As the many economic headwinds gather increasing strength, there is a sense that commercial property is an area that will face the need for significant restructuring. Thinking of real estate, in any context, immediately brings to mind locality and therefore it is no surprise that, in the realms of restructuring as well, the first thoughts may run to local jurisdictions and home-grown restructuring processes.
However, recent cases in the English courts have demonstrated yet again that there are benefits to widening one’s horizons and that “good” forum shopping (selecting a jurisdiction to access the most favourable and likely successful regime for the circumstances) remains available to all and can be highly beneficial.
New restructuring procedures
Covid-19 brought on a spate of legislation in various European jurisdictions, focused on giving company management both the breathing space to ride out difficulties and the tools to enable rescues of businesses. While many of these measures seemed designed to meet the moment, in most cases the legislation had, in fact, been in the contemplation of the various legislatures for some time.
Depending on who you asked, the reason for this was either a sense of impending doom that the US Chapter 11 process would further dominate the stage for cross-border restructurings (and monopolise the revenue they generated for insolvency professionals) or a sense of frustration that the English courts had so successfully taken the fine thread of schemes of arrangement and spun that again and again into pure restructuring gold for the English market.
Among the most notable developments were new processes in the Netherlands and Germany. The new Dutch scheme of arrangement, (Wet Homologatie Onderhands Akkoord, or, better yet, WHOA) and the German StaRUG (Gesetz über den Stabilisierungs-und Restrukturierungsrahmen für Unternehmen) both allow, among other things, for debtor-in-possession restructuring (so management can maintain control during the restructuring process), a court-granted stay against creditor action (so that companies have some breathing space to negotiate and enact a deal) and cross-class cram down (so dissenting creditors can be overruled if the courts deem it appropriate).
New measures were also introduced in certain other European jurisdictions, including Italy and Spain. But Europe was not alone in bringing in changes; Singapore, the Cayman Islands, Hong Kong and others also undertook significant restructuring related developments in the past few years.
The UK, with its eye firmly cast across the Channel, mindful of these potential European interlopers and concerned with the ripple effects of Brexit, did not sit on its scheme of arrangement laurels either. The UK developed a restructuring plan, also known as a “super scheme”, introduced under the Corporate Insolvency and Governance Act 2020, the key feature of which is the cross-class cram down (something a scheme of arrangement does not provide).
There have been more than 13 restructuring plans sanctioned from September 2020 to April 2023. Among the most recent was the restructuring plan of circa €6bn (£5.2bn) of debt for German real estate group Adler.
Adler restructuring
The Adler Group’s business consisted of investing in, managing and developing multi-family residential real estate in Germany. Domestic and global downturns had caused a drop in demand for German real estate, negatively impacting the group’s business.
This had been exacerbated by a short-seller’s report alleging the group had artificially inflated asset valuations and failed to disclose related party transactions (which the group disputed).
The parent company, Adler Group SA, was incorporated in Luxembourg and had debt in the form of German-law governed notes maturing in 2024, 2025, January and November 2026, 2027 and 2029. A subsidiary company had notes maturing on 27 April 2023, which it was not in a position to pay.
Negotiations on a consensual deal had fallen through and there was significant time pressure to enforce a compromise that would avoid a payment default and a liquidation causing a fire sale of assets with the inevitable discounts and losses that would entail. The new German StaRUG was considered, but ultimately the English restructuring plan was the chosen way forward.
The proposed restructuring plan allowed for the injection of new money to, among other things, pay off the notes maturing in April 2023 and an asset disposal plan which would allow for a solvent wind down of the group’s assets over time, in recovered market conditions, in a manner that ensured full payment to the group’s creditors.
All classes of creditors, save for the class made up of the 2029 noteholders, voted overwhelmingly to approve the plan. With a 62% vote, the 2029 noteholder group was the only class not to meet the 75% statutory voting threshold. Certain of the 2029 noteholders voted against the plan and also challenged it in court.
Key features of Adler’s restructuring plan include:
Issuer substitution and “good” forum shopping The ability to undertake the restructuring in England (notwithstanding the Luxembourg company and the German real estate assets) was facilitated by substituting, under the existing terms of the notes, the Luxembourg parent company with an English incorporated entity, AGPS BondCo PLC, as issuer. The parent company provided guarantees in respect of all the notes.
The judge in the matter of AGPS Bondco PLC [2023] EWHC 916 (Ch) recognised that the utilisation of an English restructuring plan here was a pure example of forum shopping – a term that has historically suggested opportunism and a desire to get one over on creditors.
However, he distinguished the nature of forum shopping based on its purpose. He quoted Re Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch), noting that forum shopping done for good intentions – namely for the purpose of achieving the best outcome for creditors rather than for the purpose of using a particular insolvency regime to slough off certain debts – could be classified as “good” forum shopping.
Broader purpose This was the first restructuring plan that had as its purpose the solvent wind down of assets over time rather than the rescue of a business as a going concern.
For those who may have considered that the spirit (if not the word) of the legislation was meant to facilitate business rescue only, it was a good reminder of the flexibility and expansiveness of the English courts.
Speed and efficiency The urgency of the Adler plan was matched by the complexity and breadth of the evidence that was presented to the court both by the group and the challenging creditors (with evidence and submissions running into tens of thousands of pages).
Yet the process, from application to sanction, took approximately 50 days and the court produced a 164-page judgment in impressively short order so as to ensure that the insolvency of the group did not become an inevitability as a result of delay alone.
Interrogating valuation evidence In reviewing the challenging creditors’ expert evidence on valuation, the judge balanced the need for efficiency in view of the group’s “burning platform”. Settling therefore for a “broad approach” over the detailed analysis and cross-examination that would have taken up more time.
This was a contrasting approach to the one taken to the restructuring plan in In the matter of the Great Annual Savings Company Ltd [2023] EWHC 1026 (Ch). The plan was challenged by HMRC, and its criticism of the company’s valuation was successful despite there being no presentation of alternative evidence.
The judge correctly recognised that the company’s evidence must convince on its own merits and scrutinised and gave due weight to the inherent issues; an exercise which will make creditors subject to restructuring plans more reassured of getting a fair outcome in every case.
The best judge Creditors will likely also be reassured by the weight given to their views. In AGPS, the judge noted that overall support of creditors is a relevant factor in deciding whether to exercise the court’s jurisdiction to sanction the plan (though given the cross-class cram down it should not be a decisive one).
It was acknowledged that creditors were the best judge of whether they were better off the under the plan and the notable overall support of the classes voting in favour and even the majority support of the 2029 noteholders (though short of 75%) were influential factors in the decision to sanction.
Appeal and recognition The sanction judgment in AGPS was handed down on 21 April 2023 and is currently being appealed. The restructuring plan is also awaiting recognition in Germany, which though not certain (given the after-effects of Brexit), was judged by the English court to have a reasonable prospect of success. To some degree, regardless of the eventual outcome, the English court has presented a strong case for the flexibility and accessibility of the restructuring plan to all comers.
Factors to consider
Perhaps the most compelling case made by the Adler restructuring plan is for the act of forum shopping itself. It highlights that, even with that most local asset of all, real estate, it is beneficial to have an international outlook.
Particularly in scenarios where speed, efficiency and predictability are key, which is invariably the case in restructuring situations, it is worth considering the different jurisdictions and the different processes available and making a choice based on which process is most able to deliver the required outcome, is most easily accessible and is likely to be recognised in the necessary jurisdictions.
While, on this occasion, the English restructuring plan may have been the appropriate choice, it is a reminder that taking a broad view of what is available, without being constrained by factors such as the jurisdiction of incorporation of the borrower and the asset location, may ultimately lead to the best opportunity for preserving and delivering value.
Buvini Kularatne is a partner at Faegre Drinker Biddle & Reath LLP
