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Subject: Insolvency & Restructuring
Autor: Daniel Hayek , Mark Meili
Paper: PD Newsletter
Reading time: 4 Min
24.12.2020

Recognition of a Part 26A Restructuring Plan in Switzerland and the EU

In June 2020, the U.K. introduced the so-called Part 26A restructuring plan. This new type of restructuring plan has the potential to become highly relevant for the restructuring of international corporations. To the best of our knowledge, two Part 26A restructuring plans have been sanctioned by English courts so far. However, the extensive possibilities to restrict creditors' rights under such a restructuring plan may create challenges for its recognition in other jurisdictions. Further, as the U.K. is going to leave the EU at the end of 2020, Brexit may create additional problems for the recognition of a Part 26A restructuring plan in Switzerland and other European countries.

Daniel Hayek
Mark Meili
PD Newsletter
24.12.2020

Part 26A Restructuring Plan

UK and EU companies with a nexus to the UK have been using schemes of arrangement under Part 26 of the Companies Act 2006 for centuries to carry out reorganizations. The newly introduced restructuring plan, provided for by Part 26A of the English Companies Act 2006, closely resembles the well-established scheme of arrangement. A major difference is that the Part 26A restructuring plan is limited to companies in financial difficulties, whereas the scheme of arrangement may be used by solvent and insolvent companies. A further distinct feature of the Part 26A restructuring plan is that it only requires the consent of 75 per cent in value in each class of those voting and there are no numerosity requirements as in a scheme of arrangement. Hence, it gives companies the possibility to extensively restrict creditors' rights and even senior classes may be forced into a Part 26A restructuring without having a veto right.

Recognition of a Part 26A Restructuring Plan pre-Brexit

As regards the recognition of a Part 26A restructuring plan in member states of the European Union, the majority of legal scholars are of the opinion that the Brussels I Regulation (recast) and the EU Insolvency Regulation apply mutually exclusively for the recognition of decisions relating to bankruptcy and winding-up. Accordingly, because a Part 26A restructuring plan it is not listed in Annex A of the EU Insolvency Regulation and therefore does not fall within its scope, it must instead be recognized under the Brussels I Regulation (recast).

However, this reasoning does not apply to Switzerland who is not a party to the EU Insolvency Regulation (or Brussels I Regulation (recast)). Rather, from a Swiss law perspective it is relevant that bankruptcy, winding-up, judicial arrangements, compositions and analogous proceedings are explicitly excluded from the scope of the Lugano Convention. In our view a Part 26A restructuring plan falls under this bankruptcy matters exemption and therefore the Lugano Convention would not be applicable to the recognition of a Part 26A restructuring plan in Switzerland.

Consequently, the rules of the Swiss Private International Law Act (PILA) govern the recognition of a Part 26A restructuring plan. Thereunder, the request for recognition will be granted if

  • the foreign act (i.e. the UK court sanctioning the Part 26A restructuring plan) is enforceable in the country in which it has been rendered;

  • the foreign act has been rendered in the country of the debtor’s corporate seat or in the country where the debtor has its centre of main interest (COMI), provided that the debtor was not domiciled in Switzerland at the time of the opening of the foreign insolvency proceedings; and

  • there are no grounds for refusal of recognition under art. 27 of the PILA, i.e. the decision is not incompatible with Swiss public policy.

In particular, the second and third requirement may give rise to legal disputes when recognition of a Part 26A restructuring plan is sought in Switzerland. For example, English courts have in the past (for schemes of arrangement) accepted jurisdiction when the only connection to the UK was that an underlying finance document was governed by English law. However, if the debtor does not have its seat or COMI in the UK, such rather loose connection will not be sufficient to recognize a restructuring plan under the PILA. A further challenge for recognition in Switzerland may be that some creditors (or classes) are not adequately heard or are not treated equally in the Part 26A restructuring process, which contravenes Swiss public policy. It is highly doubtful that Part 26A restructuring plans which extensively restrict creditors' rights can be recognized in Switzerland. Future case law by the Swiss courts will show how judges are going to interpret the rules of the PILA in relation to the recognition of Part 26A restructuring plans.

Recognition of a Part 26A Restructuring Plan post-Brexit

As of 1 January 2021, the UK will no longer be a member state of the EU and cease to be a party to EU treaties like the EU Insolvency Regulation and the Brussels I Regulation (recast). The UK has applied to accede to the Lugano Convention as an independent contracting party but the application has not yet been accepted. It remains to be seen whether the UK's application to the Lugano Convention will be accepted and whether the EU countries will in such case apply the Lugano Convention to the recognition of a Part 26A restructuring plan with an analogous argument as used for the applicability of the Brussels I Regulation (recast) pre-Brexit (see previous chapter). As long as the accession of the UK to the Lugano Convention has not been accepted, the internal private international law of each member state is certainly the main source to consider when it comes to the recognition of a Part 26A restructuring plan sanctioned by a UK court.

From a Swiss perspective, the possible accession of the UK to the Lugano Convention will not make any difference, since the exemption provision of the Lugano Convention will in any case remain applicable. Hence, the procedure under the PILA will still be governing the recognition of a Part 26A restructuring plan.

Outlook

Part 26A restructuring plans may be an attractive restructuring instrument for international companies. However, the recognition of a plan in other countries may prove challenging and proper legal advice in the concerned jurisdictions should be sought before a Part 26A restructuring plan is implemented.