The Tidal Wave of Class Actions continues to surge across Australia

It is widely accepted that there has been an increase in the number of class actions in Australia; however there have not been many examples of unmeritorious actions. The litigation funders are not in the business of losing money, and it would be unlikely for them to be funding any claims that in their view did not have merit. Without funding, the cases would not get off the ground. Therefore, there should not be any hysteria about the increasing number of class actions.

Growth of Class Actions in Australia

From a historical perspective in 2007 when the Global Financial Crisis hit, there were a number of corporate collapses so there may now be more financial reporting required as a result. Therefore this may lead to more class actions because the results of the numbers which were forecast over the last few years have come into the actuals now.

The biggest reason why there has been growth in class actions is that shareholders are increasingly becoming aware that class actions are a very reasonable manner in which to address corporate misconduct.  In the past there would not have been the knowledge nor understanding associated with the class actions and their roles.

As time has gone on, there is a higher level of sophistication in the class actions such as those relating to the complex financial products that resulted from the Global Financial Crisis and the collapse of those products. Class actions in Australia are more widely recognised as a mechanism to address misleading conduct and corporate mis-selling and related activities.

There is an increase in people willing to become involved in class actions from the corporate side of Australia. Substantial trusts and super funds have become increasingly involved, whereas traditionally class actions were led by applicants such individual investors.

For example, the recent class actions against Lehman’s and Standards & Poors were brought by councils and super funds. Depending on the particular corporate misconduct, some of those institutional investors who may have previously sat behind the others are now more interested in coming forward and being the lead applicant themselves.

Financial Products

These class actions are highly complex as they are financial product orientated. In 2007, all the financial products- billions of dollars of collateralized debt obligations or derivatives -came into Australia. When the financial markets crashed, there were a number of defaults and the investors lost all their capital.

The class actions have been brought in relation to those financial products against the issuers, raters and the arrangers. There are also a number of matters in the managed investment scheme space- for example the collapse of Equititrust, LM, City Pacific -all the major funds that collapsed in Queensland and had investors from Australia and internationally who lost billions of dollars.

Since about 2003, class actions have been arising in the insolvency space. The class action against Lehman’s was a class action in the liquidation and went through to judgment and included all the claims resolution processes and distributions. A further class action against Standard & Poors was settled.

Challenging nature of class actions

The court is taking a greater role in the management of these cases so they don’t drag on and they’re dealt with as efficiently and quickly as possible. That is in everyone’s interest. People who have lost their money want their money back. The funders, of course, want their money and the court wants to deal with the case in an efficient manner.

The return of Turpin! – Validity of Administration Appointments by Directors and the Duomatic Principle

Highwayman - King's HighwayIn the case of Re BW Estates Ltd the High Court considered the validity of a directors’ out of court appointment in circumstances where there was technically an inquorate directors’ board meeting.

It was held that the appointment was not invalid despite only one director being present at the meeting convened to put the company into administration in circumstances where a quorum of two was required pursuant to the company’s articles. In reaching its decision, the Court applied what is known as the Duomatic principle (arising from Re Duomatic Ltd [1969] 2 Ch. 365), the leading authority on the common law principle of the ability of shareholders to make decisions by way of informal unanimous consent.


In order to place a company into administration using the out of court procedure under Paragraph 22(2) of Schedule B1 of the Insolvency Act 1986, the directors must resolve at a properly convened board meeting to put the company into administration. A record of this decision is required to be appended to the appointment documentation as evidence of the directors’ decision. A company’s articles of association will ordinarily detail the number of directors required to be present at a meeting of directors to render that meeting quorate.


75% of the shares in the company were held by W as beneficial owner but his son, R, was the registered owner of the shares. R was also the sole director of the company (and had been for the 4 years prior to the appointment since his father had resigned as a result of being disqualified as a director). The remaining 25% of the shares in the company were held by an offshore company (B) which had been dissolved in 1996. Whilst the documentation was inconclusive, it was believed that W also beneficially owned B.

In 2009, the sole director R placed the company into administration after he passed a resolution at a board meeting at which only he was present. The company’s articles stipulated that the requisite quorum for a meeting of directors was two.

The Applicants, who were creditors of the company, asserted that the directors’ meeting was inquorate and applied for a declaration that the administration appointment was invalid.


HHJ Purle QC held that the appointment of administrators was valid:

  1. given that (1) W was the beneficial owner and D the registered owner of 75% of the shares in the company and were in agreement regarding the appointment, (2) the remaining shareholder, B, had no locus to vote on the basis it had long since been dissolved, and (3) there had been a consistent course of conduct between D and W pursuant to which they had (as beneficial or registered owners of 75% of the shares) informally sanctioned the exercise of the directors’ powers by one director alone, that operated as an informal variation of the company’s articles which was sufficient to trigger the Duomatic principle;
  2. although all the shares in the company had voting rights, in considering whether the Duomatic principle could be applied here, the Court held that the shares that were incapable of being voted on (i.e. B’s shares) could be disregarded;
  3. the Applicants had previously instigated a separate challenge of the remuneration of the administrators which had failed. The Court held that previous challenge effectively amounted to an acquiescence and approval of the administrators’ appointment by the Applicants; see our previous blog article posted on 18 May 2015 – Administrators are not required to investigate directors’ motives for appointing them.

The decision is subject to an appeal which is due to be heard by February 2017 so watch this space!


The Duomatic principle is a flexible tool and can be used in appropriate circumstances to correct a failure to comply with technicalities such as quorum and/or formal variation of a company’s articles. However, it is important to note that each case will turn on its own facts and it remains best practice to ensure that quorum and authority to appoint administrators is properly considered well in advance of an appointment.

Additional note of caution – once a company has entered an insolvency procedure the Duomatic principle cannot be triggered to approve or ratify a transaction – See In the matter of Stakefield (Midlands) and others v Doffman and another

Does a Super-Priority Claim Remain Superior Through a Conversion to Chapter 7? One Bankruptcy Court Says Yes.

Chapter 7 Bankruptcy PaperworkIn a recent decision in In re Packaging Systems, LLC, the Bankruptcy Court for the District of New Jersey ruled that a lender that held a “super-priority” administrative expense claim under section 364(c)(1) of the Bankruptcy Code was still entitled to its super-priority status even after the debtor’s case converted to chapter 7.  The decision may provide comfort to lenders and consequently make it easier for debtors to obtain debtor-in-possession financing.

First, some background is necessary. Section 364(c)(1) of the Bankruptcy Code encourages lenders to extend credit to debtors-in-possession by affording such lenders a “super-priority” claim. A super-priority claim has “priority over any or all administrative expenses of the kind specified in section 503(b)” of the Bankruptcy Code, which includes claims that are for the “actual, necessary costs and expenses of preserving the estate.” As a result, section 364(c)(1) greatly improves the chances that the lender will be repaid monies lent to the debtor-in-possession, and is an important tool for debtors seeking to obtain financing during the reorganization process. Separately, section 726(b) of the Bankruptcy Code provides that when a case is converted from chapter 11 to chapter 7, administrative claims under section 503(b) that are incurred for the administration of the chapter 7 estate take priority over section 503(b) claims that were incurred during the chapter 11 case.  By making sure that the chapter 7 trustee is compensated first, section 726(b) is meant to encourage the efficient liquidation and wind-down of the chapter 7 estate.

When it filed its chapter 11 case in 2012, Packaging Systems sought authority to assume a factoring and security agreement with Harborcove Financial, LLC, pursuant to which Harborcove held a first-priority security interest in all of Packaging Systems’ assets. Apparently unable to obtain credit otherwise, Packaging Systems also sought permission to enter into a post-petition factoring agreement with Harborcove and to provide a super-priority administrative claim to Harborcove pursuant to section 364(c)(1). The court allowed Packaging Systems to assume the agreement, subject to certain amendments, and granted Harborcove a section 364(c)(1) administrative expense claim with priority “over any and all administrative expenses incurred and priority claims arising in this case.” Recoveries received in chapter 5 avoidance actions (i.e., fraudulent and preferential transfer claims) were excluded from Harborcove’s administrative expense claim. In addition, Harborcove’s claim was subject to carve-outs for quarterly fees paid to the U.S. Trustee and for the fees incurred by Packaging Systems’ counsel.

With its funding from Harborcove, Packaging Systems remained in chapter 11 for a year before converting to chapter 7 upon motion brought by the United States Trustee. The chapter 7 trustee pursued six preferential and fraudulent transfer claims, ultimately recovering approximately $90,000 for the estate. Nevertheless, the chapter 7 administrative expenses exceeded the amount in the estate, and as a result, the chapter 7 trustee proposed to pay only the chapter 7 administrative expenses in the Final Report, citing section 726(b).  In contrast, the chapter 11 administrative expenses would not be paid at all.

Harborcove objected to the Final Report, arguing that its super-priority administrative expense claim, granted before conversion to chapter 7, should be paid before any chapter 7 administrative expenses were paid.

The case law analyzing the interplay between sections 364(c)(1) and 726(b) is split. Some courts, such as the Ninth Circuit Bankruptcy Appellate Panel, have concluded that the statutory language is ambiguous and have relied on policy arguments that favor payment of chapter 7 administrative expenses over chapter 11 administrative expenses. Other courts, such as the Bankruptcy Courts for the Southern District of Florida and for the Northern District of Illinois, have concluded that because section 726(b) does not expressly reference section 364(c)(1), but only section 503(b), section 364(c)(1) claims retain their super-priority status and must be paid before post-conversion administrative expense claims, notwithstanding section 726(b).

The Packaging Systems court, acknowledging the policy cited by some courts, concluded that the statutory language was clear and held that super-priority claims arising under section 364(c)(1) retain their super-priority status notwithstanding a subsequent conversion to chapter 7.  Therefore, the court continued, a “Chapter 7 trustee must take into account the existence of a pre-conversion super-priority claimant” such as Harborcove’s super-priority claim. Interestingly, the court held that Harborcove was not without fault, in that it had failed to put the chapter 7 trustee on notice of its administrative expense claim.  The court noted that Harborcove would not receive anything if the chapter 7 trustee had not pursued the preferential and fraudulent transfer claims.  Accordingly, the court exercised its equitable powers to order that the trustee was entitled to payment of the costs and expenses incurred in the avoidance actions.

Although Packaging Systems is focused on post-conversion issues, it is likely to have the greatest impact on the early stages of chapter 11 cases, when debtor-in-possession financing is being negotiated. At this point in the case, debtors may have less leverage, and lenders may be less willing to negotiate, if lenders believe that their interests will not be protected through a conversion to chapter 7. Lenders may be even less willing to part with protections such as section 506(c) waivers if they believe that they can lose their super-priority status if the case converts. Instead, lenders may insist on additional measures, such as additional security, to protect themselves in the event of a conversion.  The court’s decision in Packaging Systems may alleviate these concerns and may encourage debtor-in-possession financing.

OKD a.s Insolvency Proceedings: New World Resources’ International Investors appeal to Czech Court

ceskoslovenskoOn September 9, 2016, Citibank’s London Branch filed a claim as collateral agent for the bondholders of New World Resources (NWR) with the High Court in Ostrava in the insolvency proceedings of OKD. OKD owns seven coal mines in the Czech Republic, employing over 13000 people. The low cost of coal and the refusal of the Czech Government to bail it out led to OKD filing for a Czech restructuring process in May 2016.

Citibank is seeking confirmation of its claim in the amount of 10.1 billion CZK which is €373.77m. Citibank’s claim has been rejected in the insolvency proceedings of OKD based on several grounds, one of them being an argument that the “parallel debt” does not create sufficient cause for it to claim payment on behalf of all bondholders. This is not the first time bondholders are having a hard time in Czech insolvency proceedings, although the legal arguments of the parties (trustee or borrower) differ in each case. The previous proceedings where big claims arising from bonds have been rejected were the bankruptcies of betting company Sazka and of ECM Real Estate Investments A.G.

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Creditors v Private Pension Holders – has UK bankruptcy law gone too soft?

pension savingsThe recent Court of Appeal decision in Horton v Henry has highlighted the protection afforded to a bankrupt holding a private pension to the detriment of his bankruptcy creditors.


The bankrupt, Mr Henry, was the holder of  a number of pension policies all of which contained provisions entitling him to make elections which would trigger rights to receive payments (either as lump sums, annuities or regular instalment income). The Trustee, Mr Horton, applied under section 310 of the Insolvency Act 1986 (IA) for an Income Payments Order (IPO) requiring Mr Henry to pay (1) a sum equal to the percentage of the pensions presently available as a lump sum and (2) further periodic income for a period of 3 years.

Mr Henry objected on the basis that (a) the benefits which would be triggered under the policies if he were to make the necessary elections were not “income” to which he had become entitled to within the meaning of s310(7) IA (the provisions defining income for the purposes of obtaining an IPO) and (b) it was unreasonable to require him to draw down under the policies as he wished to preserve and maximise their value for transfer upon his death to his family.

The decision

In the High Court, the judge found against the Trustee on the basis that (i) Mr Henry’s uncrystallised pension rights did not constitute “income” as defined under the IA as the pensions were not in payment where definite amounts were contractually due and (ii) neither the Court nor the Trustee had power to decide how a bankrupt should exercise elections open to him under uncrystallised pension policies.

On appeal, the Court of Appeal also rejected the Trustee’s arguments (largely for the same reasons as the High Court) and dismissed the appeal, noting the distinction between pension rights (which are excluded from the bankruptcy estate) and actual payments receivable under a pension (which are capable of being the subject of an IPO).


The case highlights the difficulty in aligning the spirit of the insolvency legislation with the later reforms effected by pensions legislation.

In the former case, there is a drive to maximise returns to creditors and to discourage assets from being put out of the reach of creditors. In the latter case, there is a balance to be struck between bankruptcy creditors and the burden on the State if private pension holders are stripped of their pension investments in retirement.

As a bankruptcy creditor, the fact that a bankrupt is able to retain pension assets and gift them away to relatives whilst bankruptcy debts remain unpaid is a hard pill to swallow. This is even more so where the bankrupt has defrauded creditors in the run up to bankruptcy (although there is no suggestion of fraud in the current case).  Is the law too weighted in favour of pension rights to the detriment of bankruptcy creditors? Should insolvency law go further and enable a Trustee to have more recourse to a bankrupt’s pension assets in certain circumstances?  Whilst provisions already exist in the IA which enable Trustees to recover excessive contributions made into pension arrangements in limited circumstances (see s342c of the IA),  should the IA go further and permit Trustees access to pension assets in prescribed circumstances (e.g. where the potential size of the pension pots are over a certain threshold)? There could be a cap on the amount a Trustee could claim from pension pots (to ensure the “burden on the State” argument is addressed) but at least such reforms may mean bankrupts with large pension pots would not retire on too much of a comfortable life at the expense of unpaid creditors.

Puerto Rico Continues the Struggle to Restructure its Debts

U.S. and the Puerto Rican FlagWhen we last discussed the Commonwealth of Puerto Rico’s efforts to restructure some $72 billion in municipal debt, a Federal District Court Judge had found the Commonwealth’s 2014 municipal debt-restructuring law, the “Recovery Act,” to be pre-empted by the federal Bankruptcy Code, unconstitutional and therefore void. The ruling hinged on the definition of “State” under Section 101(52) of the Bankruptcy Code, which explicitly excludes Puerto Rico for the purpose of determining eligibility for Chapter 9 restructuring.  Puerto Rico had designed the Recovery Act specifically to provide a bankruptcy option for reducing public utility debts, which account for over a third of the U.S. territory’s total municipal debt burden.  With this option off the table, Puerto Rico and its creditors were forced to wait for the U.S. Congress to act by amending the Bankruptcy Code.

Much has happened since February. Notably, in mid-June, the U.S. Supreme Court affirmed the Federal District Court decision by a 5-2 margin, finding that Puerto Rico is indeed ineligible under the existing Bankruptcy Code and that pre-emption “bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities.”

On June 30, 2016, just a few weeks after the Supreme Court ruling, President Obama signed into law the bipartisan “Puerto Rico Oversight, Management, and Economic Stability Act,” or “PROMESA,” which is a word meaning “promise” in Spanish. PROMESA is drafted to provide Puerto Rico with a breathing spell to help it restructure its debts, rather than simply discharge them.  The law imposed an immediate stay of all litigation and collection actions directed against Puerto Rico that will remain in effect until at least February 15, 2017 and can be extended for up to 135 more days.

Shortly after the enactment of PROMESA, Puerto Rico missed a $1 billion principal and interest payment due in early July and a smaller $10 million interest payment in September. These missed payments triggered defaults on general obligation bonds, which are backed by the “full faith and credit” of the Commonwealth.  Puerto Rico’s next major principal and interest payment date occurs in January 2017.

PROMESA required President Obama to appoint members to a seven-member board, which he did on August 31, to oversee the debt restructuring efforts. The law entrusts the board with broad powers to make nearly every fiscal decision for the government of Puerto Rico and to negotiate with creditors.  The board began meeting in late September and set an October 14 deadline for Puerto Rico’s governor to deliver a plan for fiscal sustainability, along with requirements to deliver weekly cash flow reports and monthly revenue and tax collection reports.  However, the board has the authority to reject the governor’s fiscal plans and impose its own at its discretion.

The oversight board also has indicated that it expects to set deadlines for the submission of fiscal plans from Puerto Rico’s sewer authority and electric utility. Complicating matters somewhat is the fact that Puerto Rico’s political leadership will soon turn over, as the island’s unpopular governor is not running for reelection in November.  So, responsibility for executing the fiscal sustainability plan that is expected to be presented later this week will fall to a regime that did not design it.  Time is of essence, however, as funding shortfalls at Puerto Rico’s utilities have caused serious performance issues, including recent island-wide blackouts.  The utilities desperately need restructuring negotiations to reopen their access to credit markets.

Because fiscal plans are due to be presented to the oversight board soon, significant debt payments are on the horizon and November’s elections will result in a change in leadership in Puerto Rico, this will continue to be a situation to monitor closely over the coming weeks and months.

Reviewing the Ratings

Australian MoneyMultiple class actions have been commenced in the Australian Federal Court  in relation to losses suffered by investors in synthetic collateralised debt obligations and other financial products, some of which were distributed or sold by Lehman Brothers Australia Ltd (in liquidation) and by certain major Australian banks, and were assigned credit ratings by Standard and Poor’s.

The products were variously rated ‘AAA’, ‘AA or ‘AA-‘ by Standard and Poor’s and the Applicants allege that Standard and Poor’s were negligent and engaged in misleading and deceptive conduct by assigning those ratings to those financial products. Standard and Poor’s deny the allegations.

In the latest class action, the Federal Court has ordered Standard and Poor’s, by its Chief Executive Officer, to identify by affidavit the real issues relating to the ratings methodology used in rating various financial products.

Amanda Banton and Lisa Gallate have written an article about the cases which first appeared in Corporate Rescue and Insolvency October 2016 edition.
Reviewing the Ratings

Billions of ABFAb Finance

Cash Flow

The Asset Based Finance Association (ABFA) has reported that the amount of invoice finance secured by UK businesses has risen by over a quarter in the last five years and that the total amount of UK lending secured through invoice financing has hit a record and passed the £20 billion mark this year for the first time.

Invoice financing is becoming an increasingly mainstream method of finance allowing businesses to raise funds secured against the value of the invoices they issue to customers, as a means of unlocking precious capital. As reported by ABFA, 80% of asset based finance is invoice finance, with the remaining 20% representing asset based lending where businesses can secure funding against assets such as plant, machinery and inventory.

ABFA reported earlier this year that whilst invoicing financing is popular across all types of businesses, it seems that small businesses across the UK are turning to invoice financing in increasing numbers. Reports by both ABFA and the Royal Bank of Scotland’s invoice finance arm indicate this could in part be down to challenging market conditions following the credit crunch, with the more traditional lenders perhaps reluctant to lend to small enterprises. ABFA adds that during the credit crunch many UK businesses have suffered from delays in receiving payment of invoices, so it is no surprise that more businesses are turning to invoice financing as a method to boost cashflow, expand order books and fund growth.

However, ABFA has recently reported that the record high seen this year has primarily been driven by the UK’s larger businesses (with a turnover above £100m), with an 18% increase seen in the amount secured over the last year.

Jeff Longhurst, Chief Executive of ABFA, commented that ‘there’s increased appetite for Asset Based Finance amongst the UK’s largest businesses. More of these large companies now view it as one of the primary sources of funding, which has pushed the total amount of funds advanced past the £20bn barrier.’ ABFA’s report suggests that this could be down to continued fears of a potential Brexit credit crunch with large businesses seeking to diversify their funding away from solely traditional sources. There is also speculation that companies could be turning to invoice financing as a way of locking in exchange rates to reduce the risk of a weakening pound post-referendum.

Interestingly, ABFA adds in its report that the total number of businesses securing asset based finance has only risen by 1% over the last year, meaning that the growth is not in the number of businesses securing finance, but in the amount being financed. ABFA explains that although businesses are increasingly using asset based finance there are still some businesses unaware of the finance options available. In a report by Lloyds Bank – ‘Business in Britain’ – earlier this year it was estimated that British small to medium enterprises are owed more than £500 billion by customers and that these businesses also own almost £2.5 trillion of assets that could be used to fund further growth. Stephen Everett, head of product and propositions for Lloyds Bank, Global Transaction Banking, stated that ‘nearly a third of businesses told us that late payments were affecting their cash flow. Different types of funding such as invoice finance or asset-based lending can help unlock the working capital that they need, allowing businesses to grasp more of the opportunities that exist at the moment. Unless businesses look at ways to unlock the value tied up in these assets, both they and the UK economy overall are likely to be held back.

So whilst it seems ABsolutely FAbulous that asset based lending is currently in its billions, it could in fact be trillions if more UK businesses were aware of the finance options available to them.

PPF updates guidance for restructuring and insolvency practitioners

Insurance umbrella. Concept of safety business.Since its inception in 2005, the PPF has been a welcome safety net for employees whose company pension scheme is in deficit and the sponsoring employer is on the verge of insolvency. The PPF’s major challenge has been preventing employers from deliberately engineering or recklessly creating such deficits in the pension scheme (to the benefit of other creditors) in the expectation that the PPF will simply pick up those liabilities without question. As the world of restructuring and insolvency continues to evolve in a challenging economic climate, the PFF has recently refreshed both its general guidance for restructuring and insolvency professionals and its (shorter) booklet on the PPF’s approach to employer restructuring.

This latest guidance sets out the key principles the PPF will consider in order to determine the eligibility for a scheme to enter the PPF on a restructuring plan, which has come under close scrutiny following the PPF’s role in the recent high-profile restructurings of Kodak, Monarch and Halcrow as well as the PPF’s criticism of the government’s proposals for the British Steel Pension Scheme. It is also a clear reminder to the industry that the PPF is not obligated to consider a restructuring proposal and will only do so if its key principles are met.

The PPF’s key principles to consider are:

  1. inevitability: the insolvency of the company must be inevitable (i.e. the employer will shortly become insolvent if a restructuring cannot take place);
  2. a significantly better outcome: the scheme will receive money or assets which are significantly better than it would have received otherwise through the ordinary insolvency of the employer;
  3. fairness: the offer to the pension scheme is fair in the light of what other creditors and shareholders will receive as part of the restructuring proposal. The example given in the guidance is that of an insolvent employer with £100m of bank debt and a £100m pension scheme deficit who offers the PPF £1m to take on the scheme. If the PPF takes on the pension scheme, the employer continues trading and the bank debt is more likely to be repaid, rather than being impaired in an insolvency process. If a similar situation were to happen, the PPF may seek to negotiate a contribution agreement with the bank reflecting the benefit to the bank of their enhanced chance of recovery;
  4. equity: the PPF will seek at least 10% equity in the restructured company for the scheme if future shareholders are not currently involved in the company (i.e. there is a third party acquisition of the business). If the current shareholders will continue to be involved in the company a 33% equity stake will be sought;
  5. the Pensions Regulator: the PPF will liaise with the Regulator to establish if a contribution notice or financial support direction from the Regulator would put the scheme in a better position than if it were adopted by the PPF;
  6. Regulated Apportionment Arrangements (“RAA”): on the rare occasion that an RAA is proposed, draft clearance must have been submitted to and considered by the Regulator;
  7. bank fees: such fees must be deemed reasonable by the PPF where the deal involves refinancing; and
  8. costs: the party seeking the restructuring pays the costs incurred by the PPF and the trustees in delivering the restructuring proposal (including legal fees and TUPE liabilities). The PPF provides standard form documents which it will expect to be used in deals.

Restructuring professionals seeking to ensure a smooth entry for an employer’s scheme into the PPF should take note of the criteria under which the PPF will take on a scheme and draft proposals accordingly. The overarching principle is that, in order for the PPF to participate, the employer’s pension scheme must be better off than it would be if the business was simply left to fail. The proposals must also carefully consider the risk of contribution notices and/or financial support directions being imposed by the Regulator.

Links to the guidance can be found here:

General guidance for restructuring and insolvency professionals;

The PPF approach to employer restructuring;

“It’s Virtually Money!” Federal Judge Rules ”Bitcoins” Qualify as Money

bitcoinsIn the latest opinion to wrestle with the question of whether virtual currency should be considered money, Judge Alison Nathan in the U.S. District Court for the Southern District of New York found that for the purposes of a federal anti-money laundering statute, “bitcoins” qualify as money.

In United States v. Murgio, a group of defendants were charged with operating, and conspiring to operate, an unlicensed money transmitting business online.  The defendants were alleged to have attempted to shield the true nature of their bitcoin exchange business by operating through several front companies in order to convince financial institutions that their website was merely an association of individuals with common interests.

The court defined a “bitcoin” as an anonymous, decentralized form of electronic currency that exists entirely on the internet and not in physical form and that is used to purchase goods and services from any person that is willing to accept it as a form of payment (although it does not have the status of legal tender).

Because a violation of the statute at issue, 18 U.S.C. § 1960(a), requires the operation of “unlicensed money transmitting,” and the statute only defines money as including “funds,” the court had to determine whether bitcoins should be considered “funds” under the statute.  The court found that they should. For purposes of the statute, the court held, “funds” mean “pecuniary resources,” and bitcoins fall under that broad category because they are used as a medium of exchange and a means of payment.  The court also relied on another federal court’s earlier holding that bitcoins qualify as money because they can be easily purchased in exchange for ordinary currency, act as a denominator of value, and are used to conduct financial transactions.

This decision is in contrast to the only federal bankruptcy judge’s ruling on the value of bitcoins.  In In re Hashfast Technologies LLC, Judge Dennis Montali in the Bankruptcy Court for the Northern District of California refused to address whether bitcoins are currency or commodities for purposes of the fraudulent transfer provisions of the Bankruptcy Code.  Instead, the court found it “sufficient to determine that…bitcoin are not United States dollars.”  The court’s holding in Murgio also went against a Florida state court opinion that found that bitcoins differ from money in many important aspects.  For example, they are not a commonly used means of exchange and are not accepted by all merchants or service providers.  Further, the Florida court found, the value of bitcoins fluctuates widely and has been estimated to be eighteen times greater than the U.S. dollar.

Although Judge Montali in Hashfast Technologies found that bitcoins are not equivalent to dollars, no bankruptcy court has ruled one way or the other regarding the more general question addressed in Murgio—whether or not bitcoins should be viewed as money or funds.  If bankruptcy courts around the country choose to adopt the opinion of Judge Nathan in Murgio and hold that bitcoins are money, the impact on bankruptcy jurisprudence would be significant.  For example, if bitcoins are regularly viewed as money, they will need to be considered in the value of a debtor and its estate.  More time and resources may need to be invested in calculating an accurate value for bitcoins, if such a value is even calculable.  The impact of virtual currency on an ever-changing technology-focused world may make the debate over the value of bitcoins a likely candidate for consideration by more courts, including bankruptcy courts and courts of appeals, in the future.