Gategroup: What’S the Fuss About?

International Corporate Rescue

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Gategroup: What’s the Fuss About?

Mark Fennessy, Partner, Mark Fine, Partner, Nicholas Jupp, Associate, and Alexander Andronikou, Associate, McDermott Will & Emery UK LLP, London, UK

Synopsis members), as the case may be, present and voting at the convening hearing. As opposed to the re- This article summarises the findings of the High Court quirements under a Scheme, there is no additional in Re gategroup Guarantee Limited [2021] EWHC 304 requirement for the consent of a majority in num- (Ch) (‘Re gategroup Guarantee Limited’) and provides a ber of creditors or members to be obtained. view of its effects on the cross-border application of the Restructuring Plan (defined below) and the use of co- Until the High Court’s decision in Re gategroup Guar- obligor structures in restructurings. antee Limited, English courts have generally pulled from the vast body of English common law governing Schemes in their interpretation of the Restructuring The restructuring plan Plan because of the substantive similarity between these two sibling restructuring tools. The UK restructuring plan was introduced by the Cor- porate Insolvency and Governance Act 2020 as a new Part 26A of the Companies Act 2006 (the ‘Restructur- ing Plan’) and is substantially modelled on the existing Gategroup: interplay between the Lugano UK scheme of arrangement under Part 26 of the Com- Convention and the restructuring plan panies Act 2006 (the ‘Scheme’). Restructuring Plans In Re gategroup Guarantee Limited, Mr Justice Zacaroli primarily differ from Schemes in the following respects: of the High Court considered the interplay between – A company may use Restructuring Plans where: (a) the convention on jurisdiction and the recognition (i) it has encountered, or is likely to encounter, and enforcement of judgments in civil and commercial financial difficulties that are affecting, or will or matters signed on 30 October 2017 in Lugano (the ‘Lu- may affect, its ability to carry on business; and (ii) a gano Convention’) and (b) the Restructuring Plan. To compromise or arrangement is proposed between summarise, it was held that the Restructuring Plan fell the company and its creditors and/or members (or outside of the scope of the Lugano Convention on ap- any class of them) to eliminate, reduce or prevent, plication of the Bankruptcy Exclusion (defined below) or mitigate the effect of such financial difficulties. and thus English courts had jurisdiction to sanction the Schemes may be utilised irrespective of the finan- proposed compromise or arrangement, despite under- cial condition of the company. lying bond documentation being governed by Swiss law – Restructuring Plans benefit from a provision de- and subject to the exclusive jurisdiction of the Swiss rived from the US plan of reorganisation under courts. This marks a deviation from the approach of UK Chapter 11 of the US Bankruptcy Code, the cross- courts with regard to Schemes, which have historically class cram down. This allows the court the discre- been treated as falling within the scope of Regulation tion to sanction a Restructuring Plan even where (EU) No 1215/2012 of the European Parliament and one or more classes of creditors dissent if: (i) it is of the Council of 12 December 2012 on jurisdiction satisfied that none of the members of the dissent- and the recognition and enforcement of judgments ing class would be any worse off than they would in civil and commercial matters (the ‘Recast Brussels be in the event of the relevant alternative; and (ii) Regulation’) and thereby the Lugano Convention. the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors, who would receive a payment, or have a genuine economic interest in the company, in the Background: applicable European legislation event of the relevant alternative. Recast Brussels Regulation and Lugano Convention: – A Restructuring Plan requires the consent of a number representing 75% in value of the credi- The Recast Brussels Regulation provides rules for tors (or class of creditors) or members (or class of determining the jurisdiction of a dispute and for the

182 Gategroup: What’s the Fuss About? reciprocal recognition and enforcement of judgments incorporated outside of the group, a solution that has between member states of the European Union. It ul- been used regularly in Schemes. Gategroup also moved timately provides that a defendant should be sued in the centre of main interests (‘COMI’) of the Issuer to its country of domicile. However, the Recast Brussels England. Whilst this shift was somewhat artificial, the Regulation does not apply to ‘bankruptcy, proceedings High Court endorsed the COMI shift given the lack of relating to the winding-up of insolvent companies or realistic alternatives for the group. other legal persons, judicial arrangements, composi- As the Bonds were governed by Swiss law and sub- tions and analogous proceedings’ (the ‘Bankruptcy ject to the exclusive jurisdiction of the Swiss courts, Exclusion’). the main question that fell before the High Court was The Lugano Convention is an extension of Council whether the English courts had jurisdiction to sanction Regulation (EC) No 44/2001 of 22 December 2000 on the Gategroup Plan on application of the Lugano Con- jurisdiction and the recognition and enforcement of vention. Even though the UK left the European Union judgments in civil and commercial matters (the ‘Brus- on 31 December 2020 and is no longer subject to the sels Regulation’), which pre-dates the Recast Brussels Lugano Convention (pending future accession), the Regulation, and includes the same Bankruptcy Exclu- Gategroup Plan was launched prior to such departure sion. The Lugano Convention serves to regulate the on 30 December 2020 and so the Lugano Convention recognition and enforcement of judgments within and continued to apply in this case. between members of the European Union and mem- In his judgment, Mr Justice Zacaroli considered bers of the European Free Trade Association. Following whether Restructuring Plans are ‘civil and commercial Brexit, the UK has applied to accede to the Lugano Con- matters’ and thus within the scope of the Lugano Con- vention and is awaiting unanimous approval (which is vention, or whether the Bankruptcy Exclusion applied. further elaborated on below). For context, if the High Court had determined that Re- structuring Plans fall within the scope of the Lugano Convention, it likely would have been held that the pro- Recast Insolvency Regulation: posed compromise or arrangement should be subject to the jurisdiction of the Swiss courts. Regulation (EU) 2015/848 of the European Parlia- Mr Justice Zacaroli rejected the argument that be- ment and of the Council of 20 May 2015 on insol- cause Schemes fall within the scope of the Lugano Con- vency proceedings (the ‘Recast Insolvency Regulation’) vention, so too do Restructuring Plans. For example, in provides rules that seek to improve the efficiency and response to an argument advanced by a bondholder effectiveness of insolvency proceedings having cross- that the Restructuring Plan is materially indistinguish- border effects. For the purposes of this article, we shall able from a Scheme, he cited the so-called ‘threshold focus on provisions setting out the scope of the Recast conditions’ for companies to utilise Restructuring Plans Insolvency Regulation, which Mr Justice Zacaroli of the (as mentioned at the outset of this article): i.e. that (i) High Court considered in Re gategroup Guarantee Lim- the company has encountered, or is likely to encounter, ited to determine whether the Restructuring Plan falls financial difficulties that are affecting, or will or may within the Bankruptcy Exclusion of the Recast Brussels affect, its ability to carry on business; and (ii) a compro- Regulation (and by extension, the Lugano Convention). mise or arrangement is proposed between the company and its creditors and/or members (or any class of them) to eliminate, reduce or prevent, or mitigate the effect of Gategroup: the case such financial difficulties (the ‘Threshold Conditions’). As previously stated, Schemes may be utilised irrespec- Gategroup, the Swiss airline catering services provider, tive of the financial condition of the company. has outstanding an English law senior facilities agree- In determining whether the Restructuring Plan ment (the ‘SFA’) and Swiss law senior secured bonds falls within the Bankruptcy Exclusion of the Lugano (the ‘Bonds’). With the onset of COVID-19 and pas- Convention, Mr Justice Zacaroli gave consideration senger aircrafts being grounded for large parts of the to the European dovetailing principle, which provides last 12 months, Gategroup struggled financially. This that there should be no gap or overlap between the led to the company launching a Restructuring Plan to, Recast Brussels Regulation and the Recast Insolvency among other things, extend the maturities of the debt Regulation. Applying this, if the Restructuring Plan under the SFA and the Bonds by 5 years (the ‘Gate fell within the scope of the Recast Insolvency Regula- group Plan’). tion, it would satisfy the Bankruptcy Exclusion under Despite the Bonds being issued by Gategroup Finance the Recast Brussels Regulation (and by extension, the (Luxembourg) SA (the ‘Issuer’), the Gategroup Plan Lugano Convention) as there can be no gap or overlap was proposed by a special purpose vehicle incorporated between the two. Accordingly, the scope of the Recast in England, Gategroup Guarantee Limited (the ‘SPV’). Insolvency Regulation was cited and the elements set As initiating an insolvency procedure would constitute out as follows: a default by the Issuer under the Bonds, the SPV was

1. The proceedings must be collective proceedings provided an indemnity (via deed poll) to the senior (i.e. concerning all or a significant part of a debt- lenders and bondholders. The court approved the use or’s creditors); of the co-obligor structure predominantly because of 2. They must be based on laws relating to insolvency the lack of realistic alternatives to effect the Gategroup and have as their purpose rescue, adjustment of Plan, yet noted that the use of such a structure could debt, reorganisation or liquidation; and be ‘wholly objectionable… where it unfairly overrode legitimate interests of creditors pursuant to the con- 3. They must encompass at least one of the following: tracts governing their relationship with the primary – the debtor is partially or totally divested of its obligor companies or under the system of law, includ- assets; ing relevant principles of insolvency law, which applies to the relationship between them’. Accordingly, further – the assets and affairs of the debtor are subject to thought must be given prior to the use of co-obligor control or supervision by a court; or structures in both Restructuring Plans and Schemes – a temporary stay is imposed, by a court or by going forwards. operation of law, on individual enforcement proceedings to enable negotiations to take place between the debtor and its creditors. Concluding remarks

In short, Mr Justice Zacaroli held that: The judgment handed down by Mr Justice Zacaroli is 1. The Restructuring Plan satisfies the requirement a significant departure from the English court’s treat- for a collective proceeding; ment of Schemes. This has thrown into question the future use of the Restructuring Plan for restructurings 2. The presence of the Threshold Conditions means with a cross-border element. As it currently stands, it that Part 26A of the Companies Act (which gov- will not be possible (absent any departure from the rul- erns Restructuring Plans) is a law relating to insol- ing of the High Court in Re gategroup Guarantee Limited) vency; and to rely on the Lugano Convention for the recognition of 3. The ‘supervision of the court may nevertheless a Restructuring Plan in a member state of the European be said to be over the debtor’s affairs and assets Union, even if the UK is permitted to accede. The case in the sense that… the plan devised by the debtor is likely to be similar in respect of the Convention of 2 can only come into effect if the court considers it July 2019 on the Recognition and Enforcement of For- appropriate to convene meetings of creditors and eign Judgments in Civil or Commercial Matters (i.e. the subsequently to approve it’. Hague Judgments Convention), which provides that it shall not apply to ‘insolvency, composition, resolution Accordingly, he was satisfied that the Restructuring of financial institutions, and analogous matters’. Plan fell within the scope of the Recast Insolvency Reg- As a result, alternative routes of recognition will ulation and thus the Bankruptcy Exclusion applied for need to be explored, such as the application of pri- the purposes of the Recast Brussels Regulation (and by vate international law (i.e. local laws of the applicable extension, the Lugano Convention). member states of the European Union) or pursuant to Stepping back from his determination of the elements Regulation (EC) No 593/2008 of the European Par- set out above, Mr Justice Zacaroli further considered liament and of the Council of 17 June 2008 on the that the Restructuring Plan contains materially simi- law applicable to contractual obligations (i.e. Rome I) lar features to the Dutch Act on Court Confirmation of where underlying contractual obligations subject to a Extrajudicial Restructuring Plans 2020 (the Dutch law Restructuring Plan are governed by the laws of juris- equivalent of a Scheme), which is to be included within dictions within the UK, such as the laws of England and Annex A of the Recast Insolvency Regulation and thus Wales. Reassuringly, in Re gategroup Guarantee Limited, within its scope. Gategroup provided evidence from experts in Swiss law Following this, it was held by the High Court that it and Luxembourg law, who gave the opinion that the had jurisdiction to sanction the Gategroup Plan, set- Restructuring Plan would be recognised and enforced ting a precedent for the English courts that the Lugano in both jurisdictions, notwithstanding their conclu- Convention does not apply to the Restructuring Plan. sions that the Restructuring Plan falls within the Bank- ruptcy Exclusion of the Lugano Convention. It had been widely thought that the Restructuring Co-obligor structure Plan would become the favoured restructuring tool in the UK, but findings of the High Court in Re gategroup The Gategroup Plan utilised a co-obligor structure to Guarantee Limited might change that. Whilst the true avoid tripping an event of default under the Bonds, a impact of this ruling is yet to be seen, the significance tactic that has often been used in Schemes. The co-obli- is clear. gor structure consisted of incorporating the SPV, which

The aftermath to accede to the Lugano Convention in its own right on 8 April 2020. For context, if the UK’s application On 11 February 2021, following the convening hear- is unsuccessful, Schemes will likely no longer benefit ing held on 3 and 4 February 2021, the High Court from automatic recognition in member states of the ordered separate meetings of the senior lenders and European Union. bondholders to take place on 19 March 2021 to con- On 4 May 2021, the European Commission released sider, and if thought fit, approve the Gategroup Plan. a communication to the European Parliament and Eu- On 19 March 2021, it was announced that the sen- ropean Council regarding its assessment on the UK’s ior lenders and bondholders each voted to approve the application to accede to the Lugano Convention. Al- Gategroup Plan by the requisite majority (i.e. at least though three existing non-EU members of the Lugano 75% by value of the creditors present and voting at the Convention (i.e. Iceland, Norway and Switzerland) had relevant meeting) at their respective meetings: all expressed support for the UK’s accession, the Euro- – 100% by value of the senior lenders present and pean Commission considered that the European Union voting at the senior lender meeting voted in favour should not give its consent. In its reasoning, the Euro- of the Gategroup Plan; and pean Commission noted that the UK is ‘a third country without a special link to the internal market’ (i.e. the – 99.98% by value of bondholders present and vot- UK does not form part of the European Free Trade Asso- ing at the bondholder meeting voted in favour of ciation or the European Economic Area) and thus there the Gategroup Plan. is no reason for the European Union to ‘depart from its Following this, the High Court sanctioned the Gate- general approach’ in relation to third countries, which group Plan at a hearing on 26 March 2021 and is to ‘promote cooperation within the framework of the Gategroup subsequently announced the satisfaction multilateral Hague Conventions’. of all conditions to the effectiveness of the Gategroup To further elaborate on its reasoning, the European Plan on 30 April and that completion of the underly- Commission highlighted that the Lugano Convention ing transaction (involving a recapitalisation of the ‘supports the EU’s relationship with third countries that business and amendment of the terms of Gategroup’s have a particularly close regulatory integration with financial indebtedness) had occurred. the EU’ and is a ‘flanking measure of the internal mar- Thus, Gategroup’s restructuring process has com- ket and relates to the EU-EFTA/EEA context’. In fact, no pleted with Xavier Rossinyol, Gategroup’s CEO, com- third countries ‘other than EFTA/EEA countries’ are menting that Gategroup is ‘on track to a successful party to the Lugano Convention, with only Poland hav- future and positioned to emerge even stronger.’ ing joined as a third party on its path towards accession to the European Union. However, the European Com- mission made clear that it considers the UK to be a third The UK’s accession to the Lugano Convention country with an ‘ordinary’ free trade agreement that does not include ‘any fundamental freedoms and poli- Following Brexit, the Lugano Convention no longer ap- cies of the internal market’. As such, in its concluding plies to the UK. However, given that (i) the UK is seek- remarks and in accordance with the general approach ing to secure a pathway regarding the recognition and of the European Union, the European Commission sug- enforcement of judgments in civil and commercial gested that the ‘the Hague Conventions should provide matters in member states of the European Union and the framework for future cooperation between the Eu- (ii) the Lugano Convention is wider in scope than the ropean Union and the United Kingdom in the field of Convention of 30 June 2005 on Choice of Court Agree- civil judicial cooperation’. ments (i.e. the Hague Choice of Courts Convention) Notwithstanding the European Commission’s rec- which the UK acceded to in its own right on 1 January ommendation, the outcome of the UK’s application for 2021, it lodged an application with the Depositary of accession to the Lugano Convention will be determined the Lugano Convention (i.e. the Swiss Federal Council) by the European Council in due course.

International Corporate Rescue addresses the most relevant issues in the topical area of insolvency and corporate rescue law and practice. The journal encompasses within its scope banking and financial services, company and insolvency law from an international perspective. It is broad enough to cover industry perspectives, yet specialised enough to provide in-depth analysis to practitioners facing these issues on a day-to-day basis. The coverage and analysis published in the journal is truly international and reaches the key jurisdictions where there is corporate rescue activity within core regions of North and South America, UK, Europe Austral Asia and Asia. Alongside its regular features – Editorial, US Corner, Economists’ Outlook and Case Review Section – each issue of International Corporate Rescue brings superbly authoritative articles on the most pertinent international business issues written by the leading experts in the field. International Corporate Rescue has been relied on by practitioners and lawyers throughout the world and is designed to help: • Better understanding of the practical implications of insolvency and business failure – and the risk of operating in certain markets. • Keeping the reader up to date with relevant developments in international business and trade, legislation, regulation and litigation. • Identify and assess potential problems and avoid costly mistakes.

Editor-in-Chief: Mark Fennessy, McDermott Will & Emery UK LLP, London Emanuella Agostinelli, Curtis, Mallet-Prevost, Colt & Mosle LLP, Milan; Scott Atkins, Norton Rose Fulbright, Sydney; James Bennett, KPMG, London; Dan Butters, Deloitte, London; Geoff Carton- Kelly, FRP Advisory, London; Gillian Carty, Shepherd and Wedderburn, Edinburgh; Charlotte Cooke, South Square, London; Katharina Crinson, Freshfields Bruckhaus Deringer, London; Hon. Robert D. Drain, United States Bankruptcy Court, Southern District of New York; Simon Edel, EY, London; Matthew Kersey, Russell McVeagh, Auckland; Prof. Ioannis Kokkoris, Queen Mary, University of London; Professor John Lowry, University College London, London; Neil Lupton, Walkers, Cayman Islands; Nigel Meeson QC, Conyers Dill Pearson, Hong Kong; Mathew Newman, Ogier, Guernsey; John O’Driscoll, Walkers, London; Karen O’Flynn, Clayton Utz, Sydney; Professor Rodrigo Olivares-Caminal, Queen Mary, University of London; Christian Pilkington, White & Case LLP, London; Susan Prevezer QC, Brick Court Chambers, London; Professor Arad Reisberg, Brunel University, London; Jeremy Richmond QC, Quadrant Chambers, London; Daniel Schwarzmann, PwC, London; The Hon. Mr Justice Richard Snowden, Royal Courts of Justice, London; Anker Sørensen, De Gaulle Fleurance & Associés, Paris; Kathleen Stephansen, New York; Dr Artur Swierczok, Baker McKenzie, Frankfurt; Meiyen Tan, Oon & Bazul, Singapore; Stephen Taylor, Isonomy Limited, London; Richard Tett, Freshfields Bruckhaus Deringer, London; The Hon. Mr Justice William Trower QC, Royal Courts of Justice, London; Mahesh Uttamchandani, The World Bank, Washington, DC; Robert van Galen, NautaDutilh, Amsterdam; Miguel Virgós, Virgós Arbitration, Madrid; L. Viswanathan, Cyril Amarchand Mangaldas, New Delhi; Prof. em. Bob Wessels, University of Leiden, Leiden, the Netherlands; Angus Young, Hong Kong Baptist University, Hong Kong; Maja Zerjal Fink, Arnold & Porter, New York; Dr Haizheng Zhang, Beijing Foreign Studies University, Beijing.

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