the court to consider that the decision of the class was not in its interests, and on that basis to refuse to sanction the scheme as a matter of discretion. That chimes too, of course, with the inclination of judges to prefer the more flexible tool of discretion and an overall appreciation of fairness tested by reference to the real alternatives rather than the straight-jacket of jurisdiction, especially where rigidity may result in fragmentation of classes to avoid jurisdictional issues, but at the cost of enabling a small group to hold out unfairly against a majority.

I say “largely been dispelled” because there remain, to my mind, some blurred boundaries, especially as to what meaning is to be given in the context to the term “rights against the company”. Thus, for example, and as emphasised by Mr Snowden on behalf of FMS at the Convening Hearing, in the UDL case Lord Millett, when referring to Bowen LJ’s analysis in Re Alabama, appeared to equate “interests proceeding from rights” with “rights” (see page 189I). He appears to treat the real distinction as being between such rights or derivative interests on the one hand, and “different and potentially conflicting interests that arise from circumstances unconnected with their interests as members of the class” on the other. Lord Millett also later referred, in seeking to rationalise Templeman J’s approach in re Hellenic, to “different treatment” to be received under the scheme as going to the issue of class composition, without expressly confining the difference to a difference in legal rights. Indeed, he appears to have accepted that if the difference was that “rights proposed to be conferred by the scheme” on one set of shareholders “were commercially so dissimilar as to make it impossible for [that set and the other shareholders] to consult together with a view to their common interest”, that would give rise to a jurisdictional issue (see page 181).

FMS’s objections at the Convening Hearing

It was by reference to these sorts of issues that at the Convening Hearing in this case, Mr Snowden objected to the class meetings proposed on the grounds that the differences in both the rights or interests proceeding from rights enjoyed by FMS (and Litespeed), and the differences in the commercial effect for them of the proposed Schemes gave rise, required a separate class comprised of FMS and Litespeed to be convened, failing which the court would not have jurisdiction to proceed to sanction the Schemes.

If this argument were correct, and a separate class comprised of just FMS and Litespeed were to be required, that would, of course, give those two creditors a power of veto over a scheme which the Directors of the Scheme Companies consider to be a necessity if they are to avoid insolvency throughout the Apcoa Group.

The arguments and my decision at the Convening Hearing

The proposed class constitutions for meetings were as follows:

As regards these proposed classes, the Scheme Companies informed me that pursuant to a Lock-Up Agreement dated 29 July 2014 (which became effective on 15 August 2014) (“the Lock-Up Agreement”) the present proposed restructuring proposals were already supported by:

The Directors of the Scheme Companies reiterated to me with emphasis that (a) the Schemes are a critical part of the following restructuring, which will allow for a de-leveraging of the balance sheets of the Scheme Companies so as to allow for continued trading for the benefit of all creditors, and that (b) unless permitted to proceed they would have no alternative than to apply in Germany for the appropriate insolvency process.

FMS contended that this was illusory, that if the Schemes did not proceed, some other solution more acceptable to it and to Litespeed would be found and implemented, and that the court should not succumb to this sort of pressure. In any event, it could and should not do so, since the issue of class composition went to its jurisdiction.

At its conclusion on 29 September 2014, I gave my decision that the class meetings proposed by the Scheme Companies should be convened (on relatively short notice, for 13 October 2014, given that substantially all the creditors (though not of course FMS and Litespeed) were already bound by a Lock-Up Agreement) and the only known likely objectors were already before me and in effect already had had notice. As is usual, I gave further directions as to the conduct of those meetings.

I should also mention that at the Convening Hearing, Mr Snowden also sought to persuade me that (a) so clear was both the factual context and the legal reality of unfairness that, even if not persuaded that FMS and Litespeed should form separate classes, I should also decide that the Schemes had no prospect of success at the third stage; and (b) that furthermore both (i) the cross-border aspects and (ii) the feature of the Schemes imposing a “new obligation” on creditors (as I explain more fully below) plainly indicated that the court would lack jurisdiction quite apart from the class composition issues.

Mr Trower for the Scheme Companies and Mr Allison for Centerbridge urged me not to deal with either point at the Convening Hearing on the grounds that as to (a) the question of overall fairness was not properly part of the Convening Hearing and as to (b) the issue was of complexity and required more sustained analysis.

It seemed to me that Mr Trower and Mr Allison were plainly right about (a), since it went to issues of discretion; but that (b), being an issue of jurisdiction, was less justifiably deferred.

However, in the end, and largely for pragmatic reasons, I “parked” all issues other than the determination and convening of class meetings for them to be dealt with more comprehensively at the third stage hearing, “the Sanctions Hearing”. Even the issues going to jurisdiction, such as the New Obligation issue, were inevitably going to raise issues of discretion. Further, I thought it best to seek to ensure that if there was to be an appeal it would be a single composite appeal. It seemed to me that any other course would be potentially (and possibly disastrously) inimical to the tight commercial timetable.

Further elaboration of reasons for approving class composition

Having already set out the genesis of the test of “class” and given a brief statement of my reasons previously, I add the following partly in deference to the excellence of the submissions that were put before me, to which (I am acutely aware) my short statement of reasons did not do justice. I hope the following will suffice.

The principal points advanced by Mr Snowden on behalf of FMS in relation to the issue of class composition were as follows:

Did the Turnover Agreement alter legal rights against the relevant Scheme Companies?

As to point (1) in paragraph [68] above, the Turnover Agreement is a somewhat curious document. Its justification is that, as previously foreshadowed (see paragraphs [35] and [36] above), it was made as part of the arrangements in November 2013 on the occasion of, and to encourage, the introduction of new money facilities which the Apcoa Group companies considered were urgently needed to avoid a potential insolvency risk in circumstances where Commerzbank in October 2013 withdrew the Group’s cash pooling services because of its concerns about the continued uncertainty surrounding the Apcoa Group’s financial position. As Mr Ralf Bender (“Mr Bender”), a Managing Director of each of the Scheme Companies, explained in his first witness statement, the result of the withdrawal of cash pooling facilities was an immediate additional liquidity requirement, then estimated to be about €22m, exacerbated by the multi-jurisdictional nature of the group’s business.

FMS’s case is that this liquidity crisis was exaggerated with the encouragement of Centerbridge, and could have been addressed by “a simple extension of the maturity date of the Facilities”. FMS contends that Centerbridge rejected the simple and obvious solution and encouraged the Apcoa Group companies to seek new funds “motivated by its desire to acquire an equity position which has the potential to deliver higher returns for its investors than long term debt” (I quote from FMS’s skeleton argument at the Convening Hearing).

A scheme hearing at either stage is not the appropriate occasion, and it is not possible, but nor is it necessary, for me to resolve finally this dispute of fact as to the background and reasons for the Existing SSFA and the Turnover Agreement. Suffice it to say, that I consider it right to proceed on the assumption that the honest view of the directors of the Scheme Companies concerned was and remains that in proceeding as they did, they were doing so in the best interest of their companies, and out of what they perceived to be practical necessity. That perception appears also to have been shared by a number of creditors who were not themselves providing new facilities, and who became “Consenting Lenders” (see paragraphs [73] to [77] below).

The Turnover Agreement

The Turnover Agreement itself was necessary because the providers of new finance (including principally Centerbridge) not unnaturally needed some assurance of prioritised repayment; but any secured lending would have required amendments to be made to the Intercreditor Agreement which is governed by German law and required the unanimous consent of the Lenders to any variations of its terms. FMS and others did not support the proposal.

The purpose and effect of the Turnover Agreement was that each “Consenting Lender” to the Turnover Agreement became contractually obliged to turn over proceeds received by it under and in connection with the Existing SFA to the Lenders under the new money facilities (until the Lenders under the new money facilities had been repaid in full). Thus, in substance, it gave the Lenders under the new money facilities super-priority over all of the Consenting Lenders whilst not requiring any amendment to the Existing ICA.

However, the “super priority” thus provided, subject to one point, was so provided by the private arrangement between the Consenting Lenders agreeing on the terms set out to divert what they received under the Existing SFA to the new money Lenders. Although the “Super Senior Facilities” were “Super Senior” in name, the Lenders under the Super Senior Facilities Agreement had no security and no priority over the claims of the Lenders under the Existing SFA. Further, at no time have the Lenders under the Super Senior Facilities Agreement had any priority over FMS and Litespeed. By entering into the Turnover Agreement, however, the Consenting Lenders agreed (in effect) to subordinate their right to prepayment or repayment under the Existing SFA, their right to receive proceeds from the enforcement of any Transaction Security and their right to receive any realisations resulting from an insolvency of the Scheme Companies in favour of the Lenders under the Super Senior Facilities Agreement until such time as all sums due to the latter under the Super Senior Facilities had been repaid in full.

As a corollary of this, FMS and any other Priority Senior Lenders that did not sign the Turnover Agreement were entitled to, and did, retain their existing rights of prepayment and repayment under the Existing SFA and their existing rights to receive proceeds from the enforcement of security. Their rights were wholly unaffected by the Turnover Agreement. (As elaborated below, their fundamental objection to the Schemes turns on this: they contend that the critical effect of the Schemes is to remove from them that priority which they never surrendered and presently enjoy.)

contains no covenant given by the Scheme Companies;

None of the experienced Counsel who appeared before me could cite any authority directly in point in this jurisdiction (though the point has been addressed briefly in two Australian cases and one New Zealand case, to which I refer later).

At the Sanctions Hearing itself, submissions focused principally on the scope of the jurisdiction as a matter of principle, and as part of that analysis, on two decisions where the boundaries of what could constitute a qualifying “arrangement” for the purposes of Part 26 were discussed. The two cases are (a) Re T&N Ltd (No. 4) [2007] Bus LR 1411 at [45]; and (b) Re Lehman Brothers International (Europe) [2010] BCC 272 at [63]–[66].

Turning to the Lehman case itself, Mr Snowden submitted that any such extension of what can properly qualify as an “arrangement” was precluded by the actual decision and the analysis of the Court of Appeal in that case. Mr Snowden submitted that it was established by that case that the court has no jurisdiction to sanction a scheme which requires the surrender by a creditor of his own property. Again, however, the context and objective of the scheme there in issue needs to be understood.

Subsequently to the oral hearing, and in answer to a request from me for further assistance, the Scheme Companies (supported by Centerbridge) relied on two Australian decisions (which in fact were addressed by Patten LJ in the Lehman case) and a decision in New Zealand (which was not). The decision of the Full Federal Court of Australia (sitting in Melbourne) in Fowler v Lindholm, in the matter of Opes Prime Stockbroking Ltd [2009] FCAFC 125, (2009) 258 ALR 362 (“Opes”) is of particular interest.

In Opes, and as was noted by Patten LJ in the Lehman case (at [50]), it was a term of the scheme of arrangement under the relevant Australian Corporations Act 2001 (which closely resembles Part 26 here) that creditors of the scheme companies were required to release claims against two third party financiers (ANZ and Merrill Lynch) who had provided the scheme companies with cash and other securities in return for securities which the scheme companies had received from their own clients. As part of an overall settlement of claims by the creditors against the scheme companies and ANZ and Merrill Lynch, a fund was created for the benefit of creditors into which ANZ and Merrill Lynch paid some $226 million in cash and released cash and assets of the scheme companies valued at some $27 million. It was a term of the scheme that, in return for being able to prove against the fund, ANZ and Merrill Lynch would be released from any claims by either the scheme creditors or the scheme companies. Thus, and as Patten LJ (from whose judgment I have in substance taken the above summary) noted, the circumstances were very similar to those considered by David Richards J in Re T&N Ltd.

The last case that Mr Trower referred me to in this context was the decision of the High Court of New Zealand in Bank of Tokyo Mitsubishi UFJ Ltd v Solid Energy New Zealand Limited [2013] NZHC 3458 in which the question of whether a compromise (which has a meaning in New Zealand that is similar to an arrangement in England) can extend to a complex rearrangement of contractual debt including the imposition of liabilities. There, the High Court of New Zealand, whilst accepting that the relevant Act made clear that “consent or express statutory authority is required for the imposition of the liability” (see paragraph [114]), decided that (a) a compromise could include the imposition of an obligation as an incidental element of it (see [paragraph [107]), (b) the relevant consent was provided by virtue of the vote of the majority (see paragraph [114]), (c) since the particular indemnity obligation imposed was a standard feature of a syndicated bank facility and related to liabilities to which the creditor would already in effect be exposed it “arguably creates no additional exposure or burden” (see paragraph [116]), (d) the potential exposure was more theoretical than real, and (e) in all the circumstances that element of the scheme should be approved.

Mr Snowden, in written submissions in which he also complained of the lateness of the introduction of these Australian and New Zealand cases, and indicated that FMS’s response could not in such circumstances “be as full and considered as it should be”, sought to contest their application on the general basis that (a) none was binding on this court, (b) the position in Australia remained unclear, (c) the true focus in the Australian authorities was on the question of whether third parties could be released through a scheme of arrangement and no full argument had been addressed to the issue of imposing an obligation, and (d) the New Zealand case raised a question of construction on the New Zealand Companies Act 1993 and had not addressed the arguments raised in this case.

More particularly as to Opes (which all Counsel recognised to be the high point of the Scheme Companies’ legal case in this regard), Mr Snowden also submitted that

As to Lift Capital, Mr Snowden drew my attention to the fact that (a) the Judge did not appear to have considered the question whether a scheme can involve the imposition of obligations on creditors separately from the question of whether a scheme could release existing rights against third parties, and (b) the impression that the Judge had not properly distinguished between the two was confirmed by the fact that he had relied on the Lehman case in this jurisdiction which could not be read as justifying the imposition of an obligation, although it could be read as supporting T&N Ltd on the issue of release.

Mr Snowden described the reliance on the New Zealand case (The Bank of Tokyo-Mitsubishi UFJ, Ltd v Solid Energy New Zealand Limited) as also misplaced in circumstances in which none of the arguments advanced by FMS was considered by the High Court of New Zealand and therefore offers no assistance to this court.

In deference to the arguments addressed to me and in light of what I consider to be the novelty and potential future importance of the point, I have set out the opposing arguments at some length. But in the event, it is not necessary for me to make a final determination of this difficult and novel point. That is because, when I indicated on 29 October 2014 (which I was informed was the day by which, as matter of commercial imperative, the Scheme Companies needed to know the result) that on the material presently available to me I had sufficient concerns on both jurisdictional and discretional grounds that I would not feel able to approve the Schemes insofar as they indirectly imposed the New Obligations, the Scheme Companies asked for time to consider whether it might be possible to amend the Schemes so as to finesse the difficulties. I acceded to that request; and the result was that the next day, the Scheme Companies proposed that the Schemes be amended to enable relevant Scheme Creditors to elect whether or not to enter into the Deed imposing the relevant obligation. The proposal was made safe in the knowledge that creditors other than FMS would (a) make the required election to assume the relevant obligation and furthermore (b) would cover FMS’s proportion of some £3.7 million if FMS opted out.

In such circumstances, and also because I was politely urged by Mr Trower not to make any final determination lest in the manner I expressed it I might inadvertently preclude unobjectionable arrangements (an example was suggested to me of revolving credit facilities involving a true rollover of an existing obligation as contrasted to the imposition of a wholly new one), I do not think it necessary or wise to express a final view.

All I will say for the present is that in my view, the imposition of a new obligation to third parties is very different from the release in whole or in part of an obligation to such third parties. More generally, I am not persuaded that obligations may be imposed under a scheme of arrangement under Part 26: in creditors’ schemes, it appears to me likely that the jurisdiction exists for the purpose of varying the rights of creditors in their capacity as such, and not imposing on such creditors new obligations. (I also have some doubt whether in a members’ scheme it would, for example, be possible to provide for the payment up of partly paid shares, though I should emphasise that this was not properly explored).

I agree with Mr Snowden that the Australian authorities do appear to be focused on the former, and (with all respect) do not focus upon or analyse the latter; and that may be partly because the indemnities there imposed merely required the scheme creditors to redirect their scheme consideration if and to the extent that they, or their successors, receive more than they are entitled to from the third parties under the scheme. Rather than being a new and meaningful obligation, they represent a qualification on the receipt of the scheme consideration which only matters in the event of steps being taken which are inconsistent with the scheme.

Lastly in this context, I should also acknowledge that I felt especial unease in imposing new and more extensive obligations in the context of a cross-border scheme, and on dissentients.

But I should make clear that nothing in what I say should be taken to cast doubt on mere extensions or the rolling over of existing facilities involving no new contract or more extensive obligation, such as may be the case in a revolving credit facility.

The Class Manipulation point

Re PCCW Limited was, however, a very different case: it was a case where the controllers of the company had allotted and transferred shares to various “secretaries, clerks or receptionists…spouses…friends and acquaintances, including, apparently, a baby-sitter and a tailor” in order to secure an ordinary majority to approve a shareholder scheme (paragraph [43]), and even provided for the allotment to be subject to “a buy-back offer” (paragraph [65]), demonstrating clearly the contrivance. The Hong Kong Court of Appeal understandably characterised this brazen vote manipulation as a form of dishonesty and held that the court “cannot sanction dishonesty”. That, with respect, is obviously right: but Mr Snowden emphasised, entirely properly, that no such dishonesty is alleged in this case.

Nevertheless, Mr Snowden submitted that the case illustrated that the court should be very astute to detect attempts to manipulate the class composition to achieve a particular result. He supported this broader proposition by referring to the Sea Assets case. He submitted that therethe Court of Appeal said, at [45] and [51], that the exclusion of putative members of a class had to be justified for good commercial reasons and not for reasons which are arbitrary or capricious. I am not sure that this is what the Court of Appeal was saying: it seems to me that the Sea Assets case was really concerned with the selection of who are to be scheme creditors. But I can well understand and accept more generally that the court will be astute to avoid gerrymandering or its like.

That is how Mr Snowden sought then to depict the facts in this case as showing that when the Existing SFA Lenders appreciated that the Turnover arrangements they had insisted upon, in the absence of any other security, as the price of providing new money, gave rise to a class issue they engineered the Lock-Up Agreement and the Termination Agreement. These were calculated to remove the relevant Scheme Companies from the picture whilst achieving the same effect; and their true purpose was to ensure that the classes were constituted in such a way that Litespeed and FMS would not be able to vote against the Schemes in their own classes.

I accept that it is likely that the reason why the Turnover Agreement was terminated was a recognition that it might exacerbate difficulties in the context of determining class composition. But even on that basis I do not accept the conclusion urged by Mr Snowden. For reasons I have already given, I am not persuaded that the Turnover Agreement did create new rights against the relevant Scheme Companies; and I do not see why, if I am wrong about that, the effect was not such as to require separate class meetings. Even if the purpose of the Termination Agreement was to avoid an argument that separate class rights require separate class meetings, I do not regard that attempt to preclude an argument as objectionable manipulation. As it seems to me, the answer to the Class Manipulation point lies in my approach to the class constitution issue.

In summary, I do not consider that the Class Manipulation point provides any separate or sufficient reason for refusing sanction of the Schemes.

The Unrepresentative vote point

In assessing whether to treat the approval of creditors at the class meetings convened as a reliable indication of the commercial soundness of the Schemes the court will have in mind three principal requirements:

First requirement

I have already addressed and been satisfied in relation to the first requirement.

Second requirement

Although the weight of numbers is not conclusive, the turnout and the percentages in each class in favour of the Schemes naturally are of interest and relevance to the court.

At each of the Scheme meetings there was a 100% turnout; all Scheme Creditors voted on the Scheme proposals.

The majorities by number and value voting in favour of the Schemes were substantial: by value they varied between 86.9% and 97.3%.

These figures demonstrate consideration of the Schemes by all concerned and impressive support for them.

As to fairness, each member of the Guarantee Facility Lender class and the Non Guarantee Lender class is treated under the Schemes in exactly the same way as every other member of the relevant class: as previously noted (it being crucial on the issues raised at the Convening Hearing), their rights against each Scheme Company are identical both pre and post Scheme to the rights of every other member of the relevant class.

Particularly in a commercial context of this kind, involving sophisticated commercial or financial parties, the court will ordinarily recognise that the best assessment of whether a scheme is in the interest of those to be bound by it is the vote of those present and voting at the meetings: ReEnglish, Scottish, and Australian Chartered Bank [1893] 3 Ch 385, 408-409. They are in the best position to consider their own commercial interests. The Court will not, however, simply endorse the majority vote.

FMS rejected this submission. It contends that by virtue of the Turnover Agreement and the Lock-Up Agreement, the economic position of the Consenting Lenders who comprised the majority of the class of Existing SFA Lenders was so different from the position of the Non-Consenting Lenders that (even if the classes were in law properly constituted, as I have held and confirm my view that they were) the true interests of the class as a whole were not properly represented and the majority were indifferent to those interests. FMS submits that for these reasons the court should not regard the majority vote cast at the class meeting of the Existing SFA Lenders as representative of, or binding upon, the class as a whole.

The essence of FMS’s argument on the facts in this context is that in economic, even if not in legal, terms the relevant effect of the Turnover Agreement was to subordinate the rights of the Consenting Lenders behind the Existing SSFA Lenders. That subordination was achieved by a turnover arrangement pursuant to which the benefit of payments received by the Consenting Lenders would be turned over to the Existing SSFA Lenders until their debt was discharged in full; and by the Lock-Up Agreement the Consenting Lenders were locked in. Thereby, FMS submitted, the Consenting Lenders divested themselves of the very economic interest which the Non-Consenting Lenders retained.

The effect of that economic subordination was that the Consenting Lenders were at best indifferent to the Schemes’ proposals for subordination in law: indeed they stood to gain because under the Schemes FMS would be brought into line and required to share the “pain”.

The argument is initially an attractive one; and it was attractively put. However, its premise is that these divergent interests should be taken to have been central to the (hypothetical) debate and been the primary factors in informing the way the majority voted. For reasons likely to be apparent from my approach at the Convening Hearing (and the reasons I have given above in support of it) I have not felt able to accept that premise.

First, and as may be apparent from my conclusion that the members of the relevant class had much more to unite than divide them, looked at objectively FMS (and Litespeed) always have shared with the Consenting Lenders a much greater interest in common, which is the facilitation of a reconstruction which will avoid the Group’s imminent insolvency and should secure its future, for the benefit of all its creditors. This community of interest, which is to facilitate repayment of the sum of c.€660m as Existing Priority Senior Lenders, substantially outweighs any separate interest which those of them who are Existing SSFA Lenders may have to repayment of the very much smaller amount of €34m due under the Existing SSFA. As Mr Robson explained in his evidence, this is all the clearer, given that the Existing SSFA Lenders will be repaid in any reasonable scenario (because of the operation of the turnover arrangements in the event that the Scheme Companies enter into insolvency proceedings). Therefore an Existing SFA Lender does not need to vote having regard to such interest as it may have as an Existing SSFA Lender in order to secure the returns it is expected to receive as such Existing SSFA Lender.

By way of comparison, the turnover obligations on which FMS sought exclusively to focus (averting their eyes for this purpose from the much greater exposure) were very minor in economic effect. The turnover obligations only amounted to each Consenting Lender’s pro rata share of the first €34m of any recovery made in its capacity as an Existing SFA Lender. The total debt owed to Existing SFA Lenders amounts to some €730m (of which some €660m is owed to them as Existing Priority Senior Lenders). I have explained earlier that the maximum comparative advantage to FMS, looking exclusively at the turnover arrangements, is about €2.7 million. I agree with the Scheme Companies that it is not credible to suggest that the existence of the turnover obligation might have caused any member of the Guarantee Facility Lender or Non Guarantee Lender classes who is a Consenting Lender to vote in a different manner from the way in which it would have voted if it had not also been a Consenting Lender.

The position is even more straightforward so far as concerns the position of the members of the Guarantee Facility Lender and Non Guarantee Lender classes who are not Existing SSFA Lenders, but are Consenting Lenders under the turnover arrangements. They have no actual interest which diverges from the position of the Non-Consenting Lenders (FMS and Litespeed). The most that could be said is that they did not have to balance the appropriateness of the Existing SSFA Facility being repaid, because they were already under an existing obligation under the turnover arrangements to ensure that this occurred.

This analysis is supported by what all of the other (supporting) Lenders, being members of the Guarantee Facility Lender and Non Guarantee Lender classes, themselves say in their own evidence. Each creditor expressed itself in different terms but there are a number of common themes:

Additionally, the evidence of AMP, a Second Lien Lender (who thus enjoys priority over the Existing SSFA Lenders as a matter of pure priority, and is not a turnover party), was that the restructuring is the appropriate way forward, because insolvency is not sensible for any of the creditors.

Third requirement

There is no suggestion of impropriety or commercial ignorance or naïveté. It is clear that all the Scheme Creditors are experienced and sophisticated parties, such as banks or funds. There is credible evidence which explains the approach that was taken by Existing SFA Lenders and demonstrates that they behaved in a manner that was both commercial and rational. Thus, for example:

Further, I am satisfied that it is entirely understandable that an honest and intelligent member of the Existing SFA Lender classes would consider it reasonable to approve a scheme providing for repayment of the Existing SSFA Lenders. As to this:

More generally, and in light of the weight of support for the Schemes, I consider that it is legitimate and instructive to stand back to consider the reason why others gave up voluntarily an advantage that FMS contends that it should be assisted by the court to retain. This reveals, not greed or improper motive on the part of Consenting Lenders, but concern that unless they surrendered their advantage, the Apcoa Group would be likely to have to enter an insolvency process.

The important point, stressed by Mr Trower, is that the Consenting Lenders agreed to economic subordination in order to secure new monies urgently required by Apcoa in November 2013; and it is hardly surprising that the providers of those new monies to a group in difficulties to enable it to continue as a going concern should have required some certainty that they would be repaid.

I accept the submission advanced on behalf of the Scheme Companies that FMS’s evidence suggests plainly that the reason that it refused to facilitate the advance of the new monies on a priority basis was not having specific regard to what might best facilitate the Scheme Companies’ ability to continue as going concerns, but was because it disapproved of what it called Centerbridge’s “loan to own” strategy. FMS has not persuaded me that the threat of insolvency was contrived; and although I cannot say whether this was or was not Centerbridge’s strategy, the fact remains that, so far as the Consenting Lenders were concerned, economic subordination was a necessity to avoid far greater losses.

I do think there is force in the submission against FMS that it is seeking to have (as I put it in the course of the hearings) both the penny and the bun: it undoubtedly took the benefit of the further advances (the avoidance of insolvency), but refused to take any of the burden.

It is difficult to avoid the conclusion that FMS has sought to use the circumstances that arose as leverage to require a reformulation of the Schemes to its own advantage. Its correspondence suggests that, in particular, it has sought the unequal treatment of remaining whole at Opco Level in respect of the entirety or a large proportion of its debt. As the Scheme Companies submitted, on the face of it, this is obviously unfair because it would prefer FMS above the other members of the same class and is not affordable as an offer to all Lenders in the same class.

In all the circumstances, I do not consider that there is any sufficient reason demonstrated as to why I should not accept the decisions of the meetings as representative, commercially sensible and fair.

If these Schemes all concerned companies incorporated in this jurisdiction and creditor agreements and facilities each governed by English law, that would conclude matters in favour of sanction.

Cross-Border Issues

I turn next to consider issues relating to the cross-border features of the Schemes.

Although many of the points raised have been addressed in previous cases, I think it appropriate to set out my reasoning in some detail. I have been very conscious that these Schemes do test the boundaries of a jurisdiction which is by its nature potentially exorbitant. It is important, both in terms of propriety and to safeguard a salutary and useful jurisdiction to take care in its application.

That is of particular importance in this context also because in the case of schemes affecting creditors and bodies incorporated in the European Union (“EU”) the structure and objectives of the Judgments Regulation require that courts in EU Member States do not (save on very limited grounds of public policy agreed not to be of relevance in this case) question the exercise of jurisdiction by the court in the EU Member State which has given the judgment. As Mr Snowden emphasised to me, this places the onus squarely on the court seized of the matter to decide for itself whether it is appropriate to exercise its jurisdiction or not. That responsibility is in no way attenuated where (as here) there is no dispute that such recognition would be afforded if sanction is given to the Schemes.

The ‘No Sufficient Connection” issue

Jurisdictional gateway: are all the Scheme Companies “liable to be wound up” here?

Part 26 applies to a compromise or arrangement between a “company” and (a) its creditors, or any class of them (“a creditors’ scheme”) and (b) its members, or any class of them (“a members’ scheme”). The first question to consider in a cross-border scheme is whether the body corporate is to be treated as a “company” for these purposes.

Section 895 (2) CA 2006 provides that “In this Part - …. “company” … means any company liable to be wound up under the Insolvency Act 1986 ….”. Section 220 of the Insolvency Act 1986 (“section 220”) allows for the winding up of unregistered companies (such as foreign companies) and section 220 (1) provides: “For the purposes of this Part, “unregistered company” includes any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom.” (The interpretation sections for the First Group of Parts for the Insolvency Act 1986 are at sections 247 to 251 and add nothing to section 220 as regards unregistered companies.)

The effect of section 220 is that the expression “unregistered company” includes any foreign company. The Scheme Companies are incorporated in Germany, Austria, Belgium, Denmark, England and Norway respectively and are thus, as regards the companies incorporated outside England, unregistered companies within the meaning of section 220 of the Insolvency Act 1986.

The jurisdiction is thus stated in broad terms. However, before exercising its jurisdiction to wind up a foreign company in England, the court would usually have to be satisfied as to the fulfilment of three core requirements: (1) there must be a sufficient connection with England which may, but does not necessarily have to, consist of assets within the jurisdiction; (2) there must be a reasonable possibility, if a winding up order is made, of benefit to those applying for the winding up order; and (3) one or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise jurisdiction: see Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116, 140, approving the formulation of Knox J in Re Real Estate Development Co [1991] BCLC 210, 217.

As also explained in re Drax, and since all that has to be established to engage the jurisdiction of the court under Part 26 is whether a company is “liable” to be wound up under the Insolvency Act 1986, it is not necessary for the purposes of section 895 and for Part 26 to be engaged for grounds for a winding up to exist.

What constitutes a “sufficient connection”?

It was not in dispute that the “sufficient connection” test has been adapted in its application in the context of creditors’ schemes of arrangement to require that the sufficiency of connection is to be tested by reference to the object of the scheme, which is not winding up but rather a compromise or arrangement in respect of the rights of the scheme creditors: and see Re Drax at [29] – [31].

Thus, as was explained also in Re Drax, it is almost impossible to envisage circumstances in which an English court could properly exercise jurisdiction in relation to a scheme of arrangement between a foreign company and its members (a members’ scheme of arrangement, rather than a creditors’ scheme), which would not involve any legal relationship connected to this jurisdiction and essentially be a matter for the courts of the place of incorporation.

Examples of exercise of jurisdiction in the context of creditors’ schemes

The adaptation of the test of “sufficient connection” to the context of creditors’ schemes of arrangement has allowed and encouraged the English court to exercise its jurisdiction under Part 26 where the rights of the scheme creditors are governed by English law and they have submitted to the jurisdiction of the English court.

In a line of cases starting with the decision of Briggs J (as he then was) in Re RodenstockGmbH [2011] EWHC 1104 (Ch) and including (in chronological sequence) Re Primacom Holdings GmbH [2011] EWHC 3746 (Ch) (at the convening stage) and [2012] EWHC 164 (Ch) (at the sanction stage), In re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch), Re NEF Telecom Company BV [2012] EWHC 2483 (Ch) and [2012] EWHC 2944 (Ch), Re Cortefiel SA [2012] EWHC 2998 (Ch), Re Vietnam Shipbuilding Industry Group [2012] EWHC 2476 (Ch), Re Magyar Telecom BV [2013] EWHC 3800 (Ch), Re Tele Columbus GmbH [2014] EWHC 249 (Ch) and indeed Re Apcoa Parking (UK) Ltd [2014] EWHC 997 (Ch), the English court has sanctioned creditors’ schemes where the rights of creditors were governed by English law.

That list of cases illustrates both the perceived utility of the jurisdiction for foreign companies (whose laws of incorporation may not contain provisions analogous to Part 26) and the way that the exercise of the jurisdiction has expanded.

As to the ambit of the objection in this case, I did not understand Mr Snowden to doubt or question the jurisdiction or the propriety of its exercise in a creditors’ scheme in an appropriate case. Indeed, he acknowledged that in the context of the earlier scheme involving Apcoa which resulted in the last of the decisions chronicled above, FMS had not objected to the exercise of jurisdiction. Mr Snowden explained that this was because the earlier scheme was restricted to the extension of the repayment date under the various facilities (“the Extension Scheme”), and submitted that the fact that the court was prepared to find a sufficient connection for the purposes of sanctioning the Extension Scheme does not mean that the same result must follow in relation to the instant Schemes that (unlike the Extension Schemes) seek to impose very significant changes to the relationships of the parties concerned and are opposed.

In other words, Mr Snowden’s objection was focused on what he presented as insufficiency of connection; not on want of substantive jurisdiction, nor even as to the tests and analysis in Rodenstock and the cases following it (except Apcoa).

What he objected to was what he presented as being a step outside the proper boundaries of the jurisdiction in this case: and most particularly, he objected to the exercise of jurisdiction where the choice of English law relied on as the principal connecting factor had not been the parties’ original choice, and where the change to English law “was not carried out in order to accomplish any substantive commercial change in the economic relationships between the parties. It was carried out solely in an attempt to persuade the English court to exercise the scheme jurisdiction.”

Was this objection open to FMS given its acquiescence in the Extension Scheme?

I should mention in that regard that although ultimately not hard-pressed, it was submitted on behalf of the Scheme Companies that any argument on the part of FMS based on insufficiency of connection should not be permitted on the basis of principles analogous to Henderson v Henderson (1843), 3 Hare 100, 67 E.R. 313 at 319 (Ch.).

Put shortly, Mr Trower submitted that although the present Schemes are obviously different, the relevant discretionary factors for establishing the closeness of the connection are identical. Mr Snowden protested that FMS had expressly stated in a letter dated 22 May 2014 and sent prior to the sanction of the Extension Scheme, that its non-objection at that stage should not be construed as acceptance by it of any issue so considered or determined. As to that protest, I am not persuaded that a party may avoid the principle in Henderson v Henderson unilaterally in that way; in my judgment the principle (in effect that parties should bring forward the whole of their case at one time), like principles of issue estoppel and res judicata, is part of the armoury of the court in securing (a) finality and (b) efficiency, by avoiding duplication, and the question of their application is for the court, and not for the parties. However, the application of the principle is discretionary and depends upon all the circumstances. Especially having regard to the element of compulsion, and to the importance of the point and the benefit of adversarial argument, I would not have been minded to apply the principle.

As it was, as I have indicated, Mr Trower did not press the point, and I think he accepted that the test of sufficiency would be affected by the nature and terms of each Scheme, which would be a powerful, possibly overwhelming argument, against applying the principle.

The context of the choice of governing law in this case

As recorded in the evidence, and also in paragraphs [20] to [21] of my judgment at the convening stage in respect of the earlier Extension Scheme (see Re Apcoa Parking [supra]), the Existing SFA, when incepted, was not in relevant part governed by English law, nor did it contain a jurisdiction clause selecting England as the relevant jurisdiction for dealing with matters under it.

The Existing SFA did not itself provide for a change of law or forum selection clause. However, nor did it expressly exclude such changes. Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (“the Rome 1-Regulation”) enables a change of governing law and (provided Article 23 of the Brussels Convention applies) also a change of jurisdiction clause. It was the unanimous and firm view of the experts on the local laws of each of the jurisdictions of the Scheme Companies (other than English law, of course) instructed by the Scheme Companies to advise the court on these points that (a) those Regulations did enable the changes made, (b) there was nothing in the Existing SFA to exclude or preclude those changes, and (c) having been approved by a “Super Majority” of Lenders, both this change of law and the change of jurisdiction clause from German law and the courts of Frankfurt/Main to English law and the English courts respectively was effective and would be recognised and given effect in each of the relevant jurisdictions.

These matters being determined by the foreign law (and especially German law in the case of any changes to the Existing SFA as originally framed) and there being no contrary views expressed, I accept that evidence (as I did in the context of the Extension Scheme).

I did not understand that conclusion to be challenged or questioned before me on behalf of FMS, who had accepted the enforceability of the Extension Scheme which was likewise premised on the effectiveness of those changes.

Jurisdiction clause

However, this was not pressed in argument; nor did FMS suggest any difficulty in this regard in the context of the Amend and Extend Scheme or at the Convening Hearing. Further and for the avoidance of doubt, in my judgment, although not optimally clear, the changed clause is to be read in the context of the change of governing law to English law to which it was supplemental; and construed in context, and the objective intentions of the parties, it is sufficient to connote exclusive jurisdiction in respect of schemes under English law for the compromise of creditors’ rights and any dispute in respect of them.

Argument as to lack of sufficient connection

In any case, as previously indicated, what Mr Snowden on behalf of FMS objected to, was the fact that the changes were made solely in order to create a connection with England which before that change had not existed, which he likened to “forum shopping”, to which he directed his fire and which he submitted put this case in a different category. He accepted that the matter would be different, for example, if:

Mr Snowden accepted that the first situation would be a clear case in which jurisdiction would not in fact be exorbitant. The second situation would, in effect, be no different from any of the line of cases referred to above. The third situation would be one in which the court would be prepared to exercise what would otherwise be an exorbitant jurisdiction in light of the consent or non-objection of all those affected. But, he emphasised, the present case does not share any of these characteristics; and the change in governing law, albeit a necessary precondition to the exercise of the jurisdiction, was not sufficient for that purpose.

That, Mr Snowden submitted, signified a deliberate and voluntary decision, their free choice and willingness, to have their rights altered by the English court pursuant to what would otherwise be an exorbitant jurisdiction over the foreign company with which they were contracting.

In contrast, he submitted, in this case, there was no such deliberate and voluntary decision, no such personal choice, at least on the part of the dissentient minority; they did not choose English law: it, and in consequence the availability of an English scheme jurisdiction, had been forced on them by an (admittedly valid) contractual mechanism implemented by the majority.

To this Mr Snowden added the submission that the whole point of using the scheme mechanism is to bind the very minority who have not consented to the change of governing law. He posited that it might be different if FMS had agreed the change: “but we didn’t”. To bind people without their consent and who have not chosen English law as the basis of their relationship (the means of their compulsion) “is a step too far.”

Mr Snowden concluded by reminding me that in the (as he would have it) far stronger case of Rodenstock Briggs J had only reached his conclusion that there was a sufficient connection to justify exercise of the scheme jurisdiction, where there remained no active opposition, “on a fairly narrow balance”.

These are powerful submissions, well made. I have considered and weighed them anxiously. In the end, however, I concluded that they were not sufficient to require me to decline to sanction the Schemes on this ground and thus frustrate the realistic possibility of a group reconstruction which seems manifestly in the interests of all creditors and is certainly clearly and consistently supported by a strikingly high proportion of them.

The validity of the change of governing law and of the jurisdiction clause was not questioned. Paragraph 3 of Article 2 of the Rome 1-Regulation specifically enables the parties to a contract dealing with “obligations in civil and commercial matters” (such as the Existing SFA plainly is) to change the governing law is an aspect of the central theme of the Regulation, being “freedom of choice”.

The consequence pursuant to the Rome 1-Regulation, as stated by Professor Paulus, is that the “new law is to be applied from the moment of the validity of that amendment”. There is nothing to suggest that the choice of law pursuant to a change of governing law pursuant to the Rome 1-Regulation is to be accorded any lesser respect than an original choice of law.

I do not accept that it is, although I do accept that the court invited to sanction such compulsion will be particularly careful in giving it. Indeed I would go some way towards accepting Mr Snowden’s arguments; it seems to me that the onus placed on the court in exercising its jurisdiction to make an order which will be given recognition elsewhere may well require it to be especially wary if, for example, the new choice is of a law which appears entirely alien to the parties’ previous arrangements and/or with which the parties had no previous connection; or if the change in law has no discernible rationale or purpose other than to advantage those in favour at the expense of the dissentients; or even more generally, where in its discretion the court considers that, in the places in which the parties are, the extent of the alteration of rights between the parties for which sanction is sought would be considered a “step too far”.

In this case, however, I do not consider that what is proposed (subject to my reservations as to the imposition of new obligations and also to clause 14.2 of the Schemes as originally presented (as to which see further below) is “a step too far”.

I have already explained why I consider that I should proceed on the basis that the Schemes offer the means of enabling a restructuring which is necessary to avoid insolvency in the interests of all creditors. I have explained also why I consider the Schemes to be fair, and to have been approved at properly constituted classes at which those approving the Schemes were acting in a manner reasonably considered to be in the interests of that class. I consider that the change of governing law was understood and intended to enable such a result; and even if Centerbridge may also have had other motives and objectives, it could not have secured the changes without the assistance of others who did not.

I do not think that the changed choice of law is alien or indiscriminate or such as could not reasonably have been contemplated by commercial parties aware of the Rome 1-Regulation. I am fortified in that conclusion by the following factors:

All in all, I am satisfied that it is proper to proceed on the basis of a valid choice of English law and jurisdiction and that in all the circumstances the same faith and credit should be accorded to that choice as if it were the original choice. In those circumstances, I do not see that there is any real or sufficient distinction between this case and Rodenstock and the other cases in the following line of cases on the question of “sufficient connection”.

In summary, I am satisfied that there is a “sufficient connection” to warrant and justify the exercise of my jurisdiction under Part 26, provided that such exercise would not be in vain or in breach of laws within the jurisdictions in which the Schemes are intended to be given effect.

Would the Schemes be recognised and enforced?

I turn next to the question of recognition and enforcement. For reasons which will already be apparent, I can be very brief.

As to the analysis here, the EC Regulation on Insolvency Proceedings 1346 / 2000 does not apply to schemes of arrangement (proposed outside an insolvency process). Furthermore, the Judgments Regulation 44 / 2001 does not limit the original jurisdiction of the English court, even though the application may be a civil or commercial matter. The reason for this is either because no defendant is “sued” by way of a scheme of arrangement so as to engage Article 2, or because Article 23 applies by reason of exclusive English jurisdiction clauses for the benefit of the relevant lenders: see Re Vietnam Shipbuilding Industry Groups [2013] EWHC 2476 (Ch), [11 to 16] (and see Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [54, 61 and 63], Re Primacom GmbH [2012] EWHC 164 (Ch) [8 to 17] and NEF Telecom Company BV [2012] EWHC 2944 (Ch), [38 to 42]).

Accordingly, I see no real reason to doubt that the Schemes would be recognised and enforced in the relevant EU jurisdictions: the court, in giving sanction, should not be acting in vain.

Would the release of the Transaction Security be in breach of German law?

A further contention advanced on behalf of FMS was that the court should decline to sanction the Schemes because the Restructuring, of which the Schemes are part, will not be effective and will involve a breach of the terms of the Existing ICA, the governing law of which was never changed from German law. The Existing ICA, assuming its currency (which became a point in issue), regulates the holding of the Transaction Security (that is, the security created or expressed to be created under or pursuant to the Security Documents as defined in the Existing SFA) and distribution of payments to the Security Trustee among the creditors.

To support this contention FMS adduced by way of an opinion dated 13 October 2013 (the same day as the class meetings were held) the expert evidence of Dr Dietmar Shulz LL.M, (“Dr Schulz”, a German attorney-at-law admitted to the bar in Frankfurt am Main and presently a partner in DLA Piper UK LLP based in their Frankfurt office).

Dr Schulz agreed with Professor Paulus that the Schemes, if sanctioned by this court, would be recognised in Germany. However, it was his opinion, in summary, that

This unheralded evidence, introducing points relied on as giving rise to a fatal flaw in or “blot” on the Schemes, occasioned a flurry of further expert evidence and submissions, and ultimately to an extra day being required for cross-examination of the experts, namely Dr Schulz and Professor Paulus (who was instructed to assist me on this point also by the Scheme Companies).

I directed this cross-examination, which is unusual though not unknown in the context of a scheme, even though it was common ground that the English court did not need finally to determine the German law issues in order to sanction the Schemes. (Those issues are only factors going to whether or not, as a matter of discretion, the English court should exercise its power to sanction the Schemes.) The reasons why I did so, at the invitation of the parties, arose out of my concern that, having regard to the onus implicit in the system for recognition of judgments referred to previously, I should do my best to satisfy myself that, if sanctioned, the Schemes would not constitute or necessarily result in a breach of German law. That concern was heightened by (a) the direct conflict of expert evidence on German law, (b) the hurried circumstances in which expert exchange had had to be exchanged and the need for its elucidation, and (c) concerns that I would not be in a position to reach a sufficiently clear view without it.

It may assist first to elaborate a little on the ambit of this German law element of the dispute.

FMS’s arguments relied on showing (at least) that the German court would accept each of the following four contentions, none of which is accepted by the Scheme Companies:

All of Dr Schulz’s arguments would need to be accepted (and all of Professor Paulus’ be rejected) by the German court in order for FMS to succeed in Germany. If any of Dr Schulz’s arguments were to fail, then the contention that the German court would not recognise the release of Transaction Security would also necessarily fail.

Having read the reports of the two experts (each of whom I have no doubt did his best to assist me in a context where there appeared to be little or no clear guidance in the case law or unanimity view in the text books) and listened carefully to their oral evidence, I have concluded that it is unlikely that the arguments advanced by Dr Schulz would all succeed.

Given that it is accepted that my role is not to reach a decision on the German law, but only to satisfy myself as best I can that there is no such plain and obvious risk or likelihood of a breach of that law as should cause me, as a matter of discretion, to refuse to sanction schemes which otherwise appear to me should be sanctioned, it is, I think, only necessary for me to summarise my views in this regard. I can do so as follows.

First, as to whether the existing obligations under the Existing ICA will cease to have any application or relevance and should be treated as discharged, it seems to me that:

On that basis, it seems to me more likely that the borrowers’ obligations under the New SFA and Holdco Facilities are not “Secured Obligations” under the Existing SFA; and on that basis, FMS’s argument would fall away since the Existing ICA can be of no relevance to the release of Transaction Security.

That is sufficient to satisfy me that there is no insuperable objection under German law to cause me to refuse to sanction the Schemes. I deal with the other points, which proceed upon the premise of the continued application of the Existing ICA, and relate to the overall question whether (without the consent or acquiescence of FMS) a valid direction for the release of the Transaction Security could be given, for comprehensiveness, and in case this matter proceeds further.

Secondly, as to the question whether (as Dr Schulz contended) the rights and obligations arising out of the 2007 transaction would be treated as giving rise to an overarching GbR in the same way as a domestic German transaction involving the pooling of securities might be, I am satisfied that it is unlikely that, in the context of these agreements such a partnership would be implied. As it seems to me:

In the round, I am satisfied that in the particular circumstances it is unlikely that a German court would infer or imply the existence of an overarching partnership, qualifying and in important respects undermining the careful contractual definition of the parties’ agreement.

The third argument advanced by Dr Schulz on the assumption (which I do not think would be made) that a partnership would be implied is that such partnership would bar Existing SFA Lenders with cross-holdings in the Existing SSFA debt from voting to release Transaction Security pursuant to Clause 41 of the Existing SFA. As to this, and very briefly (since this argument is dependent on arguments I have already explained seem to me unlikely to succeed):

Lastly, I was not persuaded by Dr Schulz’s argument that even though (as both experts agreed) the German Courts would be required under the Judgment Regulations to recognise and give effect to the Schemes as sanctioned, they would nevertheless rely on Article 22.2 of the Judgments Regulation and refuse to recognise an instruction to the Existing SFA Agent for the release of the security. As to this (and again briefly):

For all these reasons, I am satisfied that FMS’s arguments based on German law do not provide any sufficient basis for me to decline to sanction schemes which otherwise I would sanction.

Amendment required to Clause 14.2 of the Schemes

Clause 14.2 of the Schemes as originally approved and presented for sanction comprised an unqualified undertaking on behalf of all Scheme Creditors not to commence any proceedings or other similar process to challenge the negotiation and implementation of the Schemes, the previous Restructuring Schemes or the execution or implementation of the documents and arrangements required for the restructuring. FMS objected to the provision as being in the nature of an anti-suit injunction against access to other EU courts to vindicate pre-existing rights and contrary (in substantive effect) to cases such as Turner v Grovit [2005] 1 AC 101. FMS sought especially to protect its rights (as it has perceived them to be) under German law in respect of the Existing ICA.

I can record that in the end the Scheme Companies and FMS agreed a proviso to the clause, and so it became unnecessary further to consider the matter. The Schemes have been amended accordingly.

Conclusion

Subject to (a) amendments that I have mentioned and (b) agreed provisions to enable the Schemes to proceed so far as possible without in any way precluding the Court of Appeal, if so minded, thereafter reversing this decision entirely, I considered for my part that I should give the court’s sanction to each of the Schemes. I have done so accordingly.

I have dealt with consequential matters previously. My rulings have been transcribed, and I will revise and approve these in due course.