Russian Sanctions not a blot on an English scheme

Robert Foote
2 February 2023
Robert Foote discusses a creditor scheme of arrangement case – CFLD (Cayman) Investment Ltd [2023] 1 WLUK 233


The English Courts have sanctioned a creditor scheme of arrangement, brought by a Cayman Islands incorporated applicant (“the Applicant”) under part 26 of the Companies Act 2006, that provided for the cancellation of existing unsecured US dollar-denominated bounds in exchange for new bonds and a cash pre-payment for certain creditors. The scheme addressed liquidity issues arising from the group’s offshore debts, and arrangements had been put in place to ensure that the scheme did not offend Russian sanctions.

The Applicant special purpose vehicle issued offshore debt, which was lent to other entities in a group whose ultimate parent company was a publicly traded real estate developer incorporated in China (“the Developer”). The offshore debt was comprised of eleven tranches of unsecured US dollar-denominated bonds, which were governed by English law and guaranteed by the Developer. Nine of the bonds had matured and were in default and the creditors affected by the scheme were holders of the beneficial interests in the existing bonds.  

The scheme involved the cancellation of the existing bonds, with the Applicant and the Developer being released from their liabilities. In exchange, the scheme creditors would receive new bonds with certain creditors being eligible for a cash pre-payment fee. If the scheme was not approved, the Applicant would likely enter into liquidation in the Cayman Islands, and the Developer guarantee would be called on with the likely result that it would be put into liquidation, followed by a consolidated group liquidation in China.

After the scheme was announced, financial sanctions were introduced in the United Kingdom, which affected scheme creditors whose bonds were held through Russia’s clearing system (“the Blocked Creditors”). Following a meeting of the scheme creditors to consider the amendments to the scheme documents to address the financial sanctions, the scheme was ultimately approved by 97.6% of the scheme creditors, representing 97.9% by value of the voting scheme claims. 

In granting the application the English Court held that the following questions were relevant: whether (1) the statutory requirements had been complied with; (2) the class was fairly represented and the majority had acted in a bona fide manner; (3) the scheme was one which a creditor acting in its own interests could reasonably approve; (4) there was a blot on the scheme.

The Court was satisfied that there was a sufficient connection with England (the relevant debt instrument was governed by English law), that there was a real prospect that the scheme would have substantial effect in other jurisdictions, that the statutory requirements had been complied with, that there was no evidence of oppression by the majority, and that an intelligent and honest man, being a member of the relevant class, could reasonably approve the scheme. 

The Court did find, however, that there was a technical or legal defect in the scheme i.e. a “blot” on the scheme: see The Co-Operative Bank Plc, Re [2017] EWHC 2269 (Ch), [2017] 8 WLUK 266 (requires subscription/sign-up). That blot was the original and subsequent Russian sanctions. However, on the basis that certain arrangements had been put in place to ensure that he sanctions were not infringed by the scheme, the Court was prepared to sanction it. Those arrangements meant that the Blocked Creditors would not immediately receive the benefit of the new bonds, but they would initially be held in a holding trust and then a successor trust, until the earlier of the lifting of the sanctions or the expiry of twenty-one years form the date the trust was established.

Robert Foote
Partner - Corporate/Commercial Disputes, Restructuring and Insolvency
Robert Foote is a Partner Barrister at Spencer West. He specialises in Corporate and commercial disputes, director and shareholder disputes, asset tracing claims, insolvency disputes, funds disputes, trust and probate disputes, formal corporate restructurings, contentious mergers, mediations and arbitrations.