Bankruptcy Venue Reform: Are The District of Delaware And The Southern District Of New York At Risk?

How real is the threat to the District of Delaware and the Southern District of New York as the prime venue choices for corporate Chapter 11 bankruptcy cases?  It appears that both are safe, at least for now.

Venue for bankruptcy cases is governed by 28 U.S.C § 1408, which provides that corporations may file in the district (a) in which their “domicile, residence, principal place of business in the United States, or principal assets in the United States” have been located during a majority of the prior 180 days, or (b) in any district where an affiliate, general partner or partnership has filed using any of these provisions.  Because many companies are incorporated in Delaware, the District of Delaware has been a prime beneficiary of section 1408 and many of the countries’ largest bankruptcies have historically been filed in Delaware.  Similarly, because many companies have their principal assets in the Southern District of New York, many large cases have been filed there as well.  But what has caused the most controversy is the use of affiliates, even affiliates which are insignificant in size and in importance, to establish venue in the District of Delaware and the Southern District of New York for the entire corporate enterprise even when the enterprise, as a whole, has only tangential contact with these venues.  Often this appears to be done at the behest of debtors or lenders who view the judges or jurisprudence in those districts as more favorable to their positions.

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German Federal Civil Court strengthens Leasing Receivables Securitisation, Factoring and Asset Based Lending in the Lessor’s Insolvency

In Germany, securitization SPVs, factoring companies and asset based lenders take security over the leased assets owned by the leasing company by way of a security transfer of title. However, in all cases of a leasing company’s insolvency where the leasing company has still possession of the assets, the owner of the security in the leased assets was in the past not seen as being entitled to realise the value of the assets itself. This was because of the rule contained in the German Insolvency Code that any security transfer of a movable asset does not create a full segregation right of the secured party in case that the insolvency administrator has possession to the movable object. Instead, the insolvency administrator of the leasing company was seen to be entitled to dispose of the leased assets and the secured party was only entitled to a separate satisfaction out of the sale proceeds.Sign "Bundesgerichtshof"

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Failure to follow deemed consent procedure did not invalidate appointment

Approved StampIn the recent case of Cash Generator Limited v Fortune and others [2018] EWHC 674 (Ch), the Court determined that non-compliance with the deemed consent procedure for nominating liquidators did not invalidate their appointment. The case provides a useful summary on the relatively new provisions governing the deemed consent procedure and welcome relief to Insolvency Practitioners (“IPs”) that a failure to fully comply with such provisions will not necessarily invalidate their appointment.

Brief facts and arguments

Three companies (which were franchisees of the applicant) (the “Companies”) entered Creditors Voluntary Liquidation. Pursuant to the franchise agreements in place, should a franchise cease to carry on business, or a meeting be convened for a voluntary winding up, the applicant could terminate the agreements and require the Companies to give up possession of their premises and transfer their assets to the applicant. Six days before their liquidation the Companies assigned the leases to their business premises and the Liquidators sold the assets of the Companies two days later.

The applicant applied for the reversal of the nominations of the joint liquidators (the “Liquidators”) of three companies (the “Companies”) and/or the Liquidators’ removal from office and the appointment of others in their place.

The basis for the application was that the deemed consent procedure had not been carried out as the notices required to be sent to all creditors were not sent to the applicant, employees or the landlords. The applicant also requested that the Liquidators be replaced because investigations were required into the assignment of the leases and the sale of the assets and the Liquidators were either conflicted, otherwise too closely involved or did not wish to carry out the investigations.

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Universities “Get Schooled” on Avoiding Fraudulent Transfer Risks

Each year, millions of parents across America write checks to institutions of higher learning, in payment of tuition and charges for their children to pursue a college degree. Inevitably, some of those parents end up in the bankruptcy courts. In recent years, trustees have found an attractive potential source of estate recovery: pursuing the colleges and universities to recover tuition and related payments as constructive fraudulent transfers. The argument is that a parent has no legal obligation to provide a college education to a child over 18 and therefore, that the parents did not receive “reasonably equivalent value” for the tuition payments.

A recent decision by a New York bankruptcy court examines a structure adopted by several educational institutions in an effort to avoid bankruptcy exposure. In Pergament v. Hofstra University (In re Adamo), Judge Craig examined a case where the trustee sought to avoid education payments made both pre-petition and post-petition, pre-conversion by a debtor parent who filed a Chapter 11 that was later converted to a Chapter 7 liquidation. Continue Reading

The price administrators paid for “irrational” removal of receivers.

Split Word IrrationalAdministrators are statutorily entitled to require a receiver to vacate office (paragraph 41 Schedule B1 Insolvency Act 1986 (“Schedule B1”)). In Promontoria (Chestnut) Ltd v Craig and another [2017] EWHC 2405 (Ch) they did just that, taking steps to remove existing receivers not long after their appointment, claiming the action to be in the interests of all the creditors. On the facts, that decision was not only unreasonable but costs were also awarded personally against the administrators.

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Is the UK insolvency regime equipped for the current political and economic climate?

An effective and well-equipped insolvency and restructuring regime gives confidence to investors and financiers, enabling credit to flow through to businesses and boost economic activity, growth and innovation.

In 1999, following the Asian financial crisis, the World Bank carried out a review of the international regimes to establish a set of key principles for effective insolvency regimes (see the report online here)

So, how well-equipped is the UK regime and what challenges does it face? Will the UK remain a good place to do business? This article reviews the UK’s performance against some of the key principles identified by the World Bank Group (WBG) as being necessary for an effective creditor/debtor restructuring and insolvency system.

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Imposing a Constructive Trust in Bankruptcy Cases: Federal Common Law Triumphs!

When creditors are left holding the bag after providing valuable goods or services to a company that files for bankruptcy relief, they often feel misused and that an injustice has occurred. After all, they are legitimately owed money for their work or their product, and the debtor has in effect been unjustly enriched because it received something for nothing. Unsecured creditors do not have recourse to collateral, and typically have to wait in line to receive cents on the dollar. Continue Reading

Retail CVAs – update for landlords

Store Closing SignCarpetright, the UK flooring company, has announced that it is considering a Company Voluntary Arrangement with the aim of “rationalising the company’s property portfolio in order to improve the long-term prospects of the business”.  This is expected to enable the business to close unprofitable shops and reduce their rent bill.  With 409 shops across the country, any proposed CVA is going to have a significant impact on landlords.  This announcement comes on the same day that creditors voted and approved a CVA proposal issued on behalf of New Look, which itself has 593 stores across the country, which proposes to stem losses by closing 60 stores.  The CVA also includes revised lease terms ranging from 15 to 55% across 393 stores over the term of the 3 year CVA.  The New Look CVA importantly has the backing of The British Property Federation, who are influential amongst landlords and who have been critical of CVAs in the past.  Whilst different landlords will always have their own interests to consider, such as pension providers looking after the interests of investors, engagement with professional bodies is always helpful in assisting the CVA process. Continue Reading

A sobering reminder of the potential pitfalls in doing a “pre-pack” administration

Bad Business Results

VE Vegas Investors IV LLC and others vs Shinners and others [2018] EWHC 186 Ch


The applicants were creditors of VE Interactive Limited (In administration) (“VE”). VE encountered financial difficulties and its directors sought insolvency advice from insolvency practitioners at Smith and Williamson (“S&W”) and appointed them to advise on and effect a pre-pack sale of VE’s business and assets.

S&W experienced difficulties in obtaining financial information and clarity over the extent of the sale assets from VE. This caused issues in finding an arms’ length purchaser and only one external purchaser was identified.

Insolvency practitioners from S&W were appointed administrators of VE by the court but they did not report the problems that they had had in obtaining sufficient information from VE’s directors when applying for the order. The day after appointment, the administrators then sold the business and assets to a new company set up by the VE directors.

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Voidable preference – Court considers relevant date of connection

In an article that first appeared on LexisNexis on 26 February 2018, Jon Chesman examines a High Court decision which found the applicant liquidator of a company had made out her case that a transfer of stock from the company to the first respondent, a former director of the company, amounted to a preference and a transaction at an undervalue, so relief ought to be granted under the Insolvency Act 1986 (IA 1986).

Breese (liquidator of Flexi Containers Ltd) v Hiley and others [2018] EWHC 12 (Ch), [2018] All ER (D) 77 (Jan)

What are the practical implications of the decision?

This case demonstrates that in the context of an application seeking to overturn a transaction as a voidable preference and a transaction at an undervalue, the relevant date on whether a person is ‘connected’ with a company pursuant to IA 1986, s 249, is the date on which agreement was reached in relation to that transaction, not the date on which the assets were transferred pursuant to that agreement.

In the face of inconsistent and unreliable evidence from the respondents, the court was prepared to take a common-sense approach as to the commercial reality of the transaction in question. On that basis, the court held that the transaction must have been agreed prior to the first respondent’s resignation as a director, and that she was therefore ‘connected’ with the company at the relevant time.

The court ordered her to pay the sum of £612,834 to the company, plus interest and costs.

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