Moving with the times
24 September 2007
The €500m (£347.42m) corporate restructuring of German autoparts manufacturer Schefenacker Group, which completed on 29 June, has been hailed as a triumph for the consensual approach taken by the principal stakeholders. But what are the financing implications of the three key steps used?
European Insolvency Regulation
The question of recognition of insolvency proceedings in Europe is governed by the European Insolvency Regulation. This requires courts in the country where the centre of main interests (Comi) is located to recognise insolvency proceedings in other EU countries where main proceedings have been opened. This allows all assets and claims in relation to a debtor to be dealt with under one proceeding.
The European Court of Justice (ECJ) clarified that, in principle, a company’s Comi is presumed to be where the registered office is located. This presumption can only be rebutted if factors that are both objective and ascertainable by third parties establish that a different situation exists to that which locating it at the registered office is deemed to reflect (see Eurofood IFSC Ltd (2006)).
For the purposes of the Insolvency Regulation, insolvency proceedings include: creditors’ voluntary liquidations (but only if approved by court order and not members’ voluntary liquidations); compulsory liquidations; administrations; and a company voluntary arrangement under the Insolvency Act 1986. But not a company voluntary arrangement under section 425 of the Companies Act 1985 and not an administrative or other receivership.
A company voluntary arrangement is also possible under Section 425 of the Companies Act 1985 (soon to be replaced by Section 895 of the Companies Act 2006). If an administrator concludes that a company in administration can be rescued as a going concern, they may include proposals for a compromise or arrangement to be sanctioned under this section.
Company voluntary arrangements
The Insolvency Act 1986 provides that an Insolvency Act company voluntary arrangement (IACVA) is open to companies registered under the Companies Act 1985, to companies incorporated in a European Economic Area (EEA) state other than the UK, and to companies not incorporated in an EEA state but having their Comi in a member state other than Denmark.
In order to obtain recognition as main proceedings under the Insolvency Regulation, the IACVA must, however, be an arrangement of a company whose Comi is in the UK. For insolvency regulation purposes, Scotland is not treated separately from England and Wales, so a Scottish company would be able to be the subject of main proceedings opened in England if the Comi is in the UK and those proceedings would be entitled to recognition under the Insolvency Regulation. This should include proceedings by way of an IACVA because Scottish companies are within the meaning of the Companies Act 1985.
The decision of the company and its creditors, at separate meetings, to approve an IACVA takes effect as if made by the company at the creditors’ meeting and binds every person entitled to vote at that meeting. The IACVA cannot, however, prejudice a secured creditor or a preferential creditor without the consent of that creditor.
Migration has now been used in a number of cases to move a company from one European Community jurisdiction to another to make use of different insolvency proceedings than those available in the home state. German companies Deutsche Nickel and Schefenacker are prime examples of migration to the UK for this reason.
In the Schefenacker case, the German rules of universal succession were used to effect a cross-border merger. First, a German limitedliability company or a stock corporation is converted into a limited partnership under the German Transformation Act.
As a result of the conversion, there is a German limited partnership with one or more general partners and one or more limited partners. One of these partners must be an English limited company. The shares in the company have to be allocated accordingly prior to the conversion. Second, all non-English partners of the limited partnership either sell their partnership interests to the English partner or agree to withdraw from the limited partnership.
By its nature, the limited partnership automatically ceases to exist with only one remaining partner and, under German principles of succession, the remaining English partner becomes the full legal successor to all assets and liabilities of the partnership. As a result, the German company ends up as an English limited company. Crucially, the Comi of Schefenacker also had to move to the UK to fall within the Insolvency Regulation requirements for main proceedings.
Merger as a tool
Partly in response to the migration of Deutsche Nickel and Schefenacker, the draft act on Modernisation of GmbH Law in Germany is aiming to make migration more difficult. This draft act is, however, competing with the European Merger Directive 56/2005, which was implemented in Germany on 25 April 2007 and which should enable two companies from different member states to merge and end up with a Comi in either jurisdiction, dependant principally on the selected place of registration, which was the rebuttable presumption from in the Eurofoods case.
The Merger Directive must be implemented by 15 December 2007 across the EU. The UK is one of the countries that has not yet implemented the directive, but the Department of Trade and Industry has produced consultation papers that propose producing a single set of self-standing regulations covering both the company law and employee participation aspects of the Merger Directive. This would replicate, as far as possible, the system in place for domestic mergers of public companies under Part 13 of the Companies Act 1985 and, as regards the employee participation provisions, the existing arrangements for the European Public Limited-Liability Company Regulations 2004.
The regulations will not provide for crossborder mergers involving companies outside the EEA, but the regulations will apply to public and private companies limited by shares or guarantee, unregistered companies and unlimited companies.
After implementation of the Merger Directive, then, a cross-border merger could be a viable option to migrate from both a Comi and a corporate perspective. A merger may be time-consuming and costly in a restructuring scenario, but commercial factors will be weighed up and the lawyers will adapt to the business need using the best legal tools available, which may well include a cross-border merger.
Of course, the ECJ has ruled that the relevant jurisdiction is that of the debtor’s Comi when the relevant insolvency proceedings are opened (see Susanne Staubitz-Schreiber (2006)) so planning ahead for a troubled company is vital.
Using the migration technique to give Schefenacker a Comi in England allowed the company to use the cross-border recognition granted to an Insolvency Act voluntary arrangement to restructure both operationally and financially and to preserve 8,500 jobs in 14 countries across Europe, the US, Asia and Australia.
Georgia Quenby is a partner at McDermott Will & Emery