Debtors and investors have an enhanced choice of restructuring venues as the EU Restructuring Directive is rolled out in Member States
A number of key European jurisdictions have now implemented the EU Preventive Restructuring Directive, the broad thrust of which is to introduce harmonised out-of-court restructuring procedures across Member States to address financial difficulties at an early stage of distress. These measures include the introduction of cross-class cramdown (including of shareholders) and a moratorium to provide a debtor with breathing space to propose a restructuring. Germany (StaRUG) and the Netherlands (WHOA) were first movers, with each procedure coming into force in early 2021. The French revised conciliation and accelerated safeguard process became law in October 2021. Italy and Spain are expected to implement and/or consolidate their equivalent procedures to meet the extended deadline of July 2022, but other Member States may need further extensions. Although no longer bound to do so, the UK enacted its own cross-class cramdown and standalone moratorium tools in 2020. Therefore, there are now genuine choices for debtors, and a healthy competition is emerging between the different regimes.
Domestic appetites will grow
The new procedures have been put to the test over the past 15 months in a number of domestic situations and with mostly small- to medium-sized enterprises. Although the European regimes obtain automatic recognition across the EU, the experience to date in both Germany and the Netherlands is that the vast majority of cases have been domestic (using the “private” version of each procedure) without the need for cross-border recognition. Although we are yet to see a StaRUG or WHOA used to implement a cross-border restructuring of a large group, their architects clearly designed the procedures with that in mind and with the express purpose of challenging the primacy of the English scheme and restructuring plan.
An English solution to an English problem
An English scheme or restructuring plan no longer benefits from automatic recognition in the EU. However, European restructuring regimes will face recognition difficulties in the UK where the governing law of the debt is English law. This is due to the so-called rule in Gibbs, derived from an old Victorian case that decided that as a matter of English law, only the governing law of a contract may amend or discharge it. It therefore follows that, absent the agreement of the creditor (by its submission to the jurisdiction in question or otherwise participate in the foreign proceedings), only an English law process may amend or discharge English law-governed debts. Any purported amendment or discharge via a non-English insolvency or restructuring process (such as a StaRUG or WHOA) risks not being recognised by the English court should the creditor commence proceedings in England for repayment under the unamended terms of the facility agreement. This has been an important factor influencing debtors’ use of the English scheme or arrangement or restructuring plan as a procedure of choice. If instead a foreign procedure were used, it would be necessary to use a parallel English scheme or other English process to provide legal certainty with respect to the compromise or discharge of any English law-governed obligations. As the governing law of choice for the majority of large cross-border financings remains either English or New York law, the rule in Gibbs looms large, and any English law compromise of New York law-governed debt is typically dependent on obtaining recognition in the US under Chapter 15 of the Bankruptcy Code.
What this means in practice
Our recent experience suggests that, even with large groups in EU jurisdictions with a predominantly domestic focus, supportive creditors have encouraged the debtor group to pursue an English scheme or restructuring plan as an implementation fall-back instead of an alternative domestic restructuring tool. Investors’ risk appetites understandably lean towards greater certainty of outcome. The UK government is considering whether to introduce legislation that would facilitate the recognition of foreign court insolvency-related judgments, but it remains unclear the extent to which this will erode the rule in Gibbs and permit the recognition of foreign processes amending English law debt. For the foreseeable future, it is safe to assume that any non-English restructuring procedure will hit a roadblock if the debtor has English law-governed debt facilities.