High Court Steps In to Save Creditors 600 Million Euros

The enduring popularity of the English courts with litigants from every corner of the globe was strikingly underlined by a case in which the High Court came to the aid of a heavily indebted, Spanish-owned, group of companies, saving its creditors from what would otherwise have been an inevitable €600 million loss.

The group had outstanding gross debts of €1.46 billion, most of them in the form of loan notes, which it had no means of paying in full. It was involved in the gaming business and insolvency proceedings would have put its licences at risk, greatly diminishing its value to the detriment of creditors.

In those circumstances, the group established an English company which took on the full extent of its liabilities in respect of the notes. It did so with the intention of invoking the High Court’s power under the Companies Act 2006 to sanction a scheme of arrangement as an alternative to insolvency.

The Court noted that that arrangement could be viewed as forum shopping, which is generally discouraged. However, in approving the scheme proposed, it observed that almost 99 per cent of the group’s creditors were unsurprisingly in favour of it as an effective means of stemming their losses. The scheme would enable them to recover at least 47 per cent of their investments as opposed to a recovery rate which could drop to zero.

The scheme was not being used as a means of evading debts, or to coerce a minority of creditors, but as a way of achieving the best possible outcome. Some 18 creditors, holding notes to a value of about €250 million, were domiciled in England and the vast majority of noteholders had submitted to the jurisdiction of the English court. In those circumstances, the element of forum shopping was acceptable.

The complex scheme involved the cancellation of the existing notes, in exchange for shares and other notes, and for €400 million of new capital to be injected into the restructured group. Its implementation was conditional on the company obtaining an order recognising the scheme under Chapter 15 of the US Bankruptcy Code.