Issues with the recognition of foreign restructuring plans in Switzerland

Background

In our newsletter dated 20 February 2021 (The gategroup restructuring: a creative procedure under review), we outlined how gategroup intended to amend its financing arrangements through a newly established UK subsidiary known as gategroup Guarantee Limited (the "UK Company") by proposing a restructuring plan pursuant to Part 26A of the United Kingdom Companies Act 2006 (the "Plan"). The Plan provided for an extension of the maturity of the bonds (the "Bonds"), which are issued by a Luxembourg entity (the "Issuer") and guaranteed by the Swiss gategroup parent (the "Parent"), as well as governed by Swiss law and subject to the exclusive jurisdiction of the Swiss courts.

In its judgment dated 17 February 2021, the High Court in London held that it had jurisdiction to sanction the Plan. The High Court also decided that the Plan fell under the bankruptcy exclusion of the Lugano Convention. Further, the High Court declined gategroup's request to treat senior lenders and bondholders as a single class and ordered separate class meetings for each creditor class. The two meetings took place in mid-march 2021 and both creditor classes approved the Plan. However, turnout among the bondholders was low and only 24.52% by value of the bondholders were present at the bondholders' meeting.  

Judgment sanctioning the Plan

On 26 March 2021 the High Court sanctioned the Plan. The judgment of the High Court raises a number of issues.

First, despite the low turnout at the bondholders' meeting, the High Court was satisfied that the vote was sufficiently representative of the class. It is difficult to see how a bondholders' meeting with such a low turnout can be representative of the whole class. However, since many bondholders are actually Swiss retail investors, it was unlikely that the turnout would be high.

The High Court was also convinced that there was no other restructuring procedure in Switzerland or Luxembourg available to amend the terms of the Bonds. However, according to the Swiss Debt Enforcement and Bankruptcy Act, Swiss debtors have to request composition proceedings to restructure their liabilities in Switzerland. Further, the Swiss International Private Law ("PILA") contains a provision in Art. 174b which allows administrators to coordinate composition proceedings in different jurisdictions if necessary. It cannot be ruled out that the required quorum for bondholders could have been achieved in a composition proceeding in Switzerland, because the bondholders being mainly Swiss retail investors would have been more familiar with a Swiss composition proceeding  and therefore it would have been more likely to draw their attention.

Further, the High Court admitted that the Plan is an obvious case of forum shopping (the High Court called it "good forum shopping") because gategroup incorporated an artificial company in the UK for the sole purpose of taking advantage of a Part 26A restructuring plan. It is at least debatable whether restructuring laws should facilitate corporate restructurings in jurisdictions to which the group does not have any strong links. This leads to the question whether Switzerland's bankruptcy code lacks the instruments to cope with the needs of Swiss companies/groups in distress.

Finally, the biggest issue of the Plan is its potential recognition in other related jurisdictions like Switzerland.

Recognition of the Plan in Switzerland

To prevent a bondholder from seeking repayment of its Bonds according to the original maturity date against the Parent as guarantor of the Bonds, the Plan will have to be recognized in Switzerland. The Lugano Convention does not apply because of the bankruptcy exclusion. Accordingly, gategroup will have to seek recognition on local recognition provisions. The respective Swiss internal law is found in Articles 166 through 175 of the PILA. Under the PILA, a foreign judicial arrangement or composition proceeding is recognized (and enforced) in Switzerland if (i) the relevant foreign act is enforceable, (ii) the relevant foreign act was rendered at the corporate seat or at the COMI of the debtor, and (iii) no grounds for the refusal of recognition are given (cf. Art. 175 in connection with 166 para. 1 PILA).

As regards the first requirement, we understand that the Plan has become enforceable in the UK. As regards the second requirement, the debtor of the Plan which is the UK Company, has been incorporated in the UK, so that the Plan would have been rendered at the seat of the debtor as required by the PILA. However, the UK Company has been incorporated for the sole purpose of facilitating the Plan. One could therefore argue that the incorporation of the UK Company constitutes an illegitimate forum shopping and circumvention of the mandatory provisions of Swiss law, in effect an abuse of law. For the same reasons, and considering that the UK Company has just recently been incorporated, it is also doubtful whether a Swiss court would conclude that the UK Company's COMI is in the UK, in particular as the COMI is not a mere formal requirement but rather one that relates to actual business activities.

Even if the first and second requirement for recognition of the Plan were fulfilled, the question remains whether the intended effects of a recognition would not violate formal or substantive Swiss public policy, thereby excluding recognition to such extent. As the High Court admits in its judgment, it is doubtful whether the Plan has the effect to compromise claims against another debtor (e.g. the Issuer and the Parent). The High Court solved this issue through the implementation of a structure whereby the bondholders grant the UK Company a power of attorney to amend the terms of the Bonds. Although we are not aware of any case law on this third-party issue in Switzerland, we think there are valid reasons to argue that a foreign restructuring plan compromising claims against another debtor violates Swiss public policy, particularly if the link is weak, the other debtor is Swiss (i.e. in this case the Swiss Parent) and the creditors of that debtor are mainly Swiss.

Outlook

In our view it is highly doubtful that Part 26A restructuring plans which relate to a Swiss debtor and restrict creditors' rights can be recognized in Switzerland. Future case law by 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. In the case at hand, the solution found is most probably an adequate outcome, since the Plan does not restrict creditors' rights extensively. It is therefore doubtful whether any bondholder will seek repayment of the Bonds according to the original terms before restructuring and hence, whether the Plan will have to be recognized in Switzerland at all.