German gaming group Löwen Play obtained sanction for a scheme of arrangement following a hearing in the High Court on 5 May 2022. Mr Justice Johnson granted an order sanctioning the scheme following its approval by a significant majority of creditors at the single scheme meeting. The group operates a gaming arcade business in Germany and the Netherlands, and the relevant scheme company was incorporated in Germany. The group had experienced financial difficulties as a consequence of the Covid-19 pandemic and regulatory changes in Germany that restricted certain of its operations, and cast doubt over its ability to repay its €350m senior secured notes due in November 2022, and a €40m revolving credit facility maturing in October 2022.
The proposed scheme
The group proposed a restructuring whereby the issuer of the existing notes would be transferred to a new German SPV, owned by a new Luxembourg holding structure. In exchange for the cancellation of the existing notes, the holders of those notes would be issued a pro rata share of €220m of new senior secured notes issued by the existing issuer, €130m of junior payment in kind notes issued by the new German SPV, and 95% of the equity of the new Luxembourg structure (with the remaining 5% issued to the existing owners of the group). Existing holders would also be entitled to participate in a new €30m series of notes, backstopped by an ad-hoc group of existing noteholders, which would be partially used to repay the existing revolving credit facility.
Johnson J order that a single meeting of the existing noteholders be convened following a hearing 30 March 2022. At that meeting, 98% in value of the existing notes was represented and voted on the scheme, with 100% of the votes cast in favour. At the sanction hearing, the Judge considered a number of factors relevant to sanction:
- The fact that noteholders would receive instruments worth more than they were entitled to receive under the existing notes, compared to recoveries of between 48.5% and 63.7% in the German insolvency process that the company had stated would be the likely outcome if the scheme was not sanctioned.
- The fact that the scheme company was incorporated in Germany, and therefore there needed to be a sufficient connection to England and Wales in order for him to sanction the scheme.
Shortly before the scheme was proposed, the governing law of the notes had been changed from New York law to English law (and jurisdiction had been conferred on a non-exclusive basis to the courts of England and Wales) in order to establish sufficient connection to this jurisdiction and to support the effectiveness of the scheme abroad.
However, in this case, the new choice of law provision was "floating" in that, if English law were to interpret certain provisions of the notes less favourably to the holders of those notes than if they had been interpreted in accordance with New York law, interpretation in accordance with the latter would apply.. Johnson J did not consider that this "floating" choice of law provision prevented him sanctioning the scheme as the provision operated as a choice of English law at that moment in time, subject to a change later, and even if that was wrong, the majority of the provisions would be governed by English law in any case. He also considered, and accepted an opinion from a former New York bankruptcy judge that the amendment to these provision as valid under New York law.
- The need for the scheme to be effective in the relevant jurisdictions, in this case Germany.
The company presented an opinion from a German law expert who opined that because the scheme was an English law process that purported to compromise English law-governed arrangements, this would be recognised under German law, which Johnson J accepted.
- An outstanding approval from the German tax authorities which was a condition to the scheme.
While this could result in the failure of the scheme if the approval was not received by a longstop date in the scheme documentation, the Judge concluded that it appeared likely that the approval would be obtained and that it was not of a nature to prevent him from sanctioning the scheme.
Having considered all of these factors, Johnson J sanctioned the scheme.