Re Magyar Telecom BV

The court sanctioned a scheme of arrangement under Part 26 of the Companies Act 2006 proposed by Magyar Telecom B.V. The key legal principles applied were that the court must be satisfied that the company is a "company" for Part 26 purposes (liable to be wound up under the Insolvency Act 1986) and that the class of creditors was properly constituted for the scheme (section 899). The court also required a sufficient connection with England and that the scheme would substantially achieve its purpose.

The court found those requirements met because: (i) the company was a foreign company within the scope of Part 26; (ii) the Note Creditors formed a single properly constituted class and approved the scheme by very large majorities (over 97% in number and over 99% in value of those voting); (iii) evidence showed the company's centre of main interests had been moved to England and there was compelling expert evidence that courts in the United States, the Netherlands and Hungary would likely recognise and give effect to the scheme; and (iv) the scheme would have substantial practical effect, including releasing guarantors, which was integral to the restructuring. The court noted a practice point that independence of expert foreign law reports would be better preserved if they were provided by experts unconnected with the solicitors acting for the company.

Background and parties. Magyar Telecom B.V., a Netherlands-registered company and principal financing vehicle for a group operating telecommunications in Hungary, applied for sanction of a scheme of arrangement under Part 26 of the Companies Act 2006 to restructure €345 million 9.5% Notes due 2016 issued under a New York law indenture. The Notes were guaranteed by group companies and secured over shares and assets. Interests were held in global form through Euroclear and Clearstream.

Nature of the application. The applicant sought an order sanctioning a scheme of arrangement to exchange the existing Notes for new notes with aggregate nominal value €155 million and for Note Creditors to receive a 100% equity interest in a new company holding 49% of the applicant, thereby giving an indirect interest in the main operating company. The scheme was a component of a wider group restructuring because the company had defaulted on interest and, absent restructuring, insolvency proceedings were likely with resulting material value destruction.

Procedure and creditor approval. Arnold J directed convening a meeting of Note Creditors. The meeting proceeded in accordance with directions and the scheme was approved by very substantial majorities (more than 97% in number and more than 99% in value of those voting), with almost 90% by value attending and voting. The Note Creditors were treated as a single class; a majority had entered a restructuring agreement and a consent fee was payable to those signing, but the opportunity to sign had been offered to all.

Issues for decision. The court considered (i) whether the company fell within Part 26 jurisdiction; (ii) whether the creditors' class was properly constituted; (iii) whether there was a sufficient connection with England given the company was Dutch-registered and the Notes governed by New York law; and (iv) whether the scheme would substantially achieve its purpose and be given effect by relevant foreign courts.

Court’s reasoning. The court accepted that a foreign company may be vulnerable to Part 26 jurisdiction if it is liable to be wound up under the Insolvency Act 1986. It accepted Arnold J’s earlier findings that the company satisfied the jurisdictional test and that the Note Creditors formed a single class. On connection with England, the court accepted evidence that the company’s centre of main interests had been moved to England and that, since the practical alternative was an English insolvency, an English scheme would provide a realistic and effective route to vary rights governed by New York law. The court also received detailed expert evidence that a US Chapter 15 recognition order was reasonably likely, and that courts in the Netherlands and Hungary would recognise and give effect to the scheme. The court treated the requirement for a sufficient connection and the need for the scheme to have substantial effect as closely related and concluded both were satisfied. The court also found that the release of claims against guarantors was integral to the commercial operation of the scheme and permissible. The court permitted the scheme to retain a condition that US recognition might be waived with trustee consent, given the very high creditor support and the contracting position of those voting.

Other observations. The judge recorded that expert reports on foreign law were prepared by partners in the firm acting for the company and observed that independence would be better served by engagement of experts unconnected with the solicitors acting in the matter. The judgment also discusses the interplay of the Judgments Regulation and the Insolvency Regulation but did not decide certain open questions about chapter II of the Judgments Regulation, noting these did not arise for decision on the application.

The court sanctioned the scheme of arrangement. The sanction was granted because the company fell within Part 26, the Note Creditors formed a properly constituted single class and overwhelmingly approved the scheme, there was a sufficient connection with England (including evidence of a move of the company’s COMI to England), and there was persuasive expert evidence that the scheme would be recognised and given effect in the United States, the Netherlands and Hungary. The court also accepted that the release of guarantees was integral and permissible and that the scheme would substantially achieve its purpose.