Partner London
"The principal peculiarity of bankruptcy is that it arises from the debtor’s inability to satisfy the claims of its creditors resulting in a competition among the creditors which requires a collective solution."
In gategroup, one of the matters to be decided by the Court was whether a Plan is an insolvency proceeding for the purposes of the Lugano Convention. This is similar to the important question for aircraft financiers and lessors as to whether a Plan would be an ‘insolvency proceeding’ for the purposes of the Cape Town Convention (as such term is defined therein) – if so, then a debtor’s obligations under certain leases or security agreements to which the Cape Town Convention applies cannot be modified without the creditor’s consent. The Cape Town Convention was not considered in the gategroup judgment but the Court’s reasoning on the Lugano Convention question is insightful.
The High Court held that the relevant provisions of the Lugano Convention relating to insolvency proceedings are materially identical to those in the Recast Brussels Regulation and therefore should be construed consistently. The Recast Brussels Regulation dovetails with the EU Insolvency Regulation so as to avoid any overlap or vacuum. Accordingly, if an action falls within the EU Insolvency Regulation then it will not be within the scope of the Recast Brussels Regulation or, therefore, the Lugano Convention.
The Brussels Recast Regulation and the Lugano Convention are not applicable to insolvency proceedings which are described therein as:
“bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”.
The reason for excluding such proceedings is that the peculiarities of bankruptcy require special rules. The principal peculiarity is that such proceedings arise from the debtor’s inability to satisfy the claims of its creditors resulting in a competition among the creditors which requires a collective solution. The High Court held that this rationale extends to a Plan and so that is a strong indication that a Plan is an insolvency proceeding.
The Court then considered the question from the perspective of the EU Insolvency Regulation. For an action to be an insolvency proceeding within the scope of the EU Insolvency Regulation:
a) the proceedings must be collective proceedings;
b) they must be based on laws relating to insolvency and have as their purpose rescue, adjustment of debt, reorganisation or liquidation; and
c) they must encompass at least one of the following:
"At all stages the court is required to reach a judgment based on established principles and all interested stakeholders are entitled to be heard by the court."
(i) the debtor is partially or totally divested of its assets;
(ii) the assets and affairs of the debtor are subject to control or supervision by a court; or
(iii) a temporary stay is imposed, by a court or by operation of law, on individual enforcement proceedings to enable negotiations to take place between the debtor and its creditors.
The Court held that a Plan satisfies the first requirement for collective proceedings as set forth in the EU Insolvency Regulation because it is “proceedings which include all or a significant part of a debtor’s creditors, provided that, in the latter case, the proceedings do not affect the claims of creditors which are not involved in them”. Proceedings which include only financial creditors also qualify as collective proceedings.
The court held that a Plan satisfies the second requirement because a debtor may only use a Plan if: (i) the debtor has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and (ii) the purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties aforementioned (the ‘Threshold Conditions’). The EU Insolvency Regulation is clear in that it extends to “proceedings … commenced in situations where there is only a likelihood of insolvency, [provided] their purpose shall be to avoid the debtor’s insolvency or the cessation of the debtor’s business activities”.
With respect to the third requirement, only the second limb was relevant to the Plan in gategroup – this is likely to be the case with other similar Plans although a debtor can also theoretically seek a stay. The Court gave a broad meaning to “control or supervision by the court” and agreed that a Plan satisfies the second limb of the third requirement because “There is undoubtedly significant court involvement. No plan meeting may be convened without the court’s order. The composition of the classes must be approved by the court. No plan can become effective until sanctioned by the court. At all stages the court is required to reach a judgment based on established principles and all interested stakeholders are entitled to be heard by the court”.
Accordingly, the Court concluded that a Plan is an insolvency proceeding under the Lugano Convention, the Brussels Recast Regulation and the EU Insolvency Regulation.
"The judgment provides strong support for a Plan being an ‘insolvency proceeding’ under the Cape Town Convention on the basis that the Court held that a Plan is a collective proceeding in which the assets and affairs of the debtor are subject to control or supervision by a court for the purposes of reorganisation."
As mentioned earlier, the Court did not consider whether a Plan would be ‘insolvency proceedings’ for the purposes of the Cape Town Convention. However, the Cape Town Convention defines ‘insolvency proceedings’ as:
“bankruptcy, liquidation or other collective judicial or administrative proceedings, including interim proceedings, in which the assets and affairs of the debtor are subject to control or supervision by a court for the purposes of reorganisation or liquidation”.
Therefore, we can see that the gategroup judgment provides strong support for a Plan being an ‘insolvency proceeding’ under the Cape Town Convention on the basis that the Court held in that judgment that a Plan is a collective proceeding in which the assets and affairs of the debtor are subject to control or supervision by a court for the purposes of reorganisation.
We would make two further observations with respect to the gategroup judgment:
- The debtor advocated for the Plan to be deemed an insolvency proceeding and no adversarial argument to the contrary was presented in the hearing. However, after the hearing, the Court received a letter from a party with no interest in the Plan opposing the debtor’s view. This opposition was considered by the Court and the debtor provided a response to the Court.
- A Plan is different to a scheme of arrangement under Part 26 of the Companies Act 2006 (a Scheme), not least because the Threshold Conditions only apply to a Plan. The Court did not consider in the gategroup judgment whether a Scheme is an insolvency proceeding. However, in circumstances where a Scheme is formulated in an insolvency context, the gategroup judgement might be persuasive that such a Scheme is an ‘insolvency proceeding’ for the purposes of the Cape Town Convention.
