An English High Court judge today (23 October) sanctioned a scheme of arrangement proposed by German toymaker Schleich.

In an approved judgment handed down this afternoon, Mr Justice Hildyard granted the company’s request by sanctioning the proposed debt workout – which has to become effective by the end of the month.

Today’s judgment follows a convening hearing held on 5 May and a sanction hearing held on 5 October. During the five-month gap between the two hearings, the company had to implement a number of tweaks to the proposal to take account of, among other things, decisions made by the US and UK authorities about the perceived links of one of its creditors with Russia.

Proposed by group entity SCUR-Alpha 1092 GmbH under section 899 of the Companies Act 2006, the scheme relates to a total of EUR 241m of English law-governed debt. It includes incentives via an elevation structure and is aimed at de-levering the company and facilitating a new money injection. Schleich also has debt which is unaffected by the scheme, including a UniCredit German-law Ancillary Facility and its local credit lines.

For more details on the scheme, see our coverage of the sanction hearing.

The scheme was approved by 11 of 13 creditors (out of an eligible total of 14) who took part in the vote (84.6% by number and 80.9% by value). The principal dissenting creditor was MeSoFa Vermögensverwaltungs AG in Abwicklung (MeSoFa), holder of roughly 16% of the scheme liabilities.

MeSoFa’s inclusion – or not – in the vote had been a key point of discussion at – and since – the convening hearing.

On 2 July, the UK’s Office of Financial Sanctions Implementation (OFSI) confirmed that MeSoFa was not owned or controlled by its designated liquidator for UK sanctions purposes and therefore was not subject to a UK asset freeze.

As a result, MeSoFa was admitted to vote, and the scheme documents were amended so that any creditor not prohibited from voting by applicable sanctions laws could vote. The company accepted this determination.

Also, a new creditor category dubbed “SDP Voting Eligible Scheme Creditor” was created. Such creditors could vote but could not receive restructuring benefits directly if sanctions restrictions prevented that.

MeSoFa (currently in liquidation) had raised a number of concerns ahead of the sanction stage. It did not, however, oppose the scheme at the sanction hearing. In today’s judgment, Hildyard J refused to order the company to cover MeSoFa’s legal costs, estimated at GBP 345,871.

Austrian MeSoFa was previously known as Sberbank Europe AG, a subsidiary of Russian bank Sberbank. The presence of MeSoFa among the scheme creditor constituency was the reason why a court-supervised restructuring was required in the first place, as reported.

Hildyard J ultimately concluded that the scheme was fair, that the creditor class had been properly constituted and represented, and that the objections raised by MeSoFa did not justify withholding sanction.

During the scheme proceedings, the company was represented by Adam Al-Attar KC of South Square, instructed by Latham & Watkins.

The Holding Trust question

In a nutshell, Schleich’s restructuring involves exchange of existing term and revolving credit facility debt into a combination of a new super senior facility, a restated term facility, a new holdco PIK, contingent value rights (CVRs) and partial debt forgiveness.

The restructuring was designed to introduce new money, deleverage the group by about EUR 74m, and preserve the business as a going concern. The court accepted evidence that recoveries under the scheme exceeded expected recoveries in the insolvency comparator.

Although MeSoFa ultimately did not formally oppose sanction at the hearing and did not ask the court to refuse sanction, it raised several points that were specifically reserved for consideration at the sanction stage. These became a central feature of the judgment.

On sanctions status and voting rights, at the convening stage, MeSoFa argued that it was not controlled by its sanctioned liquidator, Pavel Barchugov, and therefore should not be treated as subject to UK sanctions restrictions.

The company accepted OFSI’s view – that MeSoFa should not be barred from voting, and the court approved that decision retrospectively, noting that it was the fair course of action and didn’t cause prejudice to any creditor.

Because MeSoFa remained subject to US sanctions restrictions, the Treasury Department of the US government’s Office of Foreign Assets Control (OFAC) required that any restructuring consideration attributable to MeSoFa be held by a trustee until either those sanctions ceased to apply or OFAC authorised transfer.

The restructuring therefore included a “Holding Period Trust”, under which MeSoFa’s entitlements would be held rather than transferred directly.

MeSoFa contended that it already possessed its own OFAC wind-down licence, and therefore no trust structure was necessary.

It also objected to the potentially indefinite duration of the trust and provisions permitting eventual transfer of assets to an alternative transferee if sanctions issues remained unresolved.

The company’s response was that MeSoFa’s licence authorised MeSoFa, but not the scheme company or the various other transaction participants. Those parties required authority under the company’s OFAC licence.

OFAC had expressly imposed the trust structure as a licence condition. The scheme could not legally be implemented without complying with that condition.

The company also emphasised that MeSoFa could obtain direct receipt of its entitlements if it secured an OFAC authorisation, making the route out of the trust effectively “in MeSoFa’s hands”.

Hildyard J agreed with the scheme company’s lawyers.

He held that the trust did not alter MeSoFa’s substantive rights; it merely regulated how its entitlement would be held pending sanctions clearance. The judge found that MeSoFa received the same economic entitlement as all other creditors and that the trust did not leave MeSoFa worse off than sanctions already did.

The indefinite duration of the trust was not unfair because assets could not lawfully be transferred while sanctions remained, Hildyard J said.

An amended scheme

A significant change made to the scheme since the convening hearing was that, while back then a StaRUG proceeding was being considered as a mechanism through which the group’s operating company could compromise potential German tax liabilities, this idea was dropped by the sanction hearing.

This decision followed further discussions with the German tax authorities, after which the group reassessed the risk associated with those liabilities and concluded that the likelihood and impact of the exposure had reduced. These tax liabilities are estimated at up to c. EUR 21.8m.

The company and a steering committee of its creditors determined that pursuing a StaRUG process would be disproportionate and would generate costs that outweighed its potential benefits.

However, the abandonment of the StaRUG created a separate issue. Because the potential tax liabilities are no longer being compromised through a StaRUG process, they must still be taken into account in the financial analysis supporting the restructuring. On the latest projections, if those liabilities were to crystallise in the future, they could cause the group’s leverage ratio to exceed the threshold required for the delivery of the restructuring opinion that forms a condition to implementation of the transaction.

To address that risk, the company introduced a ‘qualifizierter Rangrücktritt’ (QR Structure). Under a new QR Undertaking, the scheme creditors irrevocably instruct the agents to establish a deeply subordinated facility if, and only if, the potential tax liabilities crystallise and doing so would push leverage above the relevant threshold. Existing debt would then convert into subordinated QR loans in reverse order of ranking and only to the extent necessary to restore compliance. The QR loans would accrue PIK interest and would be reinstated if the underlying tax exposure later reduced.

Another important amendment made to the scheme concerned the trust established to hold proceeds due to sanctioned creditors. Following the issue of an amended licence by the Treasury Department of the US government’s Office of Foreign Assets Control (OFAC), trust arrangements were revised.

As a result, if a sanctioned creditor later becomes unsanctioned or obtains the necessary authorisation, the property can be transferred to the creditor. If sanctions continue indefinitely, trust assets can remain in trust indefinitely.

After three years, the company or trustee may seek authorisation to transfer assets to an alternative transferee. Additional amendments moved certain provisions for UK tax reasons and restricted replacement of the trustee without required sanctions approvals.

The comparator

The company’s case was that, if the scheme were not sanctioned, a lock-up agreement – to which holders of 79% of the scheme debt had signed up – would terminate, the debt would become immediately due, and the German obligors would likely have to file for insolvency, leading to an accelerated sale process.

The original comparator evidence was provided by EY-Parthenon on a valuation date of 30 June 2026. It showed recoveries in the insolvency scenario of 6.6% (low), 10.7% (mid) and 14.8% (high), compared with 8.1%, 13.9% and 19.7% under the scheme.

The experts produced an indicative update to that analysis ahead of the sanction hearing. That update increased the enterprise value range by approximately EUR 15m (to c. EUR 160m-EUR 180m), while leaving the accelerated sale discount unchanged at 25%-35%.

As a consequence, recoveries improved under both scenarios: by about 5.2 percentage points in insolvency and 4.2 percentage points under the scheme. The gap between the two outcomes narrowed by roughly one percentage point, but the scheme still produced the better outcome in the mid case.