On February 27, 2018, the U.S. Supreme Court resolved a circuit split under the Bankruptcy Code and determined that where funds passed through financial institutions acting as payment conduits, where the ultimate transfer sought to be avoided was not the type of transaction protected by the safe harbor provisions of the Bankruptcy Code, the safe harbor provisions of Bankruptcy Code Section 546(e), shielding transfers through financial institutions from avoidance actions by bankruptcy trustees, was inapplicable.

The Supreme Court found that prior circuit decisions applying the safe harbor simply because financial institutions were intermediaries in the transfer is not consistent with the language or intent of the safe harbor provisions. Continue Reading Supreme Court Narrows Scope of Safe Harbor Exception for Securities Clawbacks

It’s an open secret that the commendable goals envisaged by the legislature with the introduction of the business rescue proceedings in Chapter 6 of our Companies Act are being hampered as a result of poorly drafted statutory provisions that govern the business rescue process.  Section 141(2)(a)(ii) is however not one of these vague provisions. In Western Crown Properties 61 (Pty) Ltd vs Able Walling Solutions (Pty) Ltd & Others/ 8073/16, the Western Cape High Court considered this provision and whether a business rescue practitioner can merely file a notice for the termination of the business rescue proceedings without applying to court to liquidate the company.  Continue Reading Taking the easy way out of business rescue proceedings

The English High Court has decided that collapsed retailer British Home Stores cannot challenge its own company voluntary arrangement as an unenforceable contractual penalty and must repay rental discounts to its landlords (Anthony John Wright and Geoffrey Paul Rowley as joint liquidators of SHB Realisations Limited (formerly BHS Limited) (in liquidation) v The Prudential Assurance Company Limited [2018], decision handed down on 6 March 2018)

The case, in which Hogan Lovells represented the successful landlord, provides important guidance on the operation of company voluntary arrangements (CVAs), particularly after termination, and the payment of rent as an expense of a company’s administration in priority to other debts. Continue Reading BHS Company Voluntary Arrangement – Landlords Win on Penalties

 

In January 2018 the English High Court considered whether it had jurisdiction under the Cross-Border Insolvency Regulations 2006 (CBIR) to extend a temporary stay on the commencement of enforcement action in respect of English law debt obligations owed by a foreign debtor so that in effect the stay became permanent, or whether such a permanent stay would breach the long established rule in Gibbs[1](which provides that the discharge of an English law governed debt under the insolvency laws of a foreign jurisdiction outside of England and Wales is not a valid discharge of such debt).  Ultimately, the court found that ordering a permanent stay would substantively affect the creditors’ rights and amount to a discharge of the English debts, in breach of the rule in Gibbs, and that the CBIR could not be used to modify that rule.

[1] Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Mataux (1890) 25 QBD 399 Continue Reading “Stayin’ Alive” – English Court confirms CBIR doesn’t override the rule in Gibbs

On 8 February 2018, the Hong Kong Court of First Instance (the “Hong Kong Court“) ruled in Re Supreme Tycoon Limited [2018] HKCFI 277 that the common law power to recognise and assist foreign insolvency proceedings extends to voluntary liquidations. This is the first authority on this issue in Hong Kong. Continue Reading Hong Kong Court confirms common law recognition and assistance for foreign voluntary liquidations

U.S. Bankruptcy Judge Kevin Gross sitting in Delaware recently approved J.G. Wentworth’s (the “Debtor’s”) Chapter 11 plan after overruling an objection from the U.S. Trustee regarding third-party releases. The Debtor’s Chapter 11 reorganization plan was the second it has brought before the Delaware bankruptcy court in the last ten years.

The Debtor is a consumer finance company that specializes in purchasing and selling structured settlements and other assets in exchange for insurance payouts. After restructuring $370 million in term loan debt in 2009, the Debtor filed for bankruptcy on December 12, 2017 and brought another prepackaged chapter 11 plan to Delaware bankruptcy court. The plan called for a restructure of nearly $450 million in secured debt whereby senior secured lenders’ claims would be satisfied by receiving 95.5% of the new common equity in the reorganized J.G. Wentworth in addition to roughly 46% of their claims in a cash payout.

While the Debtor and the U.S. Trustee worked through the vast majority of issues regarding the Debtor’s plan, the U.S. Trustee objected to the way third-party releases could be granted absent any affirmative action by a creditor. The U.S. Trustee argued that consent is typically given by creditors to third-party releases in the form of an opt-in or opt-out clause, but here, no such clause or provision existed. Instead, creditors had to file an objection. The U.S. Trustee argued that requiring creditors to file objections to oppose the release of such consent rights imposed an undue burden on creditors. Such an imposition would require the financial burden of hiring and retaining counsel.

In response, J.G. Wentworth noted that the plan received no opposition from any creditors regarding the releases or the plan generally. J.G. Wentworth further argued that creditors were fully aware of their rights since they received a notice explaining the releases with explanatory definitions of all terms for clarity purposes.  The notice clearly stated releases within the plan could affect the creditors’ rights.

Although Judge Gross had denied certain third-party releases in the past, he approved these releases noting that they seemed consensual in the absence of any objections from creditors.

U.S. Bankruptcy Judge Martin Glenn recently decided that a fully-negotiated agreement would not be enforced in the absence of required signatures. The agreement contemplated a settlement between the General Motors bankruptcy trust and car purchasers and accident victims of General Motors cars following an alleged vehicle defect; both parties fully and unambiguously agreed to be bound by the terms of the agreement.

After filing for Chapter 11 protection in 2009, General Motors received $50 billion to operate its business, and the reorganized company was labeled by some as “New G.M.” While New G.M. resumed its business operations as a car manufacturer, Motors Liquidation Company, or “Old G.M.”, became a trust responsible for paying back creditors.

In 2014, G.M. became the target of a litigation whereby car accident victims accused the carmaker of defective ignition switches which led to the deaths of 124 people. In addition to recalling millions of cars, Old G.M. (or “the trust”) entered into a deal whereby it agreed to accept liability, make a $15 million payment and require the issuance of 30 million shares of common stock by New G.M. to its creditors. The combination of the $15 million payment and issuance of 30 million shares of stock totaled nearly a $1.02 billion settlement. Despite the plaintiffs’ attorneys and the trust agreeing to the deal, shortly thereafter New G.M. refused to cooperate. Instead, New G.M. brokered a deal with the trust whereby New G.M. would pay the trust’s legal fees in upcoming litigation with creditors in exchange for the trust withdrawing from the original agreement.

The plaintiffs argued that the settlement agreement should be binding under New York law.  The plaintiffs argued that the trust’s constant communication regarding its intent to be bound by the settlement constituted partial performance. In opposition, the trust argued that the agreement was never executed and therefore was not binding.

Judge Glenn’s decision turned on whether a provision within the settlement agreement, which called for signatures in order for the agreement to become “effective and binding”, was an essential part of the agreement or merely a boilerplate contractual provision. Judge Glenn held that contract law allows parties to withdraw from unsigned settlements and ruled that he could not enforce the deal without the trust’s signature. Judge Glenn left open whether plaintiffs may have other remedies against the trust.

Hogan Lovells is representing Scottish Re in the implementation of a sale and restructuring plan for its Cayman Islands subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. (SALIC), and SALIC’s U.S. subsidiary, Scottish Holdings, Inc. (SHI). The sale and restructuring plan is being implemented through the commencement by SALIC and SHI of U.S. Chapter 11 proceedings in the United States Bankruptcy Court for the District of Delaware on January 28, 2018. The comprehensive restructuring of the companies’ debt and equity obligations is one of very few foreign insurance companies to seek relief under U.S. federal bankruptcy law.

The Hogan Lovells team is led by Business Restructuring and Insolvency practice partner Peter Ivanick, and also includes Lynn Holbert, John Beck, and Sean Feener.

For more details of the sale and restructuring please see Scottish Re’s press release.

On January 8, 2018, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced the Bankruptcy Venue Reform Act of 2017. The bill would require that individual debtors file in the district where their domicile, residence, or principal assets are located, and would require corporate debtors to file in the district in which their principal assets or their principal place of business is located.

Currently, corporations are permitted to file in their places of incorporation or in districts where their affiliates have pending bankruptcy cases. This means that many cases are filed in the District of Delaware, where more than half of U.S. publicly-traded companies are chartered, or in the Southern District of New York, which “benefits from [New York City’s] status as a dominant financial center,” according to Reuters. Statistics released by USCourts.gov indicate that in the one year period ending September 30, 2017, the Southern District of New York saw 587 chapter 11 filings, making up 8% of total filings nationwide. Similarly, the District of Delaware saw 435 chapter 11 filings, or 6% of total filings over the same period.

In a joint press release, Senator Cornyn noted that the bill is meant to “clos[e] the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests.” Bankruptcy Courts would be required to transfer or dismiss cases filed in the wrong district, which would prevent debtors from “cherry-picking courts that they think will rule in their favor,” according to Senator Warren. Delaware Governor John Carney (D), Representative Lisa Blunt Rochester (D-Del.), and Senators Chris Coons (D-Del.) and Tom Carper (D-Del.) have released a joint statement in opposition to the bill.

The Second Circuit recently issued its decision on an appeal to the Momentive Performance Materials Inc. (“MPM”) bankruptcy case. Amongst other issues, the Court found that when determining the appropriate interest rate in a Chapter 11 cramdown, courts should consider market factors rather than strictly apply the Till formula. The Court’s decision will benefit secured creditors when a market rate is ascertainable, as they will no longer have to accept below-market take-back debt.

Continue Reading Impact of Second Circuit’s Momentive decision on interest rates under Chapter 11