Parallel Proceedings: the restructuring Double Act
17 January 2024
17 January 2024
Following the Government's response to the UNCITRAL consultation (see our briefing here) - which suggests that, for a while at least, the rule in Gibbs is here to stay - we expect to see an increase in parallel proceedings being used when multijurisdictional corporate groups seek to restructure their debt.
Indeed, three group-wide cross-border restructurings have recently been effected by way of parallel proceedings (the Hong Kong Airlines, Vroon and Cimolai restructurings received approval during the course of last year) and this trend looks set to continue in 2024, starting with US engineering group, McDermott International.
But how easy is it to implement parallel proceedings and what might influence their success?
We need to revisit the rule in Gibbs to understand why parallel proceedings are used. This nineteenth century Court of Appeal decision establishes the rule that a discharge of debt under the insolvency law of a foreign jurisdiction will only be recognised in England and Wales if it is discharged in accordance with the governing law of the contract. It follows that an English law-governed debt cannot be discharged or compromised by foreign insolvency proceedings, unless the creditor submits to the jurisdiction of the foreign court.
It is common for lenders to opt for English law to govern their debt to take advantage of the robust and well-established nature of English law, as well as the certainty that English law and jurisdiction provides. As a result, English law-governed debt is prevalent in large, multijurisdictional group structures.
Owing to the rule in Gibbs, in a restructuring involving English law-governed debt, English legal proceedings will be required to compromise or discharge the debt, unless the English law-governed creditors submit to the foreign court's jurisdiction by participating in foreign reorganisation proceedings. However, in circumstances where (for example) group assets are also located in jurisdictions other than England and Wales; there is also foreign law-governed debt in the capital structure; or certain elements of the proposed restructuring must be implemented under foreign law, overseas proceedings may have to be implemented in parallel with the English law process.
The purpose? To ensure that:
Differences between the legal systems in which the parallel proceedings are launched (and consequential differences between the proceedings themselves) may affect how easily the proceedings run together. For example, differences between insolvency proceedings in civil or common law jurisdictions may give rise to complexities when run in parallel. This was demonstrated by Cimolai, in which Mr Justice Trower grappled with the impact of certain mandatory provisions of Italian insolvency law on the proposed class constitution for the English restructuring plans that were launched in parallel with the Italian concordato preventivo proceedings.
The relevant provisions of Italian insolvency law demote the unsecured portion of a secured creditor's claim to an unsecured claim, but provide that such creditors rank between secured creditors and unsecured creditors in an insolvency. As the English Cimolai plans were designed having regard to the ranking of rights and principles applicable to creditor claims in an Italian insolvency (which was one of the relevant alternatives), one of the plan companies proposed a class of "demoted unsecured creditors". Notwithstanding this is not a class construction one would ordinarily see in an English restructuring context, this was nevertheless approved, which demonstrates the court's willingness to overcome issues that may arise out of incongruous insolvency processes or principles in order to find a commercial solution.
Whether a successful restructuring is dependent upon the approval of both (or all) processes will also have an impact on the restructuring as a whole. Inter-conditionality of English restructuring plans or schemes of arrangement with related foreign proceedings is often a delicate issue to navigate, and we saw different approaches to this in 2023.
In Cimolai, the English restructuring plans were dependent upon the Italian proceedings being sanctioned, but this was not reciprocal: the Italian concordato preventivo proceedings could have been approved irrespective of whether the English restructuring plans were sanctioned. In the event, both the English and Italian proceedings were approved. However, if only the Italian proceedings had obtained approval, any creditors with English law claims could have enforced their uncompromised claims in any jurisdiction that did not recognise the effect of the compromise of their claims effected by the concordato preventivo proceedings (including England and Wales). Whilst it was held that in this case the value of Cimolai's assets outside of Italy wasn't substantial enough to warrant such creditors taking this course of action, in other circumstances this asymmetric approach to conditionality could undermine the effectiveness of the overall restructuring.
Conversely, the Vroon and Hong Kong Airlines restructurings both featured inter-conditional parallel processes (being an English scheme of arrangement / Dutch WHOA in Vroon, and an English restructuring plan / Hong Kong scheme of arrangement in Hong Kong Airlines), thereby minimising the risk of creditors attempting to enforce uncompromised claims in other jurisdictions.
Notwithstanding the English court's willingness to sanction the Cimolai restructuring plan without inter-conditionality, in a restructuring in which there is doubt over the efficacy of the English court's sanction of the English proceedings without inter-conditionality, the English court is likely to require it.
Whilst the debate on the rule in Gibbs continues – with strongly opposing views as to whether it is an asset or a liability to the English legal system – it is clear from recent case law that parallel processes remain a viable way around the issues it poses in cross-border restructurings, even where those processes are not particularly aligned. We expect to see more parallel-proceeding restructurings in the year ahead.
Author: Charlotte Evans