The Government fails to listen to lenders as it presses on with reforms which may stifle UK enterprise

 

We reported last week that the Government intends to proceed with its proposal to reinstate HMRC as a preferential creditor on insolvency, which could spell disaster for UK businesses, lenders and the UK economy.

The Government has failed to listen to lenders and others who responded to the Government’s consultation about the impact of its proposed changes to HMRC’s status as a creditor in insolvencies.

Squire Patton Boggs hosted a roundtable discussion in May with R3 and representatives from all corners of the lending and restructuring market. The industry as a whole was fiercely opposed to the proposal.

We know that arguments against the proposal, and the concerns and issues of lenders were relayed to HMRC. We also know that respondents to the Government consultation articulated those concerns in their responses, Squire Patton Boggs included.

The message to the government was clear, if HMRC is restored as a preferential creditor this will affect existing lending, this will affect new investment, this will affect business growth and this will affect the UK economy.   Have these been messages been taken seriously? It appears not.

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Draft Finance Bill published: HMRC preferential status on insolvency confirmed

Today the Government published draft provisions for inclusion in the Finance Bill which will amend the Insolvency Act 1986 and grant HMRC preferential status on insolvency. A status that was removed in 2003 but which will be re-instated (in part) from 6 April 2020.

Despite huge concern from the lending market, voiced in responses to the Government’s consultation on this measure, the only material change we can see is confirmation that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.

Unfortunately for businesses and lenders, this does not address real concern about the impact of this change on existing facilities and future lending.

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Dubai Makes Moves Toward International Best Practices with New Insolvency Law

On May 30, 2019, Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, signed DIFC Insolvency Law, Law No. 1 of 2019 (the “New Insolvency Law”) into law, thereby repealing and replacing DIFC Law No. 3 of 2009.  The New Insolvency Law, and supporting regulations (the “Regulations”), became effective on June 13, 2019, and govern companies operating in the Dubai International Financial Centre (the “DIFC”).

A full analysis of the New Insolvency Law is beyond the scope of this post.  However, there are many important provisions of the New Insolvency Law that will be very familiar to U.S. bankruptcy practitioners, as well as cross-border practitioners.

Voluntary Arrangements

First, Part 2 of the New Insolvency Law provides procedures for creditors and shareholders to agree to a voluntary arrangement of a company’s affairs.  The procedure for implementation of a proposed voluntary arrangement is relatively straightforward.  The proposal is considered at two meetings: (1) a meeting of the company’s creditors; and (2) a meeting of the company’s shareholders.  See Article 10(1).[1]  If the proposed arrangement is approved by both constituencies, no court involvement is required and the approved voluntary arrangement is binding on all creditors and shareholders.  See Article 11.

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Clean Air: is your business ready?

There in an increasing focus on emissions and pollution through various regulations and initiatives.

You may have seen coverage of, or taken part in activities for “Clean Air Day” on 20 June 2019, a campaign to grow awareness about air pollution. Clean Air legislation has of course been around for a number of decades, with statutory provision initially aimed at issues like smog, burning of fossil fuels, and dark smoke.

The Government set out its Clean Air Strategy earlier in the year and further legislation is likely to follow. The plans referred to in the 2019 strategy include reducing emissions from vehicles and introducing clean air zones (some of which are already in operation), reducing deposits of reactive forms on nitrogen, reducing ammonia emissions (impacting the farming industry), tighter emissions standards in industry and reducing emissions in the home.

As restructuring and insolvency lawyers, we are only too aware of the impact of a business not planning ahead and focusing on the immediate issues and challenges they face daily.

But as those who are involved in imports and exports have had to plan for Brexit, those businesses who stand to be affected by these changes must plan appropriately too. Many businesses will be affected in some way, if not already, and we touch on some the implications below:

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It Should Be Settled Law – Unsecured Attorney’s Fees Claims Are Permissible

In Travelers Cas. & Sur. Co. of Am. v. PG&E, 549 U.S. 443 (2007), the Supreme Court held that bankruptcy law does not disallow a post-petition unsecured claim for attorney’s fees to the extent such claim is authorized by a pre-petition contract and not otherwise expressly disallowed. That pronouncement should have stopped all future litigation over the issue. That has not been the case.

Recently, the Fourth Circuit confronted this very issue in SummitBridge Nat’l Invs. III, LLC v. Faison, 915 F.3d 288 (2019). The facts of SummitBridge are straightforward. The debtor, Faison, executed three promissory notes to his lender, which notes were secured by deeds of trust on the debtor’s real property. Faison commenced a bankruptcy case and the lender filed proofs of claim. The lender subsequently sold its interest in the promissory notes and claims to SummitBridge National Investments III, LLC. The debtor then proposed a plan which provided that SummitBridge’s claims would be allowed as secured claims in the amount of principal, interest, pre-petition attorney’s fees and a certain portion of the post-petition interest and attorney’s fees. The plan, however, precluded SummitBridge from recovering any post-petition attorney’s fees after it had received the value of the underlying collateral. Regardless, SummitBridge filed and pursued unsecured claims for post-petition attorney’s fees. The debtor’s objection to these claims was sustained by the bankruptcy court. The district court affirmed and SummitBridge appealed to the Fourth Circuit. Continue Reading

The changing landscape of retail CVAs – are landlords taking back control?

There has been an influx of company voluntary arrangements (“CVAs”) in recent times, as retailers fight to rescue their UK high street stores. Retail CVAs accounts for the highest proportion of CVAs at 19%. As more and more CVAs are approved, we consider some of the recent trends seen in the retail sector which showcase the flexibility of a CVA and reflect the demands of landlords whose support is vital to the continuing viability of a business.

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That Didn’t Take Long: Ninth Circuit’s Decision in Garvin v. Cook Invs. NW is Challenged

Marijuana Cannabis Leafs

As noted in prior posts, the Ninth Circuit opened the door, albeit narrowly, to cannabis company bankruptcies when it issued its opinion in Garvin v. Cook Invs. NW on May 2, 2019.  In Garvin, the Ninth Circuit affirmed the confirmation of a plan of reorganization proposed by the lessor to a marijuana growing operation.  The Ninth Court adopted a narrow interpretation of section 1129(a)(3)’s confirmation requirement that a plan be proposed “not by any means forbidden by law”, holding that this requirement applies only to the “means of a reorganization plan’s proposal, not its substantive provisions.”  The Court refused to consider the U.S. Trustee’s argument that the debtors’ plan should be dismissed “for cause” under section 1112(b) since the U.S. Trustee had failed to renew the dismissal motion prior to confirmation.

It did not take long before the Garvin Court was criticized for even partially opening the door to cannabis company bankruptcies.

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Section 363(o) Implications: Bankruptcy Court Denies Debtor’s Request to Disband Consumer Creditors’ Committee

On May 17, 2019, the Bankruptcy Court for the Southern District of New York announced that the Official Committee of Consumer Creditors (the “Consumer Committee”) appointed in the In re Ditech Holding Corp. bankruptcy case would not be disbanded.  Ditech, supported by the ad hoc group of term loan lenders (the “Ad Hoc Group”), had filed a motion requesting that the Consumer Committee be disbanded or alternatively have a limited scope and budget.  After receiving objections from the U.S. Trustee (the “UST”), Consumer Committee, and various consumer borrower groups, the Court refused to disband or otherwise limit the Consumer Committee.  The Court found that consumers constitute the majority of Ditech’s unsecured creditors and that the Official Committee of Unsecured Creditors (“UCC”) could not adequately protect consumer borrower issues arising under section 363(o) of the Bankruptcy Code. Continue Reading

Up in the Air….? Proposed changes to airline travel and insolvencies

Last year we wrote an article Let’s Fly Away’ reporting on the increasing number of airline insolvencies.

The Department for Transport has now published its final report reviewing airline insolvency and in this article, we look at the recommendations of that report.

Changes that we might expect to see in the future include:

-a new flight protection scheme (requiring passengers to pay an additional levy on flight costs);

-reforms to the UK airline insolvency regime; and

-better consumer safeguards.

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When do the Hong Kong Courts have jurisdiction to make a bankruptcy order against a foreign debtor?

Hong Kong is known to be an international business hub, and also serves as a gateway to China’s Belt and Road Initiative, which has over 65 countries participating in developing infrastructure and investment initiatives between East Asia and Europe.

High value transactions are commonplace and one way to protect the interests of Hong Kong businesses transacting with foreign companies is to seek a guarantee from the directors or shareholders of the foreign company.

However, enforcing the guarantee and proceeding to obtain a bankruptcy order against foreign guarantors is often a worry, in particular on the question of whether the Hong Kong Court will have jurisdiction to make a bankruptcy order if the debtor does not reside in Hong Kong.

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