Rodenstock GmbH: U.K. Jurisdiction over Restructurings of Solvent...

On April 19, 2011, the High Court of England and Wales heard an application for the sanction of a scheme of arrangement for Rodenstock GmbH, a solvent German company. Two days later, the court entered an order sanctioning the scheme, and indicating that Mr. Justice Briggs’ reasoning would be provided in a reserved judgment. The judgment that followed, entered on May 6, 2011, [1] is notable because it expresses a bullish or expansive view of U.K. jurisdiction over the restructuring of debts of solvent companies having a center of main interest (COMI) outside of the United Kingdom, no U.K. establishment and little connection to the United Kingdom at all. This decision creates a precedent for permitting restructurings in the United Kingdom based on not much more than English choice of law and jurisdiction provisions in the governing debt documents.

Rodenstock and Events Leading Up to Entry of High Court’s Judgment
Rodenstock is the main operating company in the Rodenstock Group, Europe’s fourth-largest manufacturer and distributor of spectacle lenses and frames. Rodenstock has a German COMI, and as the High Court found, has neither an establishment in the United Kingdom nor any assets in the United Kingdom likely to be affected by the proposed scheme. [2] As of the time of the court’s sanction hearing, Rodenstock had senior outstanding debt totaling approximately €305,335,000, advanced under an agreement governed by English law and containing a jurisdiction clause stating:

42.1 Jurisdiction

(a) The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a “Dispute”).

(b) The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no party will argue to the contrary.

(c) This Clause 42.1 is for the benefit of the Finance Parties only. As a result, no Finance Party shall be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction. To the extent allowed by law, the Finance Parties may take concurrent proceedings in any number of jurisdictions. [3]

In the second quarter of 2009, Rodenstock breached financial covenants under its senior debt facility agreement. The company obtained waivers protecting it from acceleration of its senior debt pending negotiation of restructuring proposals. Absent a restructuring, Rodenstock’s directors would have been unable to avoid for long putting the company into a German insolvency proceeding. [4]

The scheme for restructuring Rodenstock’s senior debt was proposed with the support of senior lenders who had signed up—or acceded to—an agreement committing them to support the restructuring. [5] The scheme was initially opposed by entities managed by Alchemy Special Opportunities LLP or entities that had sold their beneficial interest in portions of the senior debt to scheme creditors managed by Alchemy.

Alchemy had proposed an alternative restructuring, which was not supported by Rodenstock’s directors or a majority of senior lenders. Alchemy and other dissenting scheme creditors expressed an intention to oppose the scheme on jurisdictional grounds. They later stated that they would not oppose the scheme, but did not state that they supported it, resulting in the court’s need to “satisfy itself that the Scheme could be sanctioned and, in any event, that it has jurisdiction to do so.” [6]

High Court’s Judgment
In its analysis, the court reviewed English law and European Union legislation: Council Regulation (EC) No. 1346/2000 on insolvency proceedings (the “Insolvency Regulation”) and Council Regulation (EC) No. 44/2001 on the jurisdiction, recognition and enforcement of judgments in civil and commercial matters (the “Judgments Regulation”). The court discussed three conditions under English case law for the making of a winding up order in relation to a foreign company:

(i) that the company had a sufficiently close connection with England usually, but not invariably, in the form of assets within the jurisdiction;

(ii) that there was a reasonable possibility of benefit accruing to creditors from the making of a winding up order; and

(iii) that one or more persons interested in the distribution of assets were persons over whom the English court could exercise jurisdiction. [7]

The court concluded that these conditions “go to discretion rather than to jurisdiction in relation to the winding up of foreign companies by the English court, at least in circumstances in which…the jurisdictional restrictions imposed by the…Insolvency Regulation are not engaged.” [8]

The court reviewed at length the impact of the Insolvency Regulation and Judgments Regulation because it had “no doubt that the combined effect of the Insolvency Regulation and the Judgments Regulation has been very substantially to curtail the international jurisdiction of the English courts to wind up companies.” [9] Under Articles 1.2(a), 3.1 and 3.2 of the Insolvency Regulation, English courts have jurisdiction to wind up an insolvent company with a COMI in a foreign member state only if the company has an establishment within the U.K. and with the winding up to have effect only in relation to assets situated within the U.K. [10] The court read Article 22.2 of the Judgments Regulation as restricting English court jurisdiction to wind up a solvent company in circumstances where the company has its seat in a member state other than the U.K. [11] However, the court was of the view that neither the Insolvency Regulation nor the Judgment Regulation was intended to narrow the English courts’ “traditional jurisdiction” in relation to sanctioning schemes winding up foreign solvent companies because such jurisdiction does not “fall within the exclusive jurisdiction conferred by Article 22.2 of the Judgments Regulation.” [12]

The court ultimately concluded “on a fairly narrow balance” that there was a sufficient connection to the United Kingdom for “purposes of permitting the exercise by [the] court of its scheme jurisdiction in relation to the Company” as a result of “the choice of English law and, for the benefit of the Senior Lenders, exclusive English jurisdiction.” [13] The court noted that there was an appeal pending to the Federal Court of Justice in Germany (der Bundesgerichtshof) concerning nonrecognition of an English court’s sanction of a scheme in Oberlandesgericht Celle where “the English court’s decision to sanction the Scheme could not be characterised as a judgment within the meaning of…the Judgments Regulation, a conclusion which, if confirmed on the pending appeal to the Bundesgerichtshof with or without reference to the [European Court of Justice], would be no less fatal to the automatic recognition of a sanction order made in this case.” [14]

The court expressed a bearish view with respect to its sanction order being automatically recognized, noting that “the effectiveness of the Scheme in binding the dissident minority is unlikely to be achieved by automatic recognition of a sanction order in Germany under the Judgments Regulation.” [15] However, the court expressed a bullish view with respect to the outcome of a trial on the merits and found it “reasonably clear” that the scheme will be effective because German courts would apply English law in any litigation between the dissident senior lenders and Rodenstock to the question of whether the senior lenders’ rights against Rodenstock had been varied by the scheme. [16]

Conclusion
Whether the high court’s bullish view of U.K. jurisdiction continues in future cases remains to be seen. Meanwhile, the judgment creates a precedent for undertaking in London, via scheme of arrangement, the restructuring of the debts of solvent German companies with English choice of law and jurisdiction clauses in key documents.