Third Circuit Makes Clear That Plan Releases Can Extend To Post-Confirmation Acts

We have discussed plan releases in prior posts.  Oftentimes, disputes involving plan releases revolve around whether, and in what contexts, third-party releases in plans are appropriate.  Recently, the Third Circuit Court of Appeals addressed the relatively unique question of whether releases in a confirmed plan are binding upon post-confirmation purchasers of the debtor’s stock. The Court’s decision in Arctic Glacier Int’l, Inc. puts buyers of a debtor’s claims and shares on notice that they are bound by the terms of the plan, including third-party release provisions.

Factual Background

In Arctic Glacier, the debtors, including Arctic Glacier Income Fund (“Arctic Glacier”), filed for protection under Canada’s Companies Creditors’ Arrangement Act. The debtors also filed for and received recognition under Chapter 15 of the Bankruptcy Code. Under the debtors’ plan of arrangement (the “Plan”), Arctic Glacier was to liquidate and distribute the proceeds to its creditors, giving lowest priority to shareholders. A Monitor appointed under the Plan was empowered to sell and distribute assets with few limitations on when or how much he could distribute as long as he gave 21 days’ notice of any distribution. Continue Reading

I’ll Gladly Pay You Tuesday for an Ice Cream Cone Today: 11th Circuit Clarifies Availability of “New Value” Defense in Bankruptcy Preference

Last month, the Eleventh Circuit Court of Appeals clarified the circumstances under which a creditor can assert a “new value” defense to a preference action under section 547(c)(4) of the Bankruptcy Code—rejecting as dictum language in a prior decision indicating that the new value provided needed to remain unpaid in order to setoff against preference payments.  The Eleventh Circuit’s decision also had the effect of narrowing a split among the circuits.

The Background

In Kaye v. Blue Bell Creameries, Inc. (BFW Liquidation, LLC), Bruno’s Supermarkets filed a chapter 11 bankruptcy.  Blue Bell was one of Bruno’s pre-bankruptcy vendors, making regular deliveries of ice cream to Bruno’s on short-term credit.  Historically, Bruno’s paid twice per week for Blue Bell’s daily deliveries.  Eventually, due to cash flow problems, Bruno’s began paying only once per-week, and occasionally delayed payments even further.  In other words, Blue Bell received payments at irregular intervals, particularly during the 90 days preceding Bruno’s bankruptcy filing, all the while continuing to make its deliveries to Bruno’s.  Continue Reading

Government proposes legislation to enhance UK insolvency regime

On 26 August, the Government announced that it will be making changes to UK insolvency legislation. The changes are intended to support distressed companies and address issues highlighted by major company failures and include:Houses of Parliament

  • the ability for all companies to apply for a moratorium
  • a new insolvency process – the “restructuring plan”, enabling companies to cram down creditors
  • a prohibition on suppliers enforcing termination provisions in contracts and licences upon insolvency
  • an increase in the prescribed part
  • a change to the requirement to prove insolvency on a preference claim.

However, legislative changes are unlikely before 2019 given that implementation depends on parliamentary time, which is currently engaged with Brexit.  Continue Reading

Let’s fly away…..

In the holiday season many of us jet-set to foreign shores – but do we ever think  about how we might get home if our budget airline goes bust or are we just hunting for the best deals to make the pound stretch further?

The last decade has seen a number of airlines collapse or be swallowed up by competitors:

Airline Ceased operation Reason
Monarch Airlines 2017 Administration
Air Berlin 2017 Administration
British Midland International (including BMIbaby) 2012 Acquired by IAG and intergrated into British Airways
Flyglobespan 2009 Administration into liquidation
Zoom Airlines 2008 Administration into liquidation
XL Airways UK 2008 Administration into liquidation
Silverjet 2008 Administration into liquidation
GB Airways 2008 Acquired by Easyjet

Following the collapse of Monarch last year, over 110,000 passengers were stranded abroad and the Government launched an operation to replace the flying programme for two weeks to repatriate customers, at a cost of approximately £60 million. At around the same time the German government was mounting its own programme to keep Air Berlin flying to avoid similar impacts for its passengers. Following these events, the Government issued a consultation paper on airline insolvency and the Airline Insolvency Review Interim Report was published on 12 July 2018 (to read the full report please click here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/724883/airline-insolvency-review-interim.pdf.).

The review was established to determine the extent to which it is appropriate to protect passengers from the impact of future airline insolvencies and how to minimise the impact on the taxpayer.

The review details that the airline industry is one that has seen ‘considerable change over the last few decades as regulatory reform and liberalisation has increased competition and reduced prices’. It estimates that the risk of further airline failure in the UK market remains around 25% in the next 15 years.

The UK aviation market is concentrated in the top 3 airlines (EasyJet, British Airways and Ryanair) with the rest of the market comprising a number of smaller airlines. However, even the major airlines have hit the press recently as they have been significantly affected by the recent air traffic controller strikes. EasyJet have estimated that the strikes have cost the airline £25million and accordingly they will be lodging a complaint with the European Commission, following similar action being taken by IAG (owner of British Airways) and Ryanair.

The recent air strikes, together with the unusually hot British summer, are likely to have had an effect on demand for ‘last minute’ bookings. Despite this, it seems that EasyJet in particular still have an optimistic outlook. It was reported that the airline has raised its full year profit outlook to between £550 million to £590 million due to the strong demand for seats. Such demand is in part attributable to EasyJet taking over some of Air Berlin’s services following its collapse last year, however, it still demonstrates the demand for a cheap getaway/cheap business travel.

The advice to passengers is still to travel but not to “have your head in the clouds”. Whether you are protected on your holiday mainly depends how the travel is booked. In general, purchases of accommodation and flights result in the creation of a ‘package holiday’ which in the UK is subject to ATOL protection. Other protections can be dependent on the method of payment used for your travel services or the terms of your travel insurance. If booked on a credit card in the UK, usually the card company is jointly liable for the provision of services. Equally, some travel insurance policies include supplier failure cover, but not all do. Whilst airline insolvency is relatively rare, neither the passenger nor the government/taxpayer want to be left footing the bills if an airline does “fail to take-off”.

The Ever-Shrinking Chapter 11 Case

Most observers of the world of chapter 11 bankruptcy cases – and particularly those professionals who practice in that arena – will not be surprised to learn that their individual experiences and anecdotal reports suggesting that the duration of Chapter 11 cases has continued to shrink have been validated by Fitch Ratings, one of the “big three” credit rating agencies.  Fitch’s August 7, 2018 report, entitled “Shrinking Length of U.S. Bankruptcies,” provides many useful statistics and analyses of recent and historical trends in chapter 11 cases.

According to Fitch, the median duration from the date of filing of a chapter 11 petition to the date of confirmation of a plan of reorganization or liquidation has been declining significantly – with four months being the median duration for the 30 U.S. cases studied with plans confirmed in 2017 and five months for the 34 cases studied with plans confirmed in 2016.  In contrast, the median duration for the 304 cases which Fitch studied where plans were confirmed between 2003 and early 2018 was seven months. Continue Reading

Secured creditors – don’t be too involved with your customer’s administration!

London ConstructionThe case of Davey v Money and Anor (2018) EWHC 766 (Ch) should serve as a gentle warning to secured creditors to be aware of the level of their involvement in the administration of a customer.

Background

Angel House Development Limited (“AHDL“), a property development company, borrowed £16 million from Dunbar Assets Plc (“Dunbar“) in order to fund the purchase and redevelopment of a property, Angel House, in Tower Hamlets. Dunbar took security for the loan(s) in the form of a debenture.

Despite several discussions, extensions and amendments to the facility, AHDL defaulted on the loan after failing to obtain planning permission for the property. Pursuant to the terms of its qualifying floating charge, Dunbar appointed James Money and Jim Stewart-Koster as joint administrators (the “Administrators“) of AHDL.

Following the sale of Angel House by the Administrators, AHDL moved from administration to creditors voluntary liquidation.

Continue Reading

Claim Trading Industry: Pay Attention to Anti-Assignment Provisions!

In a June 20, 2018 opinion, Judge Carey of the United States Bankruptcy Court for the District of Delaware sustained an objection to a proof of claim that had been traded during the bankruptcy case and filed by the claim purchaser. The opinion highlights the importance of being vigilant in conducting diligence before acquiring a claim against a bankruptcy debtor, especially regarding the ability of the original creditor to assign the claim without the debtor’s consent.

Continue Reading

Post-LAPSO landscape – how have the changes affected insolvency claims?

The Ministry of Justice is seeking feedback from key stakeholders on the impact of Part 2 of the LAPSO reforms, which abolished the recoverability of success fees under CFAs and after the event insurance premiums.

Until April 2015 insolvency claims were exempt, enabling insolvency practitioners to pursue claims and if successful recover any success fee and more importantly after the event insurance premiums. There was concern at the time, that by abolishing the ability to recover the premium that insolvency claims would be stifled.

Initial discussions with key stakeholders suggest that they have adapted to the reforms and they are working well.   The MOJ is assessing the reforms and have published an on line survey which can be completed up to 24 August 2018.  Click here for further detail.

Whilst not aimed specifically at the insolvency profession, the survey offers an opportunity to report back on whether the reforms have had a detrimental impact as initially envisaged.

Chapter 11 or Chapter 9: Investors Beware

Municipalities often drive economic development through subsidiaries and affiliated entities. When these “quasi-municipalities” become distressed, however, questions arise as to whether the potential debtor qualifies as a debtor under Chapter 11 or Chapter 9. This uncertainty can lead to litigation over whether the entity may proceed as a Chapter 11 debtor or is a governmental unit that must proceed through a Chapter 9 bankruptcy filing. In states where Chapter 9 is not authorized, Chapter 11 may be the only available option for a supervised restructuring. Answering the question of “what kind of debtor” is the issuer is an important part of the due diligence process because the answer impacts whether the entity can file at all if it is a governmental entity or whether the entity can proceed in Chapter 11.

In this blog we look at two cases, one in Illinois and one in Nevada, where the primary issue was whether the debtor could proceed as a Chapter 11 debtor or was precluded from a Chapter 11 proceeding because it was a governmental unit ineligible for Chapter 11. Chapter 9 was not an option in either case because Nevada and Illinois do not authorize governmental units to seek relief under Chapter 9. Continue Reading

Insolvency Professionals – you need to know about this!! – proposals to increase the powers of The Pensions Regulator (“TPR”) may have an adverse impact on rescues and deter companies and their directors from seeking insolvency advice

The Department for Work and Pensions has issued a consultation paper which seeks to strengthen the powers of TPR in connection with defined benefit pension plans, coming in response to recent corporate failures which had pension plans with significant deficits.

The proposals introduce four new “notifiable events” in addition to those that already exist, the introduction of hefty (potentially unlimited) fines, through the introduction of new civil and criminal penalties and widening the net of those potentially liable for an offence, to include directors.

A “notifiable event” to include taking pre-appointment insolvency/restructuring advice

Of concern to the insolvency profession will be the proposal to notify TPR where an employer (which sponsors a defined benefit pension plan) takes pre-appointment insolvency or restructuring advice. Instead of the proposed changes providing additional protection to defined benefit pension plans, they instead may discourage companies from taking early advice and therefore potentially disrupt the rescue of companies in financial distress.

The proposals could therefore work to the detriment of both sponsors and pension plans, as a distressed company may be put off or delay taking advice and as a consequence the plan might lose the chance of having a restructured, stronger employer better able to support it.

The requirement to notify TPR when taking advice would replace the existing notifiable event of “wrongful trading”. Whilst it is understandable that employers are unlikely to admit to wrongful trading and therefore the current definition ought to be reframed; a requirement to notify when the employer takes independent pre-appointment insolvency/restructuring advice is not necessarily the solution.

The obvious concern here is what constitutes “advice”?

Whilst the proposal appears to be aimed at situations where insolvency is imminent, it is not unusual to find that an employer takes what could possibly be classed as pre-insolvency/restructuring advice many weeks, months or longer before a formal insolvency event occurs. Also, advice can vary significantly from advice over the telephone to a more formal business review.

Given the countless circumstances and situations where the giving of advice could be classed as pre-insolvency/restructuring advice, unless there is a very clear definition, the requirement to notify in these circumstances is likely to cause confusion and uncertainty and have an adverse impact on company rescue. It is very difficult to come up with a definition of what constitutes “advice” and where the line should be drawn. Presumably TPR would be wise to provide guidance on this point.

Failure to notify

The proposed new civil and criminal penalties are severe, with the proposed introduction of a new civil fine of up to £1,000,000 and criminal sanctions (including imprisonment) with unlimited fines. The proposals include improving those penalties where a person has failed to comply with the notifiable events regime. Whilst it is accepted that the primary motivation behind the new penalties is to deter those employers who wilfully and recklessly cause loss to the pension plan (a new offence in itself) – is there a catch 22 here? Cautious employers may delay taking advice of any kind if they fear that they will have to disclose that advice immediately, knowing that failure to do so will risk a penalty.

The proposals are likely to be met with criticism from the insolvency profession not only because of this uncertainty over what pre-insolvency advice is, but because of the very strict timing requirement, which has to be made as soon as reasonably practicable i.e. on the day or the day following.

From experience, the involvement of TPR can be time and resource extensive. It is not always in the best interests of a company to involve key stakeholders or creditors at the early stages of advice. Often there is good and justifiable reason not to. The involvement of TPR would add another layer of expense to the process and could be an unwelcome distraction and arguably divert resource which would be better spent implementing the advice given.

In any event, directors are already under a duty to act in the best interests of the company or creditors if the company is insolvent and if insolvent, the status of the defined benefit pension plan trustees alongside other creditors will be considered and factored into advice given by the employer’s advisors. As such, the position of the trustees will be a matter of fact; imposing a requirement to notify TPR in these circumstances is unlikely to enhance the position of the pension plan other than in those cases where trustees have failed themselves to take appropriate advice.

If there is to be a change, the earliest point at which the employer should be required to notify is when it receives formal advice that the company is insolvent. Although even that does not address the concern that some companies may delay seeking advice to avoid the uncertainty over whether to notify, but it at least gives greater certainty than is currently proposed.

Proposal to require earlier notification of a sale of the business or assets

It is already a requirement to notify TPR as soon as reasonably practicable where a decision is taken to sell the business or assets of the employer which has an underfunded defined benefit pension plan.   In practice, TPR is often notified post completion.   However, the proposals seek to reverse this position by requiring the employer to notify when Heads of Terms are first agreed.

In a pre-pack insolvency sale this may not have a significant impact because completion often occurs shortly after terms are agreed, but it is far from ideal if notification would interfere with completion of the transaction which is often time critical.   TPR already has five years following the event to assess the impact of it, will two or three more days make any difference? Probably not. Yet the involvement of TPR in the pre-pack process could be detrimental to what the process hopes to achieve, namely rescuing the employer.

Even in a solvent situation, it is difficult to see how the proposed changes to the timing of notification will provide any material added benefit to the pension plan.

Declarations of intent

Another proposal is the requirement to provide a declaration of intent.

The intention here is to encourage employers to think about the effect on the pension plan of a particular transaction (sale of controlling interest, sale of business or assets or granting security in priority to pension debt). It is proposed that the employer provide the declaration to the pension trustees and share it with the TPR before completion. In a distressed situation this seems problematic, particularly if the proposal to move the timing of notification of a sale is implemented.

The employer, in conjunction with the advising insolvency professionals, should already have considered the consequences of the proposed sale and the impact on the business, including the impact on the pension plan and how the effect on the plan can be mitigated.

Requiring employers to provide a declaration of intent may incur unnecessary time and cost without any material benefit to the pension plan. It is unnecessary but the consequences of not providing one are great, potentially exposing directors to the risk of a fine of up to £1,000.000.

New Targets and New Penalties

The consultation also seeks views on widening the number of people responsible for breach of the obligations, aimed at capturing anyone who has responsibility for the plan. This could include directors, sponsoring employees and any associated or connected persons, even trustees.

Coupled with this is the proposal to introduce new sanctions including a civil fine of up to £1,000,000 and criminal sanctions including custodial sentences and unlimited fines.   This is a significant leap from the existing penalty, which is capped at £5,000 for individuals and £50,000 in any other cases.

Faced with the possibility of an eye-watering fine and personal liability the proposals might (understandably) strike fear into the cautious director.   It is unclear from the consultation paper whether a director would face sanction for failure to notify – this is suggested in the text of the consultation, but not in the table of potential new offences – but they could face a penalty for failing to provide a declaration of intent.

The risk of a fine could heavily influence the timing of when businesses take advice and notify in restructuring situations. And rather than support the rescue culture and the objective of protecting defined benefit pension plans, could undermine those objectives by deterring employers and their directors from seeking advice at the earliest possible opportunity.

Conclusion

The embarrassment suffered by TPR in its handling of the BHS and Carillion collapses is the background to the Government’s proposals. Seeking to redress weaknesses in the regulatory system by giving TPR such sweeping new powers when future insolvencies occur, while laudable as an objective, must be tempered with commercial reality.

For further reading and details of the consultation (which closes on 21 August) and how to respond, click here.

LexBlog