Germany: Scheme Of Arrangement - Acknowledgment In Germany Post Brexit

Last Updated: 2 April 2019
Article by Dr. Marco Wilhelm, Dr. Malte Richter, LLM and Tina Hoffmann

I. Introduction

The departure of the United Kingdom from the European Union, in particular in the case of a "hard Brexit" in which there is no continued bilateral application of EU law, will have many consequences within the European Union.

In contrast to German law, for example, English law provides for a pre-insolvency restructuring instrument, the (solvent) Scheme of Arrangement, which has been widely used by both UK incorporated and non-UK incorporated companies as means of implementing a financial restructuring. The question of recognition of the Scheme of Arrangement as a pre-insolvency restructuring instrument following a possible hard Brexit", in particular in Germany, will be examined below.

This question of recognition is relevant both to:

  • the exercise of the English court of its discretion to sanction a scheme and
  • the recognition of that scheme by the Courts of a Member State in the event, for instance, that a dissenting creditor asserts that it is not bound by the scheme (for instance, in order to enforce against local assets).

II. The Scheme of Arrangement

Subject of this note is the Scheme of Arrangement as a statutory procedure under English law whereby a company under financial pressure may make a compromise or arrangement with its creditors (or any class of them) pursuant to Part 26 of the Companies Act 2006. The process requires the approval (or "sanction") of the English court. Schemes of Arrangement have been used to implement a wide range of restructuring mechanisms, from a simple compromise (such as deferment of debt) to a more complicated structure (such as a debt-for-equity swap).

Although the Companies Act is a set of rules directly applicable in England and Wales, Scotland and Northern Ireland only, the Scheme of Arrangement set out therein has often been used for restructuring purposes in other countries, in particular in Germany, as well.

In contrast to insolvency proceedings governed by German law, which also requires at least the threat of insolvency, in the case of a Scheme of Arrangement there is no requirement for the company to be insolvent. Also, if a company implements a scheme of arrangement it is often the case that day-to-day administrative and disposition powers remain with the company.

If the English court is satisfied that it has jurisdiction to sanction the Scheme of Arrangement, it then has discretion as to whether to do so. In practice, the English court will exercise its discretion to sanction a Scheme of Arrangement for a foreign company only, if:

  • there is a sufficient connection with the English jurisdiction and
  • it is likely that the scheme will achieve its purpose.

Thus, the English court will consider what effect the Scheme of Arrangement will have, and what recognition would be accorded to it, in any jurisdiction in which such recognition would be necessary in order for the scheme to be effective. Consideration is on a case-by-case basis and the English court may receive expert evidence from the relevant jurisdiction(s).

In the event of a "hard Brexit" Regulation (EU) 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matter ("Recast Brussels Regulation") will no longer apply between the United Kingdom and the Member States. Therefore, if recognition in a Member State is necessary for the scheme to be effective, the English court will have to consider, on a case by case basis, the alternative bases of recognition and, if there is none, may not be willing to exercise its discretion to sanction the scheme. Any decision by an English court that a scheme is likely to be recognised in any particular foreign jurisdiction is no guarantee that such recognition will in fact be afforded.

III. Recognition under the current law

The question of recognition is a matter of the domestic law and (if applicable) EU law.

While English courts have so far not finally settled whether the Recast Brussels Regulation applies to Schemes of Arrangement, it can currently still be validly argued that the sanction by the English court required for a Scheme of Arrangement constitutes a decision of a Member State within the meaning of the Recast Brussels Regulation and, thus a Scheme of Arrangement must be recognized in other Member States of the European Union.

IV. Recognition following a "hard Brexit"

As a result of a "hard Brexit", the English court sanctioning the Scheme of Arrangement would no longer be a court of a Member State, so that other Member States of the European Union would no longer be obliged to recognize the Scheme of Arrangement under the Recast Brussels Regulation.

The possible bases upon which Schemes of Arrangement could continue to be recognised as a permissible restructuring measure in Germany, even in the event of a "hard Brexit", are already being discussed. These are briefly examined below.

1. Bilateral agreements between Germany and the United Kingdom

Between Germany and the United Kingdom there are currently no bilateral agreements in place on the basis of which a recognition of the Scheme of Arrangements could be considered. It remains to be seen whether bilateral agreements or an unified European solution will be reached following a hard Brexit" or any transitional period.

2. Lugano-Convention

It is possible that the United Kingdom will accede to the Lugano Convention on jurisdiction and the enforcement of judgments in civil and commercial matters ("Lugano Convention"). Pursuant to the Lugano Convention, a Scheme of Arrangement would be recognized as a decision of a court of a Member State.

3. Rome I Regulation

In addition, a recognition under private international law, in particular Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations ("Rome I Regulation") is discussed.

Unlike the Recast Brussels Regulation, the Rome I Regulation has a universal scope and is therefore also applicable in relation to non-EU Member States and therefore will continue to apply as between the UK and Member States notwithstanding a "hard Brexit".

The German courts have already recognized a Scheme of Arrangement in relation to a German company pursuant to the Rome I Regulation. However, the German court did so as the claims which were the subject of the Scheme of Arrangement were subject to English law. A Scheme of Arrangement which, for example, compromised German law governed claims would not be recognized under the Rome I Regulation. Therefore, a recognition pursuant to the Rome I Regulation would only be of limited assistance.

4. German autonomous law

a) Section 343 German Insolvency Code

A recognition of the Scheme of Arrangement under German Insolvency law, which does provide for the recognition of foreign insolvency proceeding under certain conditions, is according to current case-law out of the question. This is because an insolvency proceeding or comparable proceeding would be required. The Federal Court of Justice has expressly rejected the qualification of the Scheme of Arrangements as an insolvency proceeding. It seems unlikely that this jurisprudence will be abandoned as a result of Brexit.

b) Section 328 German Civil Procedure Code

Finally, recognition of a Scheme of Arrangement under general German civil procedural law seems possible. Hereunder, it is also in general possible to recognize foreign judgments. However, a recognition of the Scheme of Arrangements in Germany would require that

  • the respective creditor under the Scheme of Arrangement has its place of jurisdiction in the United Kingdom
  • the place of performance of the claims in question is in the United Kingdom
  • a place of jurisdiction has been agreed or established as a result of not objecting to the jurisdiction of the court in the United Kingdom or
  • at least one creditor has its registered seat in the United Kingdom,

and the Scheme of Arrangement has a "close connection" with the United Kingdom.

Accordingly, recognition of the Scheme of Arrangement could only be assumed in a few exceptional cases.

V. Perspective

On 22 November 2016, the European Commission published a proposal for a Directive of the European Parliament and of the Council on preventive restructuring measures, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU. Following the collection of comments from the Member States as well as from the individual advocacy groups, the final wording of the compromise agreed between the European Council, the Commission and the Parliament ("Directive Proposal") was presented in December 2018. Its passing can be expected shortly. The Directive Proposal includes the creation of preventive restructuring opportunities in all Member States. In this context, it is currently being discussed whether a German Scheme of Arrangement could be implemented in Germany. The Association of Insolvency Administrators of Germany e.V. (VID) has stated in its opinion that evidence of the lack of reasons for insolvency must be submitted in order to avoid a contradiction to the existing rules on insolvency proceedings. Insofar, it remains to be seen whether and in what form a German Scheme of Arrangement will actually be implemented.

VI. Conclusion

At present, the English law Scheme of Arrangement must be recognized in Germany. However, if there is a possible hard Brexit", it remains to be seen whether Schemes of Arrangement will continue to be fully recognized in Germany.

Unless the United Kingdom accedes to the Lugano Convention or enters into another (bilateral) agreement with Germany, there are serious concerns that a Scheme of Arrangement will not be fully recognized in Germany any longer.

Among the provisions currently under discussion, recognition would in many cases only be possible under additional requirements.

Whilst the Commission's proposal could lead to the implementation of similar restructuring instruments in Germany, it should be noted, however, that as a matter of English law, a debt governed by English law cannot be discharged or otherwise compromised by a foreign insolvency proceeding, unless the creditor had participated in that foreign insolvency proceeding.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions