When is a decision to declare an interim dividend a decision?

It is often common practice for small businesses to structure payments to a director (who is also a shareholder) through a combination of dividend payments and salary, in order to minimize PAYE liabilities and reduce tax.  Consequently, rather than be paid a salary, a director is “remunerated” by dividend payments.  This works when the company declaring the dividend has sufficient distributable reserves – but when it does not, those payments are unlawful and can be clawed back under s847 of the Companies Act 2006.

It is also often the case that a director is paid by monthly interim dividend payments, albeit that at the time of payment it is not yet known whether there will be sufficient distributable reserves to justify the payment. If at the end of the financial year it turns out that the company did not have sufficient distributable reserves, the payment is re-characterised as salary and PAYE will be accounted for at that point.  This payment structure can work (although the original payment to the director is illegal), but what happens where there is an intervening insolvency that occurs before the payments are reversed? Continue Reading

Third Circuit Confirms There’s No Wiggle Room With Jurisdictional Limitations

A precedential decision issued on November 28, 2018 by the U.S. Court of Appeals for the Third Circuit highlights the limits of bankruptcy judges’ authority to transfer non-core proceedings to other courts.  The Third Circuit’s opinion in In re IMMC Corp. f/k/a Immunicon Corp., et al., Case No. 18-1177, also emphasizes the importance of choosing the right forum for filing post-confirmation litigation.

The facts of the eight-year long jurisdictional dispute are procedurally complex, but are crucial to understanding the potential significance of the Third Circuit’s ruling.  In 2008, IMMC Corporation (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.  Roberto Troisio (the “Trustee”) was appointed liquidating trustee of the Debtor’s estate pursuant to the Debtor’s confirmed plan of liquidation.

In 2010, the Trustee filed an adversary proceeding in the bankruptcy court against the Debtor’s former officers and directors, alleging that these former officers and directors had breached their fiduciary duties by pursuing risky and costly litigation against a competitor of the Debtor.  The Trustee argued that the adversary proceeding was a core proceeding or, in the alternative, a non-core proceeding related to the chapter 11 case, but the bankruptcy court held that it lacked jurisdiction to hear the claims asserted in the adversary.  The bankruptcy court explained that after plan confirmation, a bankruptcy court’s “related to” jurisdiction is limited to matters that are closely connected to plan implementation, and the claims raised in the adversary proceeding did not have a sufficient nexus to implementation of the plan.

The Trustee did not appeal the bankruptcy court’s ruling, but instead moved to transfer the adversary proceeding to the U.S. District Court for the Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1631.  Section 1631 provides:

Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Section 610 provides, in relevant part, that “courts includes the courts of appeals and district courts of the United States, the United States District Court for the District of the Canal Zone, the District Court of Guam, the District Court of the Virgin Islands, the United States Court of Federal Claims, and the Court of International Trade.”  The bankruptcy court denied the motion to transfer, reasoning that bankruptcy courts are not “courts” as defined by section 610 and therefore the bankruptcy court lacked authority under section 1631 to transfer the adversary proceeding.

The Trustee thereafter filed a motion to withdraw the reference in the U.S. District Court of Delaware.  Typically, a motion to withdraw the reference is a procedure that would permit matters that were automatically referred to a bankruptcy court pursuant to a general order to be returned to and heard by the district court.  The district court denied the motion, reasoning that “because the Bankruptcy Court lacked jurisdiction over the adversary proceeding, the action was never properly transferred to the Bankruptcy Court, and the District Court could not withdraw the reference of a proceeding that was never referred.”  Following the district court’s decision, the Trustee filed a new motion with the bankruptcy court to transfer the adversary proceeding to U.S. District Court for the Eastern District of Pennsylvania, which the court treated as an unsupported motion for reconsideration of its earlier order denying the motion to transfer, and denied the motion.

This time, the Trustee appealed the denial of the motion to transfer and the “renewed” motion to transfer to the district court.  Applying the same reasoning as did the bankruptcy court, the district court affirmed both orders, holding that bankruptcy courts are not “courts” as defined by section 610.  Thereafter, the Trustee appealed the district court’s order to the Third Circuit.

On appeal, the Trustee again argued that bankruptcy courts have authority to transfer proceedings pursuant to 28 U.S.C. § 1631 because they are “courts” as defined by section 610.  The Trustee cited the Third Circuit’s decision in In re Schaffer Salt Recovery, 542 F.3d 90 (2008), in which the court held that bankruptcy courts are “units” of the district court for purposes of 28 U.S.C. § 451, as precedential support for finding that bankruptcy courts are “courts” as defined by section 610 and are thereby authorized under section 1631 to transfer proceedings.  However, the Third Circuit rejected the Trustee’s arguments because in Schaffer, unlike here, it was undisputed that the bankruptcy court had jurisdiction over the bankruptcy petitions pursuant to 28 U.S.C. § 157.  Instead, the Third Circuit refocused the issue on the bankruptcy court’s ruling that it lacked jurisdiction to hear the case because the adversary proceeding was neither core nor related to the chapter 11 case.  The Court explained that if the bankruptcy court “[e]xercis[ed] jurisdiction over the adversary proceeding so as to transfer it under § 1631 [such action] would have been ultra vires, regardless of whether bankruptcy courts fall under § 610’s definition of courts.”

Although the question of whether bankruptcy courts are “courts” as defined under section 610 remains undecided, the Third Circuit’s decision reaffirms the well-established principle that bankruptcy courts are courts of limited jurisdiction and, more specifically, that the jurisdictional limitation includes a limitation on the courts’ authority to exercise jurisdiction simply to transfer adversary proceedings.  Going forward, bankruptcy attorneys should be very deliberate about where they file post-confirmation litigation since the bankruptcy court may not have jurisdiction over the case unless the case is connected to plan implementation.  At a minimum, this decision illustrates the various times during which the Trustee could and should have refiled the proceeding or appealed the bankruptcy court’s finding that the adversary proceeding was a non-core proceeding.

The Fifth Circuit Reminds Buyers To Beware Of Buying “Deemed Rejected” Contracts

The recent decision by the Fifth Circuit Court of Appeals in In re Provider Meds, L.L.C. is a stark reminder to chapter 7 trustees that they have an affirmative obligation to examine a debtor’s assets.  A trustee’s failure to conduct a sufficient and timely examination may deprive the estate of significant value.

The issue before the Court in Provider Meds was whether the assumption and assignment of an intellectual property license agreement (the “License Agreement”) conveyed any intellectual property rights since the Agreement had not been timely assumed by the trustee.  The facts were not in dispute.  Multiple related debtors filed chapter 11 cases, and those cases were later converted to chapter 7.  None of the debtors listed the License Agreement in their bankruptcy schedules.  The License Agreement had been executed as part of a settlement of a 2010 patent litigation in which Tech Pharmacy Services, LLC (“Tech Pharm”) had alleged that multiple defendants, including several of the debtors (pre-petition), had infringed its patent.  Under the License Agreement, all but one of the debtors obtained a non-exclusive perpetual license to use Tech Pharm’s patent.  Following conversion of their cases to chapter 7, RPD Holdings, L.L.C. (“RPD”) purchased all of the assets of three of the debtors under section 363 of the Bankruptcy Code.  The orders approving the sales provided that to the extent that any of the subject property was an executory contract, the contract was assumed by the estate and immediately assigned to RPD under section 365 of the Bankruptcy Code.

RPD’s problems began shortly thereafter, when Tech Pharm sued for patent infringement.  In its defense, RPD argued that the License Agreement had been assigned to RPD under the terms of the sale orders.  Unfortunately for RPD, a chapter 7 trustee has a limited period of time in which to assume an executory contract before that contract is deemed rejected.  Specifically, pursuant to section 365(d)(1) of the Bankruptcy Code, after a chapter 7 case is filed, or after a case is converted to chapter 7, the trustee has only 60 days in which to assume an executory contract.  Failure to timely assume an executory contract leads to the contract being automatically rejected (i.e., deemed rejected).

Here, the sale orders were entered after the 60-day time period had run, and the chapter 7 trustee had not assumed the License Agreement within the 60-day period provided for by section 365(d)(1).  Tech Pharm therefore argued that RPD had acquired no rights to Tech Pharm’s patent under the License Agreement.  In response, RPD argued that the License Agreement was not executory, and that even if it was, the time limits established by section 365(d)(1) should not apply when the debtors failed to list the License Agreement in their bankruptcy schedules and when the trustee was therefore unaware of its existence.

The Fifth Circuit began its analysis by holding that the License Agreement was executory.  In order to be executory, parties to the contract must both, at the time of the bankruptcy filing, have some performance obligations remaining which if not completed would constitute a material breach of the contract.  Here, the License Agreement was executory since (a) Tech Pharm had certain continuing obligation to refrain from suing its counterparties for patent infringement, and (b) the licensees under the License Agreement had continuing reporting obligations and had to refrain from making statements about the settled lawsuit.

The Court also rejected RPD’s argument that it should read an implicit exception in section 365(d)(1) for when a debtor fails to include an executory contract in its bankruptcy schedules and when the trustee is unaware of the contract within the 60-day period.  The Court approved an earlier Ninth Circuit opinion decided under the Bankruptcy Act where that court had held that “a trustee has an affirmative duty to investigate for unscheduled executory contracts” and that the “statutory presumption of rejection by the trustee’s nonaction within the sixty day period following his qualification is a conclusive presumption.”  According to the Fifth Circuit, section 365(d)(1) does not impose an actual or constructive notice requirement for the 60-day period.  Therefore, because the License Agreement had not been assumed within 60 days of conversion to chapter 7, the License Agreement was deemed rejected and was not part of the bankruptcy estate.  This meant that the License Agreement could not be sold under section 363, which permits a trustee to sell only “property of the estate.”  The fact that the trustee had no knowledge of its existence was irrelevant for purposes of section 365(d)(1).

Importantly, the Court did not reach the question of whether the 60-day deadline applies where a debtor intentionally conceals the existence of an executory contract from a trustee.  As noted by the Fifth Circuit, some courts have refused to hold that the executory contract is deemed rejected in such circumstances.

The Court’s decision in Provider Meds is a wake-up call to chapter 7 trustees.  Chapter 7 trustees have an affirmative obligation to thoroughly investigate a debtor’s assets, including those assets that may not be scheduled.  If the trustee suspects that the debtor is hiding assets, he or she can seek an extension of the 60-day period, but they cannot let the period run without ensuring that all executory contracts have been identified.  Failure to do so could deprive the estate of value, since the trustee could not then assume and assign an executory contract which may have value.  Further, the Provider Meds decision reminds parties acquiring executory contracts under section 365 in chapter 7 cases to ensure that the contracts have been timely assumed by the chapter 7 trustee.  Otherwise, they run the risk that they will have paid value for a contract that no longer exists.

Did Jevic Doom Future Chapter 11 Recovery Efforts By Unsecured Creditors?

Can a senior secured creditor, who credit bid for substantially all of a debtor’s assets, contribute non-estate property to a litigation trust for the benefit of general unsecured creditors without following the absolute priority rule?  In the recent Constellation Enterprises case, the Bankruptcy Court for the District of Delaware ruled that, as a result of the Supreme Court’s Jevic decision, it cannot and on that basis refused to approve a settlement which would have provided a significant recovery to unsecured creditors. The court’s decision resulted in a multi-million dollar windfall for the senior secured creditors with whom the creditors’ committee in that case had negotiated a favorable settlement.

In an article published in the Journal of Corporate Renewal, the official publication of the Turnaround Management Association, entitled “Did Jevic Doom Future Chapter 11 Recovery Efforts by Unsecured Creditors?,” Squire Patton Boggs Restructuring & Insolvency Group partners Norman Kinel and Nava Hazan examine Constellation Enterprises and its potential ramifications on efforts by creditors’ committees to obtain recoveries for their constituents in the chapter 11 cases of highly overleveraged companies.

Black Friday- risks and opportunities for UK retailers

You may have noticed from the emails flooding into your inbox (even in this post-GDPR world) that this Friday 23 November is “Black Friday”. The event, originating in the US, takes place the day after Thanksgiving and is now synonymous with heavy discounting by retailers, especially those online.

Less than a decade ago, this would have been an utterly unremarkable shopping day in the UK. The UK’s shoppers understood that, whilst the retailers were fiercely competing with each other to secure consumers’ spending in the run-up to Christmas, November and December were not months in which retailers would slash their prices as a means to generate sales. The UK public had to wait until Boxing Day for the retailers to cut prices in order to sell their excess Christmas stock, with the leading news story on Boxing Day often consisting of shoppers (both from the UK and overseas) flocking to the UK’s department stores to try to obtain the best bargains.

That changed with the increased adoption of Black Friday discounting by the UK’s retailers approximately five years ago, (although Amazon had offered UK consumers Black Friday deals from 2010). Black Friday firmly came on the UK’s radar in 2014, when the headlines featured shoppers at several UK supermarkets coming to blows in a bid to purchase heavily discounted televisions.

So what will be the effect of Black Friday on the retail sector in 2018, in the context of the current challenging market, with a number of well-known retailers releasing profit warnings and others proposing CVAs and/or entering administration? In recent years, Black Friday has undoubtedly had an impact on consumers’ shopping habits during the key trading period prior to Christmas, meaning that retailers have had to react. Continue Reading

The Supreme Court May Finally Give Guidance On Trademark Protections In Bankruptcy

In prior posts, we discussed the perplexing issue of how and whether a trademark licensee is protected when the trademark owner/licensor files a bankruptcy petition and moves to reject the trademark license in accordance with section 365 of the Bankruptcy Code.

In January of this year, the First Circuit Court of Appeals issued its ruling in Mission Product Holdings, Inc. v. Tempnology, LLC, 879 F.3d 389 (2018), holding that a trademark licensee was not permitted to continue to utilize the trademark after the rejection of the license agreement. In so holding, the First Circuit disagreed with the Seventh Circuit Court of Appeals’ decision in Sunbeam Prods. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (2012), where the Seventh Circuit held that a non-debtor’s right to continue to use a trademark license is based upon section 365(g) of the Bankruptcy Code which provides that a rejection of an executory contract (such as a trademark license agreement) simply constitutes a prepetition breach of that contract — it neither acts as a contract rescission nor termination.  Instead, the court held that rejection leaves in place the licensee’s right to continue to use the licensed trademark notwithstanding the contract’s rejection.

In what could only be considered as good news for trademark licensees and licensors, as well as bankruptcy professionals advising them, on October 26, 2018, the U.S. Supreme Court granted certiorari in the Mission Product Holdings, Inc. v. Tempnology, LLC case.  This means that parties may finally get guidance as to what happens to a trademark license when the trademark licensor rejects the trademark license agreement. Do trademark licensees have any protections like those afforded licensees of intellectual property under section 365(n)?  Is the Seventh Circuit’s approach in Sunbeam appropriate, or, as held by the First Circuit, is it up to Congress to clarify the status of trademark rights post-rejection? Only time will tell. 

We will keep our readers informed as to all developments in this incredibly important case.

HMRC, Insolvency and Post-Budget Preferential Status

Following the Enterprise Act 2002, the preferential status which HMRC had enjoyed in an insolvency was abolished, rendering HMRC the same as any other unsecured creditor. The effect of this was to swell the pot of assets available to be applied to all unsecured creditor claims.U Turn Sign

Philip Hammond announced in Monday’s budget that HMRC’s preferential status is to be restored. What does this mean for HMRC and unsecured creditors? Continue Reading

What Value is Cryptocurrency to a Bankruptcy Estate?

In their article published by the IBA Insolvency and Restructuring International Magazine titled “Russia: Cryptocurrency and Bankruptcy Estate”, Sergey Treshchev and Elena Malevich of Squire Patton Boggs, Moscow analyse recent decisions in the Russian courts considering whether cryptocurrencies are an asset which form part of the bankruptcy estate.

Given the speed at which cryptocurrency has grown as a concept, it is of no surprise that bankruptcy and insolvency legislation has yet to catch up and define just what cryptocurrency is and therefore how it should be treated in a debtor’s bankruptcy or corporate insolvency. Not just in Russia but internationally.

As courts worldwide grapple with the concept of whether cryptocurrency should be treated as an asset or currency, there is no uniform view. In the U.S., for example, some bankruptcy courts concluded that they should be treated as currency: HashFast Technologies, LLC v. Lowe (In re HashFast Technologoes, LLC), Bankr. Case No. 14–30725DM, Adv. Pro. No. 15-3011DM (Bankr. N.D. Cal. Feb 19, 2016).  In the EU, Member States are split on the position.

Sergey and Elena discuss their thoughts on the findings of the Russian courts.  If you would like to read the full article, please click here.

Squire Patton Boggs: offering certainty to restructuring and insolvency in the face of an uncertain future post-Brexit

No one knows for certain what the future will hold for the UK and the remaining EU countries post 29 March 2019 but in the context of cross-border insolvency we do know that if there is a no-deal Brexit, that the Recast Regulation on Insolvency Regulation (EU) 2015/848 will be repealed.

So, what does this mean for UK insolvencies with a cross-border element?

In simple terms a UK appointment taker will have to apply to the EU local Court for recognition of their appointment and cannot rely on the mutual recognition which currently exists under the EU Regulation.   They may also have to seek the assistance of the EU local courts to enforce judgments and orders and negotiate with foreign office holders. The UNCITRAL Model Law on Cross-Border Insolvency may plug some of the gaps on mutual recognition, but not all.

What is clear is that the support and assistance of local lawyers is key to ensuring cross-border insolvencies are managed without additional cost, frustrations and delays and that assets are recovered and value maintained for creditors.

Where can we help?

Squire Patton Boggs has one of the largest, most experienced and respected global restructuring and insolvency practices of any law firm, with more than 130 experienced lawyers in 36 offices in 15 countries collaborating on domestic and cross-border restructuring matters.

Cross-border restructuring and insolvency cases require a diverse set of skills and for our lawyers it is second nature to operate across different markets and boundaries blending our understanding of the potential risks, with a strategic approach, efficient project management, local insigt and the ability to see the bigger picture.

If the UK exits the EU without agreement, Squire Patton Boggs through its network of European offices will continue to provide office holders with the skill, support and assistance required to manage cross-border insolvencies efficiently and effortlessly whether the appointment taker is a UK insolvency practitioner seeking assistance in the EU or an office holder based in the EU seeking assistance in the UK.

We have 14 offices throughout Europe and our partners are recognised leaders in their field, competing at the top level in their markets and representing the very best clients. We boast broad sector experience in diverse industries, regularly advising on the most complex and challenging restructuring assignments. We bring you deep industry knowledge, with proven strength in diverse sectors such as automotive, manufacturing, energy and utilities, chemicals, retail and leisure. Our client base spans every type of business, both private and public, worldwide, from Fortune 100 and FTSE 100 corporations to emerging companies.

Please get in touch with your usual contact at Squire Patton Boggs for any enquiries or contact our Cross Border Restructuring Practice European Co-Chair Susan Kelly on +44 774 092 4773 or by email to susan.kelly@squirepb.com.

Spotlight on conflicts of interest for insolvency practitioners

Andrew Tate & Paul MuscuttPaul Muscutt, London restructuring partner at law firm Squire Patton Boggs, talks to Andrew Tate, former R3 President, Chair of R3’s Policy Group and Partner at accountancy firm Kreston Reeves LLP, about conflicts of interest in the restructuring and insolvency profession*. Continue Reading

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