Amy Walker, Macfarlanes

Despite the last couple of years being marred by the dreary, and often frightening, Covid-19 pandemic, opportunities to learn and adapt have been many. As Macfarlanes senior associate Amy Walker discovered advising Castle Trust on its restructuring.

“Castle Trust has been a real highlight of my career to date and has reinforced what a fantastic team I am a part of,” she says. “There were a number of interesting legal points which came up on the transaction, which will be invaluable to my career. The greatest takeaway for me has been that even when something has not been done before, it is all about having the “can do” attitude and being able to think outside of the box to achieve the desired result for the client.”

Castle Trust was launched in October 2012 with backing from US private equity firm JC Flowers & Co, initially offering investment products and specialist mortgage finance. JC Flowers & Co continue to be Castle Trust Bank’s principal shareholder to this day.

As the business grew, it expanded its operations with the acquisition of Omni Capital Retail Finance in 2017. Castle Trust began working on its application for a banking licence in 2018. When Castle Trust proposed a scheme of arrangement to convert retail investors’ existing bonds into fixed term deposits in bank accounts, an overwhelming majority of those investors who chose to vote were in favour. As a result, in June 2020, Castle Trust became a fully authorised bank and changed its name to Castle Trust Bank.

Macfarlanes has advised Castle Trust since its inception, including an innovative form of scheme which, when it became effective on 22 June 2020, converted bonds sold to more than 20,000 retail investors into deposit balances.

The Macfarlanes team was led day-to-day by restructuring specialist Simon Beale with support from restructuring partner Jat Bains, finance partner Richard Fletcher, and solicitors Walker and Tim Bromley-White.

Walker joined Macfarlanes in January 2019, having qualified at DLA Piper in September 2016. “I have worked across a broad range of matters spanning restructuring and insolvency, leverage finance and real estate finance. I was part of the finance team alongside partner Kirstie Hutchinson advising the consortium led by Lawrence Stroll on a strategic investment in FTSE250 luxury British sports car manufacturer Aston Martin Lagonda,” she says.

“I have also been part of the team advising Buzz Group Limited and Buzz Entertainment Limited, operating as Buzz Bingo, the UK’s biggest omni-channel bingo business, in relation to liquidity, new capitalisation and a restructuring process including by way of company voluntary arrangement.”

Since Castle Trust, as the firm, and the rest of society, emerge from Covid-19, Walker says she has been an incredibly busy, as she continues to work on a broad range of matters with a focus on both areas of restructuring and insolvency and leverage finance.

“I have also had the opportunity to spend some time on secondment with Arcmont, a credit fund client and completed the Certificate of Proficiency in Insolvency with distinction earlier this year. I am also on the IFT NextGen committee having previously held roles such as the head of the R3 West Midlands Young Professionals committee,” she adds.

“I am really fortunate to have had the opportunity to work with all of the partners in the finance team at Macfarlanes, many of which act as a mentor to me – it is a very tight-knit and supportive team. I work closely with Jat Bains and Paul Keddie on restructurings and advising insolvency practitioners and companies in financial difficulties and their directors and shareholders. I also work closely with Andrew Perkins advising credit funds on leverage finance deals.”

The Castle Trust schemes

The Castle Trust schemes of arrangement were notable for several reasons. It is the first time that schemes of arrangement have been used to convert bonds into deposits in bank accounts. The judgment of the court at the convening hearing for the scheme was not only one of the first to order that meetings be held virtually following the outbreak of covid-19, but re-wrote the existing case law in holding remote meetings by relaxing a previous requirement that participants needed to see and be seen as well as to hear and be heard.

The court also accepted that investors with beneficial interests in bonds could be contingent creditors even where they did not have a completely unfettered right to call for full legal title to those bonds. Macfarlanes provided first-of-a-kind legal and structuring advice to Castle Trust and made new law as to how participants might attend and vote at a meeting on a proposed scheme of arrangement.

While the provisions of the bonds might conceivably have allowed Castle Trust to convert the bonds into deposit balances without requiring a scheme, this either would have required at least a 75 per cent majority of all bondholders or would have required Castle Trust to impose the changes without seeking consent from any of its investors. The first of these routes would have been unrealistic, as it was extremely unlikely that at least 15,000 investors would positively vote in favour of a change that would have very little economic impact for them. The second route would have been highly controversial. Only a scheme would allow interested investors to engage and vote but also to overcome the fact that the bulk of the investors would probably choose not to engage at all.

“This project stands out for a number of reasons in particular,” Walker explains. “First, we provided first-of-a-kind legal advice to Castle Trust, as it was the first time that schemes of arrangement had been used to convert bonds into bank account deposits and as we had just entered the covid-19 pandemic, we re-wrote existing case law in relation to holding remote meetings.

“Being able to adapt quickly on a transaction and having a positive “can do” attitude is key. Given we had just entered the covid-19 pandemic, the way in which we had planned to do certain things rapidly changed and so we needed to find creative ways to work through those, all while learning the new ‘home office’ work processes and methodologies.”

Walker says the most exciting part of the project was doing something that had not been achieved before, all of which had to be done under the constraints of homeworking and remote communications.

“Working remotely on a full-time basis is not something which we and clients were used to. Whilst it had its challenges of not being face to face and getting used to the new technologies, it also had some real positives and has allowed us to communicate in new ways. A Zoom or a Microsoft Teams call with a client is a lot better than a phone call and has become more of the norm. It is great to return to the office and see colleagues and clients and also to retain that flexibility to work at home,” she recalls.

“Teamwork and project management were essential – having to switch to preparing for remote hearings and meetings at short notice required significant reorganisation and communication between all parties. Whilst we were not all in the office together, we were still able to work together in a seamless manner.”

When the claim form instigating the scheme process was filed with the Court on 5 March 2020, Castle Trust was still anticipating that it would hold physical scheme meetings. Castle Trust needed very rapidly to re-formulate its plans because of covid-19. It had been obliged to cease to issue bonds to new investors once it had instigated the scheme process and had the schemes been delayed, it would have risked running out of cash as a percentage of existing investors would still have wanted to redeem their bonds on maturity.

There were difficulties as nearly half of the 20,000 investors involved still communicated with Castle Trust by post rather than by email and more than 50 per cent of the investors were over the age of 70.

The court hearings were also held remotely, with the convening hearing taking place by Skype on 3 April 2020, less than two weeks after lockdown was introduced in England. We needed to convince the court at the convening hearing to make an order allowing Castle Trust to conduct both the scheme meetings and the voting at those meetings by telephone, with investors who had access to the internet additionally able to view the meeting via a linked webcast.

Macfarlanes achieved a conversion that would not have been practical simply by using the contractual terms of the bonds, working rapidly to overcome the difficulties posed by covid-19 without any delays to the timetable. The firm provided an expanded team that acted quickly as Castle Trust had been obliged to cease issuing new bonds once the process was underway, a delay could have had serious adverse financial consequences.

A scheme of this kind could be used in various other circumstances where an organisation has initially financed itself by issuing bonds to retail investors but, perhaps due to an increase in the scale of its operations, wishes to take advantage of the various benefits of becoming a bank.