A new byword for cross-border restructuring: scheme of arrangement as judgment (Re Cavell)

Abstract

As a means of effecting cross-border restructuring, a scheme of arrangement under section 425 of the UK Companies Act 1985 suffers from a serious defect in that it may not be binding on 'foreign creditors' in the following sense. As the question of whether an obligation has been discharged is governed by its proper law, creditors whose claims are governed by foreign law may, notwithstanding a section 425 scheme compromising their claims, enforce their claims against the company in a foreign court. Two methods have often been used in practice to overcome this defect so that the scheme is effective according to the law of the place in which the company's assets are located. First, if there are assets in the United States of America, the company may seek a permanent injunctive relief under section 304 of the US Bankruptcy Code in order to protect those assets. Second, if there are assets in jurisdictions (such as Australia and the Cayman Islands) that have an equivalent restructuring regime, parallel schemes of arrangement may be put forward in those jurisdictions. The recent decision of the Ontario Superior Court of Justice in Re Cavell Insurance Company opens up another avenue by which a section 425 scheme may be binding on foreign creditors, namely by enforcing the English scheme overseas as a judgment. Re Cavell also supports the position that an English court order sanctioning a scheme of arrangement is a judgment within the Council Regulation (EC) 44/2001.