Part 26A scheme not within scope of Lugano Convention

The insolvency criteria for instigating a Part 26A scheme had the effect that Part 26A schemes fall within the insolvency carve out contained in the Lugano Convention and so are not within its scope.

The new scheme procedure in Part 26A of the Companies Act 2006 closely resembles the old scheme procedure under Part 26, one difference being that to avail itself of the Part 26A scheme procedure a company must show that:

  • The company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern.
  • The purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any such financial difficulties (together the “Distress Criteria”).

In the instant case the company sought an order from the court convening creditors’ meetings to consider a restructuring of its bonds pursuant to a Part 26A scheme. The application was brought just before Brexit such that the Lugano Convention was still capable of applying. The key question for the court was whether Part 26A schemes were subject to the Lugano Convention such that the exclusive Swiss jurisdiction clause in the bonds prevented the English court from sanctioning the Part 26A scheme.

The Lugano Convention contains an insolvency carve out and the court decided that, in consequence of the Distress Criteria, Part 26A schemes were distinguishable from Part 26 schemes and fall within the insolvency carve out such that the Lugano Convention does not apply to them. It followed that the English court had the jurisdiction to convene the Part 26A scheme creditors’ meetings notwithstanding the exclusive Swiss jurisdiction clause in the bonds. 

In re Gategroup Guarantee Limited, Chancery Division first instance judgment

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