US-based Fossil group recently (15 October) received the English High Court’s permission to convene noteholders to vote on a UK restructuring plan. The watch and fashion accessories retailer joins the ever-growing list of non-UK debtors to follow the well-trodden path to London’s Rolls Building to take advantage of the UK’s restructuring regime. While the UK frequently welcomes restructuring tourists from a range of overseas jurisdictions, it is relatively rare to see US groups turning to UK restructuring tools  given the US is home to the effective and well-used Chapter 11 bankruptcy process.

Below, Debtwire’s legal analyst team considers the cross-border dimensions of Fossil’s case and possible motivations for Fossil’s trans-Atlantic trip, including noting that the absolute priority rule is a fundamental principle of Chapter 11 bankruptcy proceedings but not a prerequisite for sanction of a UK restructuring plan. Notably, Fossil’s case marks a stark contrast to Kloeckner Pentaplast, where –  as discussed in our recent analysis – a German debtor appears to have shunned European restructuring tools in either Germany or the UK in favour of a US Chapter 11 process.

London calling

Through its restructuring plan, which is proposed under Part 26A of the UK’s Companies Act 2006 (CA 2006), Fossil seeks to replace its USD 150m in existing bonds with new longer-dated notes while bringing in USD 32.5m of new funds. Additional information concerning the debt, background and terms of the plan are explained in more detail in our Court Coverage.

Source: Debtwire credit report 

The creditors subject to the plan are the holders of the USD 150m 7% senior unsecured notes due November 2026 issued by Fossil Group, Inc and guaranteed by the plan company. The noteholders comprise (by value) c.76% institutional noteholders and c.24% retail noteholders.

Fossil claims it had sought to avoid the need for the plan and achieve the notes restructuring consensually by launching: (i) a private exchange with supporting holders and (ii) a SEC-registered exchange offering to all other noteholders. However, as at 13 October, the minimum tender amount of at least 90% of the aggregate principal amount of the notes had not been met such that it was necessary to proceed with the plan. As of 10 October, 71.98% of noteholders had tendered their notes. If 90% of the notes are tendered, the plan will be abandoned.

The UK offers two restructuring tools under the CA 2006 – the Part 26 scheme of arrangement and the Part 26A restructuring plan.

Restructuring plans are a highly flexible process that facilitate a full range of workouts. Not all of a company’s creditors need be included, as it is possible for a company to pick and choose and use a plan to deal with just one aspect of the capital structure e.g., bonds as is happening here. Notably, in Chapter 11, a company cannot choose which stakeholders to include, as all claims and interests would be subject to the Chapter 11 case.

In terms of the procedure, when a restructuring plan comes before the English High Court, the judge will deal with class composition at the convening hearing (i.e., the first stage of the three-step hearing-vote-hearing process); the theory being that any issues should be resolved upfront because, if it later turns out that the classe(s) were incorrectly constituted, the court lacks the jurisdiction to sanction the plan, and the time and costs of the process are wasted, not to mention potential damage to the plan company. An important safeguard is the court has discretion whether or not to sanction a restructuring plan and the judge is not bound by the creditors’ vote.

UK restructuring plans, which were introduced in 2020, were designed to offer an alternative workout tool to supplement the existing scheme of arrangement tool. Thus, there are numerous similarities between the two, including in terms of the process. There are, however, some material differences. While both processes require the approval of 75% in value of those voting for a class to be deemed to approve them, in contrast to a scheme, there is no numerosity test for restructuring plans, i.e., no majority in number is required. This could be a reason why Fossil has opted for a restructuring plan rather than a scheme – especially given the chunk of notes in the hands of retail investors – despite only including one class and therefore not attempting to rely on the cross-class cram down provisions (discussed below). Another reason for using a restructuring plan could be in case the court split the single class proposed and a cross-class cram down application did become necessary.

Unlike schemes, restructuring plans facilitate cross-class cram down, meaning that a plan can potentially succeed despite the existence of a dissenting class, provided the safeguards of Conditions A and B (see below) are met.

In US Chapter 11 cases, a class accepts a plan if holders of two-thirds in amount and more than half in number vote to accept. Creditors can also be crammed down in Chapter 11 cases. The chart below sets out some key terms in relation to UK restructuring plans.

Significantly, both schemes and plans are potentially available to foreign groups, provided there is a “sufficient connection” with the English jurisdiction. It is well-established that non-UK debtors can actively create a sufficient connection to engage the jurisdiction of the English court. This could be by amending the governing law and jurisdiction clauses in the relevant debt documents to English law or shifting the debtor’s centre of main interests (COMI) to England. Alternatively debtors can introduce a new English company into the group structure to propose the scheme/restructuring plan in order to secure the English court’s jurisdiction. While the English courts have typically welcomed what they consider to be “good” forum shopping, forum shopping will be scrutinsed (discussed further below).

The English court will also need to be persuaded that it is not acting in vain and that the scheme/restructuring plan would have “substantial effect,”  – i.e.,, be recognised and effective in the key jurisdictions such as where the company is incorporated and where the group has material operations and assets –  the US in Fossil’s case. Recognition is discussed further below.

In Fossil’s case, the plan company was incorporated in August in England and Wales for the purposes of establishing a basis for jurisdiction in the UK and promoting the plan.

Further, on 9 September, in parallel with the launch of an exchange offer, Fossil solicited consents from noteholders through a public consent solicitation to change the governing law and jurisdiction clauses of the relevant notes to English law from New York law and to submit to the exclusive jurisdiction of the courts of England and Wales. The consent solicitation was made on the express basis that it would assist with the restructuring plan, should the plan become necessary. Then, the plan company entered into a deed of contribution pursuant to which it undertook in favour of Fossil Group, Inc to contribute to any amounts that are paid by Fossil Group, Inc towards the obligations under the notes. These steps facilitate the use of a UK plan.

Why London?

While it is clear that UK restructuring plans are open to non-UK debtors, this begs the question as to why a US-based debtor such as Fossil would opt for a UK proceeding when the US has its own well-established and effective restructuring tool in the shape of Chapter 11. This could be because of differences between the two processes, such as the ability to use a UK restructuring plan to deal with just one subset of the capital structure (as noted above). Another, or perhaps an additional factor, could also be certain features of Chapter 11 – namely, the absolute priority rule (discussed further below).

Interestingly, Fossil claims that if the restructuring plan is not sanctioned, the most likely scenario would be for: (i) Fossil Group, Inc to enter Chapter 11 in the US with the aim of effecting what is known as a 363 sale of the business; and (ii) the plan company to be wound up. This is said to be the “relevant alternative” to the restructuring plan. In that scenario, Fossil claims the noteholders likely would see a recovery range between 40%-74%, compared to significantly higher returns under the restructuring plan (as detailed in paragraph 64 of the skeleton argument), with the expectation that the new notes issued under the plan would be repaid in full on maturity.

At the 15 October hearing, English judge Mr Justice Cawson was not persuaded by complaints from a retail noteholder who argued the notes should be restructured in the US. Among other complaints, the retail investor, Craig Stover, objected to the restructuring plan on the basis that the English Court was not the proper jurisdiction of the notes, claiming that “the USA Company should be presenting a restructuring plan in the USA, where the Old Notes were established and not in the UK.”

While this complaint did not derail Fossil securing a convening order, we could see more on this at the sanction hearing, which is currently pencilled in for 10 November. At the sanction hearing, the English court will have to consider the overall fairness of the plan, and this will include any objections.

A matter of priority

A key principle of US Chapter 11 proceedings is the absolute priority rule, which, broadly speaking, means that a dissenting class must be satisfied in full before a more junior class can receive any distribution, or retain an interest under the US plan. While some commentators advocated inclusion of a formal absolute priority rule in the UK restructuring plan prior to its introduction in 2020, unlike the US, there is no statutory absolute priority rule. The existence of the absolute priority rule in the US, and the lack of such a rule in the UK, could be another factor why US debtors could opt for UK proceedings because in the US, if any class of creditors voted to reject the plan, the absolute priority rule would apply and effectively prevent shareholders from retaining their equity interests unless the senior class of dissenting creditors were to be paid in full.

Shareholder retention of equity is treated differently in the UK. This issue has come up in various UK restructuring plans, including before the Court of Appeal (CoA) in Adler, where the challenging creditors submitted that it was unfair for the existing shareholders – who were not providing support for the workout – to retain their equity while creditor claims were compromised. The CoA found that shareholder retention of equity was not contrary to the pari passu principle (see glossary above), which does not demand shareholders to give up their equity. Further, the CoA provisionally found that there is no jurisdiction to sanction a compulsory cancellation or transfer of a company’s equity for zero consideration.

However, the specific circumstances when shareholders can retain equity in UK workouts remains unclear and there is much scope for further judicial guidance in this area, and to what extent the Adler decision is confined to its own facts remains to be seen. In the meantime, UK plan applicants should ensure valuation evidence is robust, especially given the current contentious climate for UK in-court workouts.

Road to recognition 

Given Fossil has a significant presence in the US, it intends to file a petition for recognition of the restructuring plan under Chapter 15 of the US Bankruptcy Code, which provides for the recognition of foreign proceedings in the US.

There is a history of UK schemes of arrangement, and, more recently, restructuring plans being recognised under Chapter 15, with examples including the very first UK restructuring plan, Virgin Atlantic.

To this end, Fossil has obtained an independent expert opinion from a US bankruptcy law expert, James Michael Peck (a former US bankruptcy court judge), in relation to whether an order sanctioning the plan is likely to be recognised and given effect in the US under the Bankruptcy Code. Peck concluded that the UK restructuring plan will likely be granted recognition and given substantial effect under Chapter 15.

In particular, Peck opined that: (i) courts in New York are likely to conclude that the choice of governing law in the indenture was properly changed to the law of England and Wales from New York law ; and (ii) a bankruptcy court, upon consideration of a petition for recognition and a properly presented and well-argued motion, would likely find that the restructuring plan is enforceable, binding and fully effective in the US.

Forum shopper 

The UK restructuring regime offers flexible workout tools and a potential route to address a capital structure without shareholders losing grip on their equity.

While the English courts generally welcome what has come to be seen as “good” forum shopping, we have seen scrutiny of forum shopping techniques in recent cases. An example is Home Shopping Europe’s (HSE) scheme, which was sanctioned in June. While the bond debt’s governing law was only recently changed to English law, under the scheme, the post-restructuring new debt instruments would be governed by New York and Luxembourg law. English Judge Hildyard J likened this “curious” sequential change of governing law to “helicoptering,” without seeing enough reason to withhold sanction. The judge also expressed a general concern with regards to what he called the “extremely expansive” approach of the English court with regards to the question of forum shopping. Hildyard J noted that he had voiced such concerns as far back as the Apcoa scheme of arrangement in 2014, where he expressed the need for limits in the forum shopping exercise. While sanctioning HSE’s scheme, he warned that if the English courts continued to push the boundaries on the question of sufficient connection, a foreign court, especially a US one, might find that approach “too expansive” and refuse recognition. The judge added that it was important that the courts of foreign jurisdictions from which the English court seeks cooperation are reassured that the principle of comity and dangers of forum shopping are properly addressed.

Finally, it should be borne in mind that the UK restructuring plan is by no means the finished article. Indeed, in a recent judgment, Justice Hildyard agreed to issue a “leapfrog certificate” permitting Waldorf to apply for permission to appeal the rejection of its restructuring plan to the UK’s highest court, the Supreme Court, and last week the Supreme Court granted permission, with the hearing expected early in 2026 and the UK restructuring plan tool set to evolve further.

In terms of Fossil’s restructuring plan specifically, the court will consider fairness at the 10 November sanction hearing, and disgruntled stakeholders may appear before the court to voice any concerns. While to date, concerns raised by minor individual noteholders have not scuppered schemes of arrangement or restructuring plans, the climate is contentious for UK in-court workouts and recent cases have proved that courts will subject workouts to detailed scrutiny.

With Kloeckner Pentaplast seemingly set to forum shop in the opposite direction, choice of forum is certainly a key area to watch.

Related links:

Fossil’s skeleton argument for the 15 October convening hearing
Retail Advocate’s skeleton argument for the 15 October convening hearing
Retail Advocate’s addendum skeleton argument for the 15 October convening hearing
Fossil Group secures convening order for UK restructuring plan despite retail bondholder objection
Kloeckner Pentaplast potential Chapter 11 filing raises questions over choice of forum – Legal Analysis

Dawn is a former practising restructuring and insolvency lawyer. Prior to joining Debtwire as a Legal Analyst, Dawn practised with DLA Piper UK LLP and Stevens & Bolton LLP, as well as working in legal know-how for LexisNexis. Dawn’s experience includes advising lenders, insolvency practitioners, directors and creditors in relation to insolvency and restructuring issues. Dawn worked on several large-scale restructurings.

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