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‘Rare’ written judgment on banking deal

Lawyers at Mason Hayes & Curran (MHC) have welcomed a “comprehensive” written judgment on a scheme of arrangement approved by the High Court last month. 

The court was giving the go-ahead to a proposal from Barclays Bank Ireland (BBI), a subsidiary of Barclays plc, to sell its German retail business to Austrian financial-services group BAWAG. 

In a note on the MHC website, the firm’s lawyers explain that the deal was structured as a scheme of arrangement to transfer BBI’s German consumer business into a new company (NewCo), followed by a cross-border merger of NewCo into BAWAG.

To avoid the need for NewCo to obtain a banking licence, which MHC says would have been “a protracted and expensive” process, the parties received an exemption from the European Central Bank that allowed NewCo to hold the German firm’s assets for a ‘legal minute’ before merging with BAWAG. 

Scheme of reconstruction 

The MHC lawyers note that orders for the transfer of assets and liabilities can be made only where the scheme proposed is a scheme of reconstruction or amalgamation.  

In this case, it was argued that the scheme was a scheme of reconstruction, with NewCo applying to the court for pre-merger clearance immediately after it took effect. 

The lawyers also point out that ‘reconstruction’ does not have a statutory definition in the Companies Act 2014. 

“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,” they say. 

Mr Justice Michael Quinn ultimately held that a scheme of reconstruction did not lose its character as such, by reason of a subsequent step, however integral that is to the transaction as a whole. 

‘Multi-step’ transaction 

The MHC note adds that the court, adopting the reasoning in a number of overseas judgments, also held that the terms of the scheme did not impair or compromise the interests of creditors. 

“Written judgments on solvent schemes of arrangement, especially where they are approved, are rare,” the MHC lawyers state. “Such cases being fully argued where no party wishes to oppose the scheme are even rarer.” 

The lawyers highlight three key elements of the judgment: 

• 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, and
• A members’ scheme of arrangement is permissible where the scheme does not propose to alter the rights of creditors. 

The MHC lawyers conclude that the approach in this case indicates that an Irish scheme is more flexible than its English equivalent, due to the interpretation of the meaning of ‘reconstruction’ in previous cases.