In October 2019, syncreon Group Holdings B.V. and its subsidiaries (collectively, the syncreon Group) completed a landmark cross-border balance sheet restructuring of approximately US$1.1-billion of debt. The syncreon Group’s restructuring is believed to be the first time that English scheme of arrangement proceedings have been used to restructure debt issued by a U.S.-based multinational enterprise (Scheme Proceedings).
Further, in its milestone decision recognizing the Scheme Proceedings in Canada, the Ontario Superior Court of Justice (Canadian Court) concluded that its decision represented the first time that English scheme of arrangement proceedings commenced pursuant to the U.K. Companies Act 2006 (Companies Act) had been recognized pursuant to Part IV of the Companies’ Creditors Arrangement Act (Canada) (CCAA).
The syncreon Group’s Canadian operating entity (syncreon Canada) was not a party to the Scheme Proceedings, however, it had provided a guarantee (syncreon Canada Guarantee) of over US$900-million of funded debt, which was to be restructured in the Scheme Proceedings (Scheme Debt). The schemes approved by the High Court of Justice of England and Wales (English Court) provided for a comprehensive third-party release in favour of syncreon Canada releasing, among other things, the syncreon Canada Guarantee. The Canadian recognition proceedings were required to give effect to that release and to satisfy a key condition precedent to the global restructuring.
The syncreon Group is a significant global enterprise with over 14,000 employees. It provides specialized logistics, sequencing, and technology services. The syncreon Group is comprised of over 60 legal entities operating on six continents and in more than 20 countries, including Canada.
In 2018, the syncreon Group was highly leveraged and experiencing an imminent liquidity shortfall as a result of unanticipated launch costs for new businesses, customer contract expirations, reductions in customer volumes, and certain operational challenges. In addition to the Scheme Debt, the syncreon Group’s debt load also included liquidity loan facilities of approximately US$75.5-million and an asset-based lending facility (ABL Facility) of approximately US$80-million owed by an indirect subsidiary of syncreon Canada.
In the summer of 2018, it became clear that a long-term, structural solution to the syncreon Group’s liquidity and balance sheet issues was required to maintain the viability of the business as a going concern.
To address the financial challenges of the syncreon Group, two members of the syncreon Group, syncreon Group B.V. (syncreon B.V.) and syncreon Automotive (UK) Ltd. (Scheme Companies) pursued the Scheme Proceedings under Part 26 of the Companies Act as a means of effecting a global balance sheet restructuring. The Scheme Debt was compromised of borrowings under secured credit facilities and obligations owing under publicly issued notes. Syncreon B.V. was the sole borrower under the applicable credit facilities and the co-issuer of the notes. Prior to commencing the Scheme Proceedings, the governing law of the debt documents was changed from New York law to be English law, to create the necessary connection to the U.K. and ensure that they could qualify for relief under Part 26 of the Companies Act.
Part 26 of the Companies Act permits companies to use a well-established statutory mechanism known as a “scheme” or “scheme of arrangement” to impose a compromise or arrangement upon all creditors proposed to be subject to the schemes. Before schemes can be implemented, they must first be approved by a numerical majority of each class of affected creditors, representing 75 per cent of voting claims by value and must ultimately be sanctioned by the English Court.
Given the syncreon Group’s global presence, guarantors of the Scheme Debt were present in numerous jurisdictions. Accordingly, recognition of the Scheme Proceedings and the order of the English Court sanctioning the Schemes (Sanction Order) in certain key jurisdictions was paramount to ensuring the effectiveness of the Schemes and releases contemplated therein. Canada was one of those key jurisdictions (the United States was another).
RECOGNITION OF SCHEME PROCEEDINGS
Part IV of the CCAA provides that a foreign representative may apply to a Canadian court for recognition of a “foreign proceeding” in respect of which he or she is a foreign representative. If the Canadian court is satisfied that the proceeding in question is a foreign proceeding, the court is to specify whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding. A foreign main proceeding means a foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests (COMI). A foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding.
Giving effect to the Schemes, and the related releases in Canada, was a two-stage process. At the first stage, the foreign representative appointed in respect of the Scheme Companies (Foreign Representative) sought recognition of the English Proceedings as a “foreign non-main proceeding”. Recognition was sought as a foreign non-main proceeding because syncreon B.V.—the borrower under the credit facilities and the issuer of the notes—did not have its COMI in the U.K.
For a foreign proceeding to be recognized under the CCAA, it must be a judicial or administrative proceeding “dealing with creditors’ collective interests generally under any law relating to bankruptcy or insolvency…” The Companies Act, which provided for the Scheme Proceedings, is not a bankruptcy or insolvency statute. It is, as the name suggests, a corporate statute.
Through sworn expert evidence, the Foreign Representative submitted that schemes of arrangement are routinely used to address the financial challenges of companies that are in financial distress. Further, for a scheme of arrangement to be available to companies, the companies must be liable to be wound up under the English Insolvency Act 1986, demonstrating an additional statutory nexus to “bankruptcy and insolvency”. The Foreign Representative further argued, and the Canadian Court accepted, that recognizing the Scheme Proceedings advanced the purposes and objectives of the CCAA to facilitate restructurings, preserve enterprise value and avoid the most deleterious effects that are inherent in the cessation of businesses and forced liquidations.
The Canadian Court recognized the Scheme Proceedings and the convening order (i.e., the order that, among other things, ordered the meetings of creditors) granted by the English Court. The Schemes were passed at meetings of creditors, well in excess of the requisite majority and ultimately sanctioned by the English Court. One of the conditions precedent to implementation of the Schemes, however, was recognition of the Sanction Order by the Canadian Court (as well as recognition of the Sanction Order by the U.S. Bankruptcy Court pursuant to Chapter 15 of the U.S. Bankruptcy Code). Thus, recognition of the Sanction Order in Canada was the second required step in the two-step recognition process.
The Schemes contained comprehensive third-party releases in favour of parties that were not themselves Scheme Companies. Recognition of the Sanction Order in Canada was particularly important to give effect to, and enforce, the release of the syncreon Canada Guarantee.
The Foreign Representative submitted that the Canadian Court has granted third-party releases in appropriate circumstances in CCAA cases and thus the relief requested was not inconsistent with Canadian public policy—one of the main tests for determining whether a foreign order should be recognized under Part IV.
The Foreign Representative’s position was that even if the Canadian Court were to find that a guarantee could not be released by a third-party release in a plenary or main CCAA proceeding, Canadian courts have recognized foreign orders in circumstances where the requested order would not necessarily have been granted under the CCAA itself. The main consideration, it was argued, should be whether the procedures used in the foreign court met domestic standards of fairness. In support of the position that they did, the Foreign Representative established that the Scheme Proceedings were conducted in a fair, reasonable and transparent manner consistent with the principles of creditor democracy embedded in the CCAA provisions providing for plans of compromise and arrangement.
In recognizing the Sanction Order, the Canadian Court confirmed that a foreign order providing for third-party releases may be recognized in appropriate circumstances.
The completion of the syncreon Group’s global balance sheet restructuring resulted in, among other things:
- A reduction of approximately US$625-million in debt and approximately US$5- million in annual cash interest expenses
- Repayment of the ABL Facility in full, totalling approximately US$80-million
- Additional liquidity of US$125.5-million from an ad-hoc group of lenders
- The establishment of a new US$135-million ABL facility.
The recognition of the Schemes in Canada illustrates the flexibility of the CCAA as a harmonizing and powerful instrument in international reorganizations. The CCAA is consistently interpreted in a way that best accomplishes the goals it was designed to achieve. Principles of international comity and cooperation are deeply ingrained in the DNA of Canadian insolvency legislation and the syncreon Group restructuring was a clear demonstration of the Canadian Court’s commitment to advancing those principles.
Blakes acted for the Foreign Representative in this matter.
For further information, please contact:
Linc Rogers 416-863-4168
Aryo Shalviri 416-863-2962
Caitlin McIntyre 416-863-4174
or any other member of our Restructuring & Insolvency group.