The recent restructurings of Deutsche Nickel and Schefenacker have involved an intriguing metamorphosis, that of a German AG into an English limited company.
It is the essential flexibility of English insolvency law and its restructuring mechanisms that have led to this strong trend for companies to migrate to England, particularly from Germany.
How to get through passport control
Put simply, migration is the transformation of a legal entity established in one jurisdiction into a legal entity established in another jurisdiction. Following Deutsche Nickel’s transformation into an English limited company, it was then put into administration and restructured through the use of a company voluntary arrangement (CVA).
The more recent restructuring of Schefenacker also saw the German AG holding company transform itself, but this time into an English plc. It too was restructured using a CVA.
How it works for German companies
First the German AG, with shareholder approval, must be converted into a limited partnership (kommanditgesellschaft) under the German Transformation Act. The limited partnership has both limited and general partners and so it must be ensured that the general partner is an English company.
Then the limited partner must withdraw from the partnership or sell its shares to the general partner. This is the key step. The partnership will cease and, under the German law of succession, all assets and liabilities will transfer to the general partner. You now have an English company.
While England is not the only country to which companies might seek to migrate (and it is not just German companies that are looking to do so), England, with its user-friendly insolvency regime, is seen as a mecca for restructuring and insolvency possibilities. Notably, in the context of restructurings, it is creditors that are driving this development, particularly US investors in Europe who like what they know – English insolvency law – and know what they like – ‘cram downs’ and debt-for-equity swaps. But what in particular does England have in its favour?
When a company’s financial position has deteriorated to the point where its solvency is in question, there is no requirement under English law for directors to file for insolvency. Instead, the Insolvency Act 1986 seeks to protect creditors by encouraging directors to keep an eye on the situation with the threat of personal liability otherwise, so that where there is no reasonable prospect of the company avoiding insolvent liquidation, the directors must take every step to minimise potential loss to creditors (the so-called ‘wrongful trading’ test).
In some cases such loss can only be minimised by an immediate filing for insolvency proceedings. In others, however, English law recognises that continued trading may in fact benefit creditors, for example by maintaining the value of the company’s assets so they can be sold at a price higher than in a liquidation.
In contrast, some jurisdictions strictly regulate when directors should commence insolvency proceedings. For example, in France, if a company is unable to pay its debts as they fall due, then the managing director has 45 days within the date of the cessation des paiements to file for insolvency. Similarly in Germany, managing directors must file for commencement of insolvency proceedings within three weeks of the company becoming cashflow or balance sheet insolvent. Such time constraints can add unwelcome pressure for directors seeking a solution that does not involve a value-destructive insolvency filing.
The ‘wrongful trading’ test under English law allows directors more flexibility to carry on trading where a better outcome might be reached for creditors. Such freedom allows directors time to try to agree a standstill and investigate refinancing or restructuring possibilities.
A key part of a restructuring may involve some form of debt-for-equity swap, in which creditors agree to exchange a proportion of their debt in return for equity or rights to equity.
Strict capitalisation rules, however, make debt-for-equity swaps difficult in some jurisdictions, for example in Germany. Not so in England, where the debt-for-equity swap is an important rescue tool frequently put to use. For example, in the recent restructuring of the Polestar group, the senior lenders agreed to convert a significant proportion of their debt into equity, in addition to providing the restructured group with new facilities.
Of course, not all restructurings will have the company and its creditors in unanimous agreement as to what should be done. In such situations English law permits the use of schemes and CVAs to squash, or ‘cram down’, dissentient creditors. Once the ‘ugly Betty’ of the restructuring world, the CVA has become something of the attractive sister to the scheme of arrangement. Such a transformation stems from CVA’s lack of formality (there is little court involvement, unlike a scheme) and simpler creditor approval mechanisms. There is a single class of creditors that can approve the scheme with a 75 per cent majority in value, meaning there is no need for multiple classes or approval by a majority in number.
Under the European Regulation on Insolvency Proceedings 2002, main insolvency proceedings (which have automatic effect throughout Europe) can only be opened in the jurisdiction where a company has its centre of main interests (Comi), with secondary proceedings taking place in other jurisdictions. The Comi is presumed to be the place of the registered office. Migration is, therefore, seen as an attractive proposition to take advantage of the legal flexibility identified above and create the opportunity to use insolvency filings based upon the English Comi.
However, it would be a mistake to think that by migrating to England a company has necessarily shifted its Comi to England. The registered office presumption can be rebutted if there are factors, both objective and ascertainable by third parties, establishing that the Comi is elsewhere. The directors of a former German engineering company that transformed into an English limited company – Hans Brochier Limited – recently discovered that migration alone was not sufficient to change the Comi.
The purported opening of administration proceedings in England was held to be invalid as opening main proceedings. Instead, the Comi was found to have remained in Germany – so, proceedings opened there (45 minutes after the English proceedings) and were the main proceedings. Think of the Comi as a hat and remember: wherever you lay your hat, that is your home (for the purpose of opening main insolvency proceedings at any rate).
The future of migration
Some in Germany see the development towards corporate migration, together with the English courts’ constructive approach to the Comi, as an attempt by England to establish itself as the New York of Europe for restructurings. The German Ministry of Finance has even launched an inquiry into the practice of migration. Perhaps such concerns are valid, although with European legislation in the pipeline to make the transfer of registered seats easier, attempts to stall migration may be short-lived.
However, the real driving force behind recent examples of migration is creditor power – without creditor support, migration would be pointless. As France has showed with its new sauvegarde procedure (used in the Eurotunnel and GAL restructurings), if the laws are right, restructurings will come.
Migration, whether corporate or otherwise, may often be a sign not only that the new host nation is getting things right, but arguably that the country of origin could do better.
•Ken Baird is a partner and Paul Sidle an associate at Freshfields Bruckhaus Deringer