Irish Schemes of Arrangement – More Flexible Than UK Schemes?

Barclays Bank Ireland plc (BBI), a subsidiary of Barclays plc, has obtained approval from the Irish High Court for a transaction to sell its German retail business (the Target) with 2.3 million customers, 4.6 billion euro in deposits and 4.4 billion euro in loans to BAWAG P.S.K. (BAWAG).

The transaction structure

The transaction is structured as a scheme of arrangement (the Scheme) to hive down the German consumer business of BBI into a new company (NewCo), followed by a cross-border merger (the Merger) of NewCo into BAWAG.

To avoid the need for NewCo to obtain a banking licence, which would have been a protracted and expensive process, the parties obtained an exemption from the European Central Bank (ECB) allowing NewCo to hold the assets of the Target for a ‘legal minute’ before merging with BAWAG.[1]

This meant that there were two applications before the Irish Court at the same time:

1. To approve the proposed scheme of arrangement as a scheme for the reconstruction of BBI, with orders effecting a statutory novation of deposit agreements;[2] and
2. To grant a pre-merger certificate in respect of the proposed merger.

Mr Justice Quinn gave a comprehensive written judgment,[3] regarding the Scheme and its interaction with the Merger.

The issues

At a preliminary hearing, three key issues were identified:

1. Whether, with knowledge of the pre-agreed Merger occurring immediately after the Scheme becomes effective, the Court could properly treat the Scheme as a scheme of reconstruction?
2. Whether it was appropriate for the Scheme to be effected as a members’, rather than a creditors’ scheme? This arose because while the Scheme was not intended to impair the rights of creditors, it would effect a statutory novation of third party contracts and liabilities to NewCo, followed by their transfer to BAWAG pursuant to the Merger.
3. Whether the Court had jurisdiction by reference to the Brussels Regulation (Recast)?

The Court requested the appointment of a legitimus contradictor.[4] However, it did not direct that the appointed legitimus contradictor would oppose the application, rather that the Court would be assisted on those questions by submissions researched independently of the applicant.

A scheme of reconstruction?

Orders for the transfer of assets and liabilities can only be made where the scheme proposed is a scheme or reconstruction or amalgamation. In this case, it was argued that the Scheme was a scheme of reconstruction.

Reconstruction does not have a statutory definition in the Companies Act 2014, or its predecessors.

The Court noted that in South Africa Supply & Cold Storage Company,[5] Buckley J., held:

“Neither of these words, ‘reconstruction’ and ‘amalgamation’, has any definite legal meaning. Each is a commercial and not a legal term and even as a commercial term, bears no exact definite meaning. In each case one has to decide whether the transaction is such as that, in the meaning of commercial men, it is one which is comprehended in the term ‘reconstruction’ or ‘amalgamation’“.

Buckley J. also held that reconstruction did not include a mere sale, rather that following a reconstruction, the undertaking must continue:

“in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially the same business shall be carried on and substantially the same persons shall carry it on.”

It was accepted that if the Scheme took effect as a standalone procedure and NewCo applied to the Court for pre-merger clearance immediately after it took effect, the Scheme would be a reconstruction scheme.

That being the case, the real issue was whether the fact that the Court was aware of the intended merger, which would follow the effectiveness of the Scheme, could cause the Scheme to lose its character as a reconstruction.

The Court was referred to and considered a number of cases, most of which were decided in the context of the construction of tax statutes.

Ultimately, it held that a scheme of reconstruction does not lose its character as such, by reason of a subsequent step, however integral that is to the transaction as a whole.

A members’ scheme?

The Court, adopting the reasoning in a number of overseas judgments, held that the terms of the Scheme did not impair or compromise the interests of creditors, and the advertisement and direct notification to creditors provided an adequate protection for any dissenting creditors. Accordingly, it was content that the Scheme proceed by way of a members’ scheme.

Jurisdiction under the Brussels Regulation

The Court found that the Scheme proceedings were “civil and commercial” matters within the scope of the Brussels Regulation. In particular, it held that a solvent scheme of arrangement is not analogous to bankruptcy or insolvency proceedings.

It also found that Articles 17 – 19 of the Brussels Regulation are directed at proceedings brought against a consumer and that no consumer was called upon by the Scheme proceedings to “defend itself” so as to warrant the protection of Article 18(2).[6]

Finally, while not relevant to the ultimate decision, the Court held that the domicile of the respondent, being a wholly owned subsidiary of the applicant, could not be relied upon for the purposes of Article 8.1 of the Brussels Regulation.

Comment

Written judgments on solvent schemes of arrangement, especially where they are approved, are rare. Usually, the applicant is happy to take its order and restructure its business. Such cases being fully argued where no party wishes to oppose the scheme, are even rarer.

Accordingly, the fact that the Mr Justice Quinn took the time to deliver a comprehensive judgment, in a case where a legitimus contradictor was appointed, is to be welcomed.

This judgment makes it clear that:

• A scheme of arrangement can be one step in a pre-planned multi-step transaction.
• An application for approval of a solvent scheme of arrangement does not constitute proceedings brought against creditors.
• A members’ scheme of arrangement is permissible where the scheme does not propose to alter the rights of creditors.

Moreover, arguably the approach in this case indicates that an Irish solvent scheme is more flexible than an English scheme where, in MyTravel,[7] Mann J., considered himself constrained by the authority of a number of tax cases, which were considered in this case, in construing the meaning of reconstruction, for the purposes of the relevant English Companies Act.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] ECB approval for the merger is awaited.

[2] In that the contracts between the depositors and BBI will become contracts between the depositors and NewCo, without any action or explicit agreement on behalf of the depositors.

[3] Barclays Bank Ireland PLC -v- Companies Act 2014 [2024] IEHC 738.

[4] Normally, a party appointed to oppose the application.

[5] [1904] 2 CH 268.

[6] Which requires that proceedings be brought against consumers only in the courts of the Member State in which they are domiciled.

[7] [2005] 1 WLR 2365.