This article features four Loyens & Loeff team members who specialize in insolvency matters and restructuring. They discuss the implications of corporate insolvency for Luxembourg. What has the UK’s departure from the EU meant for the enforceability of judgments? How has the UK’s withdrawal impacted Schemes and Restructuring Plans?
What are the main outcomes of Brexit in cross-border restructuring and insolvency proceedings?
As in many EU jurisdictions, Luxembourg does not have a specific legal framework for automatically recognising UK judgments after Brexit. This means that there is no substitute or equivalent to the existing: (i) EU Insolvency Regulation; (ii), Brussels Recast Regulation on the recognition of judgements; and (iii). Recognition in certain situations where the Hague Convention would not normally apply. These consequences can have a significant impact on certain common restructuring tools, such as the UK Scheme of Arrangement or, more recently, UK Restructuring Plan.
While UK schemes and other processes were used frequently to restructure debt before Brexit, their widespread use has decreased post Brexit because of the lack of automatic or direct enforceability. Although the UK’s restructuring processes are still available, their use is limited. Parties should conduct a detailed factual analysis to determine whether the UK judgment in the particular matter can be enforced and the associated risks due to the lack of enforceability.
It appears that the UK’s Scheme or any other UK restructuring process can only be used on debt that is governed only by English law. This applies only to the contractual nature of the debt. This is a departure from the past, when the UK could be used to order positive action against debtors. These positive actions against debtors require the immediate enforcement of the judgment to be effective. This would make them appear ineligible for the Scheme.
Market trends following Brexit: (i). The overall use of Schemes is down, (ii). Other restructuring processes in EU countries can be considered in greater detail (such the German or Dutch process of restructuring), and (iii). The scope of Schemes has been relegated to and generally restricted to contractual debt matters.
While UK schemes and other processes were used frequently to restructure debt before Brexit, their widespread use has decreased post Brexit because of the lack of automatic enforcement.
However, the UK’s restructuring procedures are still very practical. The UK Courts have extensive experience in restructuring debt. It is therefore a goal of parties to try to match facts and circumstances to continue using these processes. To limit recognition issues, there is a growing trend to try to create a coobligor structure based on the Gategroup model.
What impact has Brexit had on international recognition of and enforcement of UK judgments in EU member countries?
English Schemes of arrangement (voluntary Pre-Insolvency Proceedings) are not considered insolvency proceedings. These orders were recognized in the EU by the Brussels Recast Regulation prior to the Brexit transposition deadline.
As there are no similar proceedings, treaties, or recognition conventions in EU Member States and the Brussels Recast Regulation is no longer applicable post-Brexit the sanctioned schemes would need to go through the exequatur procedure to be recognized in EU Member States. The Luxembourg exequatur procedure, which is an ordinary civil proceeding, has no priority. This can make it difficult to reach in contested proceedings and leave uncertainty in the restructuring transaction, which often proves fatal because of time being of the essence.
English Company Voluntary Arrangements ( CVAs ) are, on the other hand considered insolvency proceedings because they are listed under European Insolvency Regulation [1]. CVA rulings had automatic recognition in all Member States prior to Brexit. This was subject to the public policy of that European Member state. A Luxembourgish court, for example, would have to use the exequatur procedure to recognize foreign judgments after the Brexit transposition deadline. Luxembourg has not integrated the European Insolvency Regulation into its national legislation.
English restructuring plans were often equated with those of Schemes for arrangement for recognition (i.e. The Brussels Recast Regulation was considered to be applicable. Following the controversial Gategroup case [2] restructuring plans are widely considered to be within the scope of the European Insolvency Regulation’s description of insolvency proceedings. Any restructuring plans that were launched before Brexit would be recognized in all Member States where the European Insolvency Regulation has been fully implemented. However, plans for restructuring launched after Brexit would be recognised only if they are following the exequatur or equivalent procedure.
What does the UK’s withdrawal from the Lugano Convention have to do with the outcome of the judgments?
If there is no treaty or convention between the UK, UK, and another Member state that allows automatic recognition, then the exequatur (or equivalent procedure) is not applicable. The Lugano Convention on jurisdiction, enforcement and recognition of civil and commercial judgments was previously considered a possible way to obtain recognition of a Scheme in Europe. The Lugano Convention no longer applies to the UK due to Brexit and the UK not adhering in its own right to be an EU Member state.
The recognition of a Scheme would have been possible under the Lugano Convention (which is not insolvency). Some parties viewed the UK’s possible accession to the Lugano Convention, as a way of ensuring that a restructuring plan was recognized. However, the Gategroup decision by the English Courts cast doubt on this view.
Although the facts in the Gategroup case differ from those of restructuring plans launched post Brexit, (the proceedings were opened on the day of the Brexit transposition deadline), the case provided an analysis of an English restructuring plan and ultimately determined that it was exempted from bankruptcy proceedings under the Lugano Convention. The English Courts were not eligible for automatic recognition because they did not fall under the Lugano scope.
This is because, while a Scheme, CVA, or restructuring plan ruling would likely be recognized in most Member States under their exequatur (or similar) proceedings , if a Luxembourg-based entity is the initiator of a UK Scheme or arrangement, the ruling must be recognized in Luxembourg. The English court ruling on the Scheme or CVA or restructuring plan is not authorized to hear the pre/post insolvency proceedings of a Luxembourgish entity.
If there is no treaty or convention between the UK, UK, and another Member state that allows automatic recognition, then the exequatur (or equivalent procedure) is not applicable.
Second, Luxembourg still believes in creditor cramdown, but this is not the case in Luxembourg. Luxembourg does not have the preventative de faillite procedure [4] . This creates uncertainty about whether or not a Luxembourg court will recognize the concept of creditor creditor cramdown within pre/post insolvency mechanisms that are used through CVAs, Schemes, or restructuring plans, which are in accordance with national policy. After lengthy exequatur proceedings, companies are at risk of the Luxembourg court finding that schemes, CVAs, and restructuring plans that creditor cramdown is ordered are against public policy. This could mean that the recognition order cannot been given.
Some practitioners claim that Luxembourg failed to implement Insolvency Regulation by transposition deadline. However, creditor cramdown elements should be recognized in Luxembourg courts (if necessary). This cannot be guaranteed and leaves an atmosphere of uncertainty. This risk is not significant (a lack in public policy is seldom used to justify a ruling), but it is important. As was demonstrated in Ireland in Apperley Investments Limited & Others v Monsoon Accessorize Limited [2020] IEHC523.
An English Scheme/CVA/restructuring plan is perfectly fine to proceed in the UK without being subsequently recognised in a European Member State, unless the proposed procedure expects to make changes within a European Member State whereby recognition is required. An English or Welsh judge should confirm that recognition is possible in the relevant Member States prior to sanctioning these actions, as detailed in the case [5].
Are there any other significant developments in insolvency since the Brexit transition?
Since the Brexit transposition period ended, there has been little insolvency law developments in Luxembourg. It is worth noting that the COVID-19 pandemic, which was ongoing at the end of the transition period, had resulted in a lower number Luxembourg-based insolvency proceedings. However, we have seen signs that this is changing.
Separately, the European Insolvency Regulation was in existence before the Brexit transition period ended. However, more Member States have taken national measures to harmonize their approaches with the UK’s. Luxembourg has yet to implement the EU Restructuring Directive and has not implemented it. Luxembourg does not currently have the same restructuring tools as other EU jurisdictions (e.g., the French safeguard, German and Dutch Schemas). Complex restructurings cannot be done in Luxembourg’s courts, but are instead settled outside of court through security enforcement or using procedures from abroad.
The so-called ‘Luxembourg Pre-Pack’, which uses the extremely advantageous and robust Luxembourg financial collateral law, is still a common way to implement cross-border debt restructuring. This involves the enforcement of the top Lux security and the transfer of ownership to the relevant creditor group. Luxembourg’s collateral law is still one of the most creditor-friendly laws in Europe.
Luxembourg does not currently have the same restructuring tools as other EU countries.
What are the implications of these post-Brexit developments for Luxembourg?
These new changes have led to renewed interest in Luxembourg and additional requests regarding where Luxembourg stands in matters such as the EU Restructuring Directive implementation or recognition of Schemes CVAs or restructuring plans. There has also been a push for greater clarity on this matter in the Luxembourg market. Luxembourg, despite being more complex in structuring restructuring deals, is still a popular restructuring jurisdiction due to the large number of Luxembourg SPVs involved in international financings. This, along with the creditor-friendly financial collateral law, makes the enforcement of Luxembourg sharesecurity one of the most popular methods of taking control over a debtor group within Europe.
What is the likelihood of the status quo in UK insolvency changing in the near future.
Although it is unlikely that the situation will change significantly, depending on how Luxembourg implements the EU Restructuring Directive, the use of a Scheme could become more simple in the future.
There is also discussion about whether the UK might attempt to join the Lugano Convention. While, as per Gategroup, this would not be of assistance to those seeking to initiate restructuring plans or, separately, CVAs, this could certainly aid companies or groups seeking to initiate Schemes out of the UK while having their COMI/headquarters/place of central administration in an EU Member State, or in one of the other countries which are a party to the Lugano Convention.
We expect more complicated litigation, especially if UK judgments are recognized in the insolvency context. When exequatur proceedings are initiated for post-Brexit UK insolvency and pre-insolvency judgments, and the Luxembourg judgments are rendered, creditors will be able to see the likely consequences, timing, and consequences of any UK judgment being enforced in Luxembourg.
Why is it important to find experienced legal counsel?
There are large differences in how pre-insolvency proceedings in the UK are recognized across Europe and within EU member states. Complex restructuring cases require a dedicated team with international restructuring experience. It is also important to be familiar with US concepts and regimes so that the best solutions are possible.
The type of financing required will determine the advice needed. The type of financing involved will determine the advice required. Because of the uncertainty surrounding this area, it is more important in Luxembourg.
These situations are why a multidisciplinary team is so useful.
Large-scale multijurisdictional debt restructurings often involve multiple layers of debt. This is why it is important to have a multidisciplinary team who is familiar with both corporate and lending aspects. Our cross-practice restructuring team has a major advantage in that many of its members have a UK or US legal background. They are therefore familiar with common and civil law concepts. Complex restructurings require a team of experts in corporate finance, tax, and litigation to ensure all aspects are covered.
What changes have you seen in the process of financial restructuring over your time together?
As funds are more likely to be on the lender and sponsor side, we see more litigation cases. There are many alternatives. Not only is the US or UK driving the restructuring process, but other jurisdictions may be crucial as well. Or, a local restructuring process may be necessary to secure the key assets. The US has also been influencing the parties and structures. In the past decade, US funds have made more investments in Europe, and some US companies have increased their European (or at the very least London) presence.
[1] Regulation 2015/848 of European Parliament and of Council of 20 Mai 2015 on Insolvency Proceedings (recast) (annex A).
[2] Re Gategroup Limited [2021] EWHC304 (Ch.
[3] Spain, according to Book II of CIL and Germany under German Corporate Stabilisation and Restructuring Act. This was based on the English Scheme of arrangement and allows both horizontal and vertical cramdown of dissident creditors.
[4] Note that this procedure cannot be initiated if central administration is located in Luxembourg. No consideration of creditors cramdown for a Luxembourg company following a COMI switch.
[5] DTEK Energy B.V. & Anr [2021] EWHC1456 (Ch. (convening); [2021] EWHC1551 (Ch. ) (sanction).
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Michael Scott is a partner and a member the Loyens & Loeff Luxembourg office’s Corporate Restructuring Team. He also co-heads the overall Luxembourg Restructuring Practice. He is a specialist in cross-border distressed debt restructurings, both for multinational companies and noteholder groups. He advises clients based in the United States and UK who have investments in Luxembourg entities that own target groups in EU jurisdictions.
Anne Marie Nicolas is a partner and heads Loyens & Loeff’s Luxembourg Banking & Finance Practice. She also co-heads the Luxembourg Restructuring Practice. Anne-Marie is a specialist in secured lending. This includes acquisition finance, real estate, and distressed financings.
Veronique Höffeld is a partner and a member the Executive Committee at Loyens & Loeff Luxembourg. She heads the Litigation & Risk Management Practice Group in its Luxembourg office. She is an expert in international arbitration, financial litigation, and commercial law. Her expertise in contentious insolvency is another reason she is well-respected.
Patrick Ferguson is an associate in the Banking and Finance practice group at Loyens & Loeff Luxembourg. Patrick is a specialist in banking and finance law. He acts for investors, private equity firms and financial institutions in various cross-border finance transactions including acquisition finance, secured lending, refinancings, restructuring, and refinancing.
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