London Courts’ Allure as Restructuring Haven Draws Creditor Ire

Disgruntled creditors to the firm behind a struggling German real estate project are challenging the company’s decision to bring its restructuring hearing to London.

The Luxembourg-based holding company for Aggregate Holdings’ Project Fuerst is seeking to make England the center of main interests for the sprawling Berlin development, much to the chagrin of some junior creditors who argue the firm has no real links to the country. They argue the move is motivated by the expectation of a more favorable outcome for senior creditors.

London has a long reputation as a restructuring hotspot since the tools English law offers are far more advanced and tested than in the rest of Europe, while the connection to the country required is not very restrictive. However, a series of high-profile cases, including a recent ruling against Germany’s Adler Group SA, is leading to some scrutiny of this so-called “forum shopping” practice and is challenging assumptions about the speed of getting things done.

The Adler case “is the first restructuring plan that has gone to the Court of Appeal, and it lays down some guardrails for other cases going forward,” said Bevis Metcalfe, a partner at Cadwalader, Wickersham & Taft LLP. Previously “it was difficult to avoid a conclusion that, if you got a majority of creditors together with the company, you could do whatever you wanted in the English courts.”

While foreign companies restructuring in England tend to do so because their debt is governed by English law, or the group has some entity or business in the nation, there have been other instances where the link looks more tenuous. Some have created it artificially, drawn by the laws that make it easier and quicker to push through a deal even when some stakeholders are opposed.

The Royal Courts of Justice in London.

Photographer: Vuk Valcic/SOPA/LightRocket/Getty Images

Bad Shopping

That’s increasingly pulling in companies from Brazil to China to visit lawyers in the City of London. On the back of this growth, challenges from creditors and other stakeholders are also on the rise. In the case of Fuerst, some creditors — whose investments risk being mostly wiped out — dubbed it an example of “bad forum shopping,” saying the plan compromised their “rights in a way that could not be achieved in Luxembourg,” according to a court filing.

The Fuerst hearing highlighted the various trappings a company might gather in order to prove links to England, such as a website, an office and some employees. Yet a lawyer for opposing investors questioned whether a 16-person office was really necessary for a holding company with three employees and one director, and honed in on its seeming difficulty to open a UK bank account.

The holding company for Fuerst argued the move to the UK had been made with the support of over 97% of in-the-money senior creditors. The firm did not respond to Bloomberg requests for comment.

“Forum shopping is selecting the jurisdiction that you think has the tools to help you achieve your restructuring,” said Craig Montgomery, a partner at Freshfields Bruckhaus Deringer. “Where there are more eyebrows raised — even if it has been accepted in a number of cases — is when a newly created company registered in the UK is substituted or added as an obligor to create jurisdiction artificially.”

Adler also made changes to try to restructure in London, by switching the issuer of its debt to become an English company. Other firms having incorporated new debt-issuing entities in England include Spanish gambling firm Codere SA and Swiss airline catering firm Gategroup Holding AG. Brazilian call center operator Atento SA, listed in New York, resorted to a restructuring process in London on the basis that its currency swaps contracts were under English law.

The popularity of English courts has grown since the UK introduced a new insolvency process — called the Restructuring Plan — during the pandemic. This allows for a so-called cross-class cram-down, meaning a deal can be imposed on dissenting creditors provided they wouldn’t be worse off versus an alternative plan.

Legal Reforms

While the win for Adler’s challengers tested the limits of the UK’s restructuring tools, there are no signs borrowers will avoid English courts. Firms looking for a quick turnaround may need to take note of the judge saying that leaving things to the “last minute” can have “undesirable consequences.”

In practical terms, UK restructuring plans might now drag on for longer. In the case of US engineering firm McDermott International, the court held a first hearing in September and the judge then postponed a sanction hearing by three months to this week, given the presence of challengers. That compares with such proposals typically having been wrapped up in just over a month.

European companies do have more choice following the reform of insolvency regimes across the continent in the last few years, said Freshfields’ Montgomery. These now offer a local option, whereas before the most likely alternative was liquidation, he said.

“The fact remains that the UK is still attractive from a procedural perspective, e.g. the speed of the courts, decades worth of helpful scheme jurisprudence and the quality of the judiciary and that is difficult to replicate quickly in other jurisdictions,” said Karsten Raupach, a restructuring partner for Ashurst in Munich, in a note to clients.

To contact the reporters on this story:
Irene García Pérez in London at igarciaperez@bloomberg.net;
Giulia Morpurgo in London at gmorpurgo1@bloomberg.net;
Libby Cherry in London at ocherry2@bloomberg.net

To contact the editors responsible for this story:
Bruce Douglas at bdouglas24@bloomberg.net

Neil Chatterjee

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