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The King’s Student Law Review
Title: Recognition of English solvent Schemes of Arrangement in Germany
Author: Arthur Swierczok
Source: The King’s Student Law Review, Vol. 5, No. 1 (Spring 2014), pp. 78-91
Published by: King’s College London on behalf of The King’s Student Law
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RECOGNITION OF ENGLISH SOLVENT SCHEMES OF
ARRANGEMENT IN GERMANYArthur Swierczok English solvent Schemes of Arrangement under the Part 26 of the Companies Act 2006 have proved to be a valid restructuring device for non-English companies. Since 2010 for example four German companies, Tele Columbus GmbH, Rodenstock GmbH, Primacom GmbH and Monier Group Services GmbH, which were all financially distressed but solvent, have restructured themselves via an English solvent Scheme of Arrangement. However, from a legal perspective, what is very remarkable in all of these three cases is the fact that the English courts did not demand a shift of the companiesʼ seat or Centre of Main Interest for the application of the Scheme of Arrangement. This leads to significant and contentious recognition questions and problems in the country of the SoA company’s origin, which this paper – particularly for Germany – will address.
THE BACKGROUND AND PROBLEMUntil recently in continental Europe the question of corporate debt restructurings has been solely or mainly an issue dealt with in insolvency situations. However, at present a new trend is observable in the realm of pre-insolvency restructurings, which would regularly allow the company in distress to reach a compromise with its stakeholders such as shareholders and creditors.1 The first advantage of this approach to corporate troubles is its flexibility and the ability for the company to negotiate with all its creditors at an early stage. The second advantage is the avoidance of typical indirect insolvency costs, such as the loss of goodwill and reputation, which usually occurs in an insolvency scenario.
While this trend is embraced in some jurisdictions2, Germany has been slow to deal with this new development.3 Rather, the strong thinking in a strict dualistic sense still prevails here, which means that a company is either flourishing, or insolvent.4 Consequently, something ʻin-betweenʼ, in the sense of a legallyChristoph G Paulus, ʻDas englische Scheme of Arrangement – ein neues Angebot auf dem europäischen Markt für außergerichtliche Restrukturierungenʼ  ZIP 1077, 1081.
For instance in France, where the law offers several pre-insolvency restructuring procedures such as the the „mandat ad hoc“ (L 611-3 Code de commerce) or the “Sauvegarde financière accélérée (SFA). Further in Italy, where the law offers the “accordo di ristrutturazione dei debiti” (Art. 182 a Italian Insolvency Code) or the “piano di risanamento attestato”.
Christoph G Paulus, ʻDas englische Scheme of Arrangement – ein neues Angebot auf dem europäischen Markt für außergerichtliche Restrukturierungenʼ  ZIP 1077, 1081.
However, Germany is on the move and has significantly reformed its insolvency law through the ESUG (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen) in 2012. See Franz Bernhard Herding ʻGermany is on the move: the new Germany insolvency law survives its first testʼ (2013) 3 CRI 95.
King’s Student Law Review regulated and/or court-supervised, pre-insolvency restructuring mechanism, with the aim of proactively avoiding or preventing a threatened insolvency, does not exist in Germany at present.5 Against this background, it is thus not surprising that financially distressed but solvent German companies have looked to other jurisdictions, and particularly the UK, with the hope of finding better legal restructuring mechanisms than the domestic ones. And indeed, the English solvent Scheme of Arrangement (SoA), regulated in Part 26 of the Companies Act 2006 (CA 2006), does appear to offer a better corporate restructuring device. Up to now, four financially distressed but solvent German companies with their seat and COMI in Germany, Tele Columbus GmbH6, Rodenstock GmbH7, Primacom GmbH8 and Monier Group Services GmbH 9 have taken advantage of a solvent SoA for restructuring purposes. 10 Other German companies have already announced their interest in the procedure.
However, to be of real value for the German corporate restructuring practice it is essential that the legal effects of a sanctioned SoA will be recognised in Germany. Otherwise, dissentient parties to the SoA, especially creditors, may disregard the scheme and enforce their claims or other rights against the company, despite the fact that they have been ʻextinguishedʼ under the terms of the SoA.11 Furthermore, without recognition a dissentient creditor may also seek to initiate separate restructuring or insolvency proceedings in another jurisdiction, which could potentially conflict with the SoA and lead to a tangled mess of conflict of laws. Considering this, the following paper will address the important question of solvent SoA recognition in Germany.
STRUCTURE OF THE PAPER
The analysis starts with an outline of what is actually meant by the term ʻrecognitionʼ in this context. Thus, the term basically covers two different options, on the one side a procedural duty of recognition and on the other side, a material duty of recognition. Concerning a possible procedural duty of recognition of solvent SoA, it will first be necessary to deal with an insolvencybased approach of recognition pursuant to Art. 16 (1), 25 (1) European Christoph G Paulus, ʻDas englische Scheme of Arrangement – ein neues Angebot auf dem europäischen Markt für außergerichtliche Restrukturierungenʼ  ZIP 1077, 1081.
Tele Columbus GmbH (Ch, 14 December 2010).
Re Rodenstock GmbH  EWHC 1104,  Bus LR 1245.
Primacom Holding GMBH  EWHC 164.
Monier Group Services GmbH  EWHC 3919.
Also the three Spanish Scheme cases of Corftifel SA (Cortifel SA  EWHC 2998) La Seda de Barcelona SA (La Seda de Barcelona SA  EWHC 1364) and Metrovacesa SA (unpublished) should be mentioned as well as the first Italian Scheme case of Seat Pagine Gialle SPA (Seat Pagine Gialle SPA  EWHC 3686).
Jo Windsor and Paul Sidle, ʻInternational recognition of Schemes of Arrangementʼ (2010) 25(9) JIBFL 523.
79 Recognition of English solvent Schemes of Arrangement in Germany
Insolvency Regulation12 (EIR) and § 343 (1) Insolvenzordnung13 (InsO), which is part of the autonomous German international insolvency law. As I will show, none of these two options is viable. Next, it will further be necessary to deal with a pure procedural duty of recognition of solvent SoA pursuant to Art. 33 (1) European Judgment Regulation 14 (EJR). In this regard, the paper will particularly examine whether the sanctioning order to a SoA does constitute a judgment in the sense of the above provision. And finally, the question of a material duty of recognition of solvent SoA arises. Such a duty may exist under Art. 12 (1) (d) of Rome I Regulation 15 (Rome I), if certain specific circumstances are fulfilled
MEANING OF ʻRECOGNITIONʼ IN THE CONTEXT OF SOA
At the beginning of the analysis it is first helpful to clarify what exactly is meant when talking about SoA recognition. And indeed, there are two separate questions which have to be answered here. The first is the question of a procedural duty of recognition.16 In this case, the result would be that an action of a dissentient to the SoA before a German court would have to be dismissed because of inadmissibility.17 There would be no legitimate interest in obtaining a second ruling on the SoA by a German court.18 The decision of the English court would be regarded as legally effective and binding, regardless of any substantive submissions against the SoA.19 Second, even if a procedural duty of recognition does not exist, a SoA is still an act of English substantive law.20 A German court could thus be obliged to recognise the substantive law effects of a SoA upon the legal relationships affected by it. 21 Keeping this in mind, we can now start the analysis with the question of a procedural duty of recognition of solvent SoA.
Such a duty may exist under European legislation, as well as national German law.
Recognition under Art. 16 (1), 25 (1) EIR According to Art. 16 (1) and Art. 25 (1) EIR, any judgment, opening insolvency proceedings or concerning the course and closure of such proceedings, issued by a responsible court of a Member State, must be recognised in all of the other COUNCIL REGULATION (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings  QJ L 160/1.
German Insolvency Statute: http://www.gesetze-im-internet.de/englisch_inso/index.html.
COUNCIL REGULATION (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters  QJ L 12/1.
REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008 on the law applicable to contractual obligations (Rome I)  QJ L 177/6.
Kirsten Schümann-Kleber, ʻDie Sanierung deutscher Gesellschaften über ein englisches Scheme of Arrangementʼ  IILR 447, 448.
See § 322 Zivilprozessordnung (German Code of Civil Procedure): http://www.gesetze-iminternet.de/englisch_zpo/index.html.
Jo Windsor and Paul Sidle, ʻInternational recognition of Schemes of Arrangementʼ (2010) 25(9) JIBFL 525.
80 King’s Student Law Review
Member States. However, to benefit from these provisions, solvent SoA would have to fall within the scope of the EIR. Looking closer at the regulation, it only covers proceedings which materially fulfil the criteria set down in Art. 1 (1) EIR and are, pursuant to Art.2 (a) EIR, also formally listed in Annex A of the regulation. The list in Annex A thereby has a comprehensive and exclusive function.22 As solvent SoA are not mentioned in the list, they consequently do not fall within the ambit of the EIR. A procedural duty of recognition pursuant to Art. 16 I and Art. 25 I EIR does not exist.
Recognition under § 343 (1) InsO (analogous) Interestingly, the Rottweil Regional Court has assumed an insolvency-based procedural duty of recognition of solvent SoA pursuant to § 343 (1) InsO, which is part of the autonomous German international insolvency law.23 In contrast though, the Potsdam Regional Court24, the Celle Higher Regional Court25 and the German Federal Supreme Court (BGH)26 have rejected such an insolvency-based procedural duty of recognition. The three courts reasoned that a solvent SoA does not constitute an ʻinsolvency proceedingʼ in the sense of the above provision. And in fact, the decision of the Rottweil Regional Court seems very difficult to justify.
Thus, the starting point of the analysis has to be § 343 (1) InsO itself. The provision states that ʻthe opening of foreign insolvency proceedings shall be recognizedʼ. As we can see, the provision is only applicable to foreign insolvency proceedings. However, what exactly is meant by this term, and whether an English solvent SoA does constitute such a proceeding, as assumed by the Rottweil Regional Court, is now examined.
Insolvency proceeding in the sense of § 343 (1) InsO A comprehensive definition of the term insolvency proceeding in the sense of § 343 InsO (1) does not exist. This is the case because the legislator of § 343 (1) InsO held the view that it was impossible to define exactly the essential features of such a proceeding. 27 Thus, the question of whether we have a foreign insolvency proceeding has to be answered on a case by case basis. Looking at the legislative materials to § 343 InsO, according to them, the central criterion for the determination is whether the proceeding in question pursues the same, or at least similar goals to the proceedings of the InsO.28 However, what these goals are, and whether solvent SoA meet them, is questionable.
Pursue the same or at least similar goals to the proceedings of the InsO
Peter Kindler, Münchener Kommentar zum BGB (5. edition, Beck 2010) VO (EG) 1346/2000 Art.2 Definitionen para 2.
LG Rottweil, 3 O 2/08.
LG Potsdam, 2 O 501/07.
OLG Celle, 8 U 46/09, para 76.
BGH, IV ZR 194/09, para 24 Peter Kindler, Münchener Kommentar zum BGB (5. edition, Beck 2010) § 343, para 6.
Bundestag-Drucksachen. 15/16, 21.
81 Recognition of English solvent Schemes of Arrangement in Germany
§ 1 s 1 InsO states that the primary function of the insolvency proceedings of the InsO is the best possible collective satisfaction of a debtor’s creditors.29 Against this background, any kind of foreign liquidation, (court) settlement or restructuring proceeding can qualify as an insolvency proceeding in the sense of § 343 InsO, insofar as it primarily aims at the best possible collective satisfaction of a debtor’s creditors.30 However, a solvent SoA does not seem to meet this decisive criterion.