Is London still the “reconstructing” capital of Europe?

June 19, 2024
Volker Beissenhirtz


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The original German language article can be found here:

The future of the relationship between the UK (especially London) and the EU was always up in the air after the Brexit referendum in 2016. London courts had been heavily intertwined with the courts across the continent, and was known as the unofficial restructuring capital of Europe, but Brexit left many unsure if it would keep this title. 

However, recent decisions highlight that London isn’t ready to give up its prominence the “scheme of arrangement” procedure. The article below looks at these decisions and the impact it has had on both the UK and continental Europe.

The recent cases focus on the (out-of-court) restructuring of financing for the German real estate developers Adler Group and Aggregate. The London High Court assumed international jurisdiction in two cases, arguing—with the assistance of a German legal scholar—that these decisions should also be recognised in Germany. The Court of Appeal did not address the issue of international jurisdiction in its decision. The following commentary focuses on this issue, highlighting the key aspects and attempting to predict how German courts might react to such instances.

The cases in question:

Initially, the London High Court confirmed the restructuring plan for Adler Group companies in April 2023. However, this decision was overturned by the Court of Appeal in January 2024 (see analysis below). While the High Court extensively discussed its international jurisdiction in its decision (from para. 100), the Court of Appeal only briefly mentioned it (para. 34), noting that this point was not part of the appeal.

Ultimately, the Court of Appeal decided to overturn the previous court’s decision as the restructuring plan violated the principle of equal treatment of creditors, known as “pari passu principle” in Latin.

Aggregate Holding appears to have learned from the Adler appeal ruling and has included corresponding compensation payments in its plan. The High Court confirmed the plan in April 2024, once again delving deeply into the international jurisdiction of the London court and the (hypothetical) recognition of its decision in Germany (from para. 69).

The UK and international jurisdiction

The High Court examined its international jurisdiction in depth in both decisions.

In the Adler case, the High Court assumed its international jurisdiction because the case had a “sufficient connection” to England (from para. 100). According to the court, this sufficient connection was established because the original bond debtor—contractually stipulated in the bond conditions governed by German law (see para. 103 ff.)—was replaced by a “Plan Company” under English law and based in England without the separate consent of the bondholders (see details in para. 16 ff.).

The High Court first noted that this so-called “Issuer Substitution Strategy” is a common tool in English law to gain jurisdiction over a restructuring (para. 101) and, following a thorough discussion of German legal scholars’ opinions, subsequently assumed that the contractual replacement of the bond debtor is also permissible under German law.

In contrast, the High Court in its decision regarding Aggregate delved deeply into the “COMI-shift” and the resulting jurisdiction of English courts (from para. 69). The issue of the “COMI shift” concerns the extent to which the relocation of the debtor’s centre of main interests (COMI) is related to a restructuring or insolvency filing. The COMI-shift is often discussed in connection with so-called “forum shopping,” or the search for the most favourable legal system for the applicant debtor, which German courts view critically.

The presiding judge found that the debtor’s COMI was in Luxembourg until 16 October 2023 and was successfully relocated to England after the management’s view on 6 October 2023 that the COMI shift was “in the best interest of the debtor,” which prompted steps to relocate the COMI and the notification to creditors of the intention to present a restructuring plan (para. 70, 71). The judge also assumed that the proceedings in Luxembourg would be recognised (para. 112 ff.).

The judge assumed, based on the statements of German legal scholars, that the English restructuring procedure, comparable to a restructuring procedure under StaRUG, would also be recognised in Germany (para. 123 ff.). under “Other Considerations,” the judge also addressed the issue of “sufficient connection” (para. 216 ff.) and affirmed it.

Analysis of the Decisions

From an English legal practitioner’s perspective, the High Court’s decisions highlight, that on some level, the UK courts have the confidence to predict the approval of courts overseas, in this case German. However, does this confidence have any validity?

The precedence of § 3 SchVG over § 307 BGB assumed by the High Court in the decision on the restructuring plan for the Adler Group is likely only valid if the bonds were issued solely to institutional creditors and not also to consumers. It doesn’t depend on the actual expertise of the bond issuers and debtors, as assumed by the court (see para. 139), but simply on the classification of the bondholders as “consumers” according to § 13 BGB. If the transparency rule of § 307 BGB applies, it is doubtful, given a BGH-ruling from 2019, whether the “Issuer Substitution” provision is actually effective. If not, the corresponding clause would be invalid, and the debtor exchange would be ineffective under German law.

Considering the process of the Adler Group case, the question arises whether an English court’s decision would be recognised in Germany court, especially when the justification for international jurisdiction (the “Issuer Substitution”) is to get into a favourable restructuring regime for the company. The substitution, however, only took place on 11 January 2023 (para. 16), approximately 3.5 months before the maturity of a bond (para. 10) and about 2.5 months before the creditors’ meeting that approved the restructuring plan (para. 4).

This is a period during which the debtor was likely imminently insolvent under German law according to § 18 InsO. On the one hand, the “sufficient connection” assumed by the High Court in this case to justify its own international jurisdiction might not meet the requirements analogous to § 3 InsO for establishing jurisdiction internationally. Thus, recognition could fail under § 343 (1) No. 1 InsO if the COMI was not clearly in England at the time of the application.

On the other hand, according to BGH, decision of 08.12.2022 – IX ZB 72/19, in cases where the international jurisdiction of German courts is given according to Art. 3 EuInsVO, the opening of insolvency proceedings by a German court takes precedence over a later opening of foreign insolvency proceedings, even if the application was filed earlier in the foreign court and the opening of the foreign insolvency proceedings would be recognisable under § 343 InsO. Thus, instead of just a lack of recognition, a “competing” insolvency proceeding could even arise in Germany.

Given the sceptical stance of German courts towards a COMI shift at a time when insolvency reasons cannot be ruled out, England’s High Court’s decision in Aggregate seems even bolder, as the assumption of an effective COMI relocation is based on the need to relocate the COMI for the restructuring plan’s implementation, with the management considering it “in the best interest of the company” and creditors’ interests playing no role in this point.

It’s important to note that the Adler Group has now reached a preliminary agreement with bondholders on the restructuring of liabilities, with initial reports suggesting that a large portion of the claims will be converted into equity.

Due to this, it’s questionable whether the effectiveness of the English court decisions will still be tested before German courts or, rather, if other struggling German real estate developers will follow Adler Group’s example.

From an English legal perspective, the decisions of the London High Court, particularly regarding the justification of English courts’ international jurisdiction, highlight the want to be recognised internationally.  However, it is questionable whether German courts, or other EU courts in general, will approve such bold acceptance of jurisdiction.

This article originally appeared on our German website, which you can check out here.

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