Zone of Insolvency

Zone of Insolvency

Claims against IPs: the rising tide

Posted in Europe

The role of an IP has always been challenging – taking control of a company in crisis, making swift decisions based on limited information and balancing the competing interests of stakeholders; all of this requires sound judgment, often under extreme pressure. It is no surprise that, when things go wrong (or perhaps more accurately when parties feel they have lost out), the IP can become the focus of blame, and their insurance policy an attractive target for ‘last resort’ litigation.

The traditional situation in which an IP finds themself the target of litigation is one where lenders have enforced personal guarantees against the company’s directors or shareholders. Faced with the prospect of paying out under the guarantee, the director or shareholder responds with a cross claim against the IP1, usually along the lines that the IP breached his/her duties by failing to realize the best price when selling key assets. In other words, a claim that the IP ‘undersold’ those assets2.

However, in the past few years, there has been a noticeable change in the type of claims brought against IPs and their firms, as well as a large uptick in their frequency. Two main themes have emerged.

The first is that claims for ‘underselling’ are increasingly being brought as standalone actions, rather than as a defensive tactic to demands under a guarantee. See, for example, AM Holdings v. Batten & LePage [2018] EWHC 934 and Davey v. Money & Another [2018] EWHC 766 (Ch). Both of these claims were brought by the company or its shareholders as standalone claims that (inter alia) the IPs had undersold the company’s assets. It is notable that both claims were brought after what would ordinarily be perceived as successful administrations – in AM Holdings the company returned to solvency, and in Davey unsecured creditors had received a significant dividend.

The second theme is the rise in claims based on economic torts – most notably claims for unlawful means conspiracy. The most high profile of these claims has arguably been Premier Motor Auctions v. Lloyds Bank and PwC, which was dismissed earlier this year, but there have been (and still are) many similar claims at various stages of proceedings. The typical allegation in such claims is that the IP or their firm unlawfully conspired with a secured creditor (usually a bank) to place the company into an insolvency process with a view to extracting the associated fees and (in the case of the bank) a discounted equity stake in the company.

In this article we look at a number of cases exemplifying these themes and consider: (i) what has driven the increase in them; (ii) what tactics IPs and their firms have used to defend them; and (iii) what the future holds for this type of litigation.

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Cambridge Gas resuscitated — Farewell Rubin and Singularis?

Posted in Europe

Cambridge Gas Resuscitated – Farewell Rubin and Singularis?
On September 19, 2018 UNCITRAL published the final text of its new Model Law on Recognition and Enforcement of Insolvency-Related Judgments.
The working group considered the arrested development of the concept of modified universalism following the UK Supreme Court (“UKSC”) judgments in Rubin v Eurofinance SA [2013] 1 AC 236 which overturned a previous decision of the Judicial Committee of the Privy Council (“JCPC”) in Cambridge Gas v Navigator Holdings on appeal from the Isle of Man. Continue Reading

Approval of third-party releases under the CCAA: the court lowers the bar in Aquadis

Posted in Canada

A monitor appointed under the Companies’ Creditors Arrangement Act (CCAA) may commence a claim against third parties in the name of the debtor. The purpose of such a claim is obviously to maximize the value of the debtor’s assets for the benefit of its creditors.

In the event the monitor settles a claim with some of the defendants, the latter will usually insist on obtaining a full and complete court-approved release. Courts will generally approve the release if it is fair and reasonable in the circumstances and if the rights (both procedural and substantive) of the non-settling defendants are protected.

In a recent decision, the bar for approving a third-party release was, however, significantly lowered. In the matter of Aquadis,* the court indeed approved a settlement agreement (i) granting release to defendants who did not contribute to the settlement, (ii) offering no procedural protection to the non-settling parties, and (iii) offering very limited protection to the substantive rights of the non-settling parties. Continue Reading

“No Deal Brexit” and cross-border insolvency cases in the EU

Posted in Europe

On 13 September 2018 the UK Government published a briefing on the likely response post exit of the UK to cases which currently fall within the Recast EU Insolvency Regulation (2105/848) (“Regulation”)

The full text of its proposal for insolvency cases is as follows:

Cross-border insolvency cooperation

The majority of the Insolvency Regulation, which covers the jurisdictional rules, applicable law and recognition of cross-border insolvency proceedings, would be repealed in all parts of the UK. We would retain the EU rules that provide for the UK courts to have jurisdiction where a company or individual is based in the UK, and the law will ensure that insolvency proceedings can continue to be opened in those circumstances. But after exit, the EU Insolvency Regulation tests would no longer restrict the opening of proceedings, and so it would also be possible to open insolvency proceedings under any of the tests set out in our domestic UK law, regardless of whether (or where) the debtor is based elsewhere in Europe. Continue Reading

Eleventh Circuit rules doctrine of equitable mootness applies in chapter 9

Posted in U.S.

On August 16, 2018, the United States Court of Appeals for the Eleventh Circuit issued an opinion in the chapter 9 case of Jefferson County, Alabama, reversing the decision of the District Court and ruling that the doctrine of equitable mootness applies in municipal bankruptcies.

In Jefferson County’s chapter 9 case, the bankruptcy court confirmed the County’s chapter 9 plan over the objection of a group of sewer ratepayers, which provided for the issuance of approximately $1.8 billion of new sewer warrants with maturities that ranged up to 40 years. The chapter 9 plan included a provision that the bankruptcy court would retain jurisdiction throughout the life of the new sewer warrants to enforce a covenant that the county must raise sewer rates in sufficient amounts to cover debt service of the new sewer warrants. On December 1, 2013, two days before the effective date of the chapter 9 plan, the ratepayers filed a notice of appeal to the District Court but did not file a stay pending appeal or request that the appeal be expedited. On Dec. 3, 2013, pursuant to the bankruptcy court’s confirmation order, the County issued the new sewer warrants and creditors received distributions on their prepetition claims.

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Chapter 15 does not provide back door for appeals of confirmed foreign restructuring plans

Posted in U.S.

It is common for a foreign debtor with assets or other connections to the U.S. to request an order enforcing its restructuring plan in the U.S. under Chapter 15 of the Bankruptcy Code. U.S. courts will generally grant comity to a foreign plan if it has been confirmed by a foreign court with jurisdiction and enforcement of that plan in the U.S. would not prejudice the rights of U.S. citizens or otherwise violate domestic public policy. Resolution of all appeals in the foreign jurisdiction is not a pre-requisite to enforcement of that plan by  the U.S. court under Chapter 15. See In re Oi S.A., Case No. 16-11791 (Bankr. S.D.N.Y. July 9, 2018). Continue Reading

Australian law reform: the new ‘safe harbour’ for directors and stay on enforcement of ‘ipso facto’ clauses

Posted in Australia

Australian insolvency laws recently underwent the most comprehensive review and reform since the early 1990s.  Part of those reforms included the introduction of:

* a ‘safe harbour’ for directors in respect of the insolvent trading offence; and

* a stay on the exercise of certain rights (including termination rights) for counterparties (or ‘ipso facto’ clauses).

The New ‘Safe Harbour’ for Directors

Directors of Australian companies are liable for any debts incurred while the company is, or is likely to become, insolvent. The reforms introduce a safe harbour for directors to somewhat temper the onerous insolvent trading provisions. Continue Reading

In a 5-4 decision, SCOTUS levels the retail playing field

Posted in U.S.

Brick and mortar retail businesses have been experiencing financial distress, with retail defaults at an all time high. In 2018 alone, there have been over a dozen retailers filing for bankruptcy protection, several of which, including Toys “R” Us and The Bon-Ton Stores, have been forced to liquidate. However, while many traditional “mall tenants” and other brick and mortar retailers have been struggling, online retailers have been flourishing. The convenience and speed of online retail, coupled with ongoing advances in technology and delivery distribution capabilities, have led to a consistent increase in e-commerce customers. Further fueling the divide between e-commerce retail success and brick and mortar retail failure has been the different tax obligations imposed against each group. Specifically, brick and mortar retailers are required to collect and remit sales tax, which currently exists in 41 states, while online retailers have largely been exempt from this requirement. In today’s highly competitive market, this taxing requirement has placed traditional retailers at a significant pricing disadvantage compared to e-commerce retailers. Continue Reading

AAT approves registered liquidator application of non-resident and provides important clarification in respect of the new registration regime

Posted in Australia

Norton Rose Fulbright represented Mitchell Mansfield, an Australian citizen but who now resides in and works in Singapore, of Borelli Walsh in a successful appeal before the Administrative Appeals Tribunal (AAT) in relation to his application for registration as a liquidator.

The appeal raises significant issues about the new statutory regime for the registration of liquidators following the reforms introduced by the Insolvency Law Reform Act 2016 (Cth) (ILRA) and is the first case before the AAT where the operation of the new regime has been considered. Deputy President J Redfern (Redfern DP) handed down her decision and reasons for decision on 5 June 2018.

New statutory scheme for registration of liquidators

Pursuant to the reforms introduced by ILRA, an applicant seeking to become a registered liquidator is required to apply to the Australian Securities and Investments Commission (ASIC). ASIC in turn refers the application to a specially convened committee (Committee) under section 20-10 of the Insolvency Practice Schedule (Corporations) (Corporations Schedule) for determination of the application against criteria specified in subsection 20-20(4) of the Corporations Schedule.

The Committee is comprised of a delegate of ASIC, a registered liquidator chosen by the Australian Restructuring Insolvency and Turnaround Association (ARITA) and an appointee of the Minister for Revenue and Financial Services. The Insolvency Practice Rules (Corporations) 2016 (Cth) (Corporations Rules) prescribe the standard of qualifications, experience, knowledge and abilities required for the purposes of 20-20(4)(a) of the Corporations Schedule. Continue Reading