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.

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