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.

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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.

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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.

Tempting Fate: What Trademark Licensees Stand to Lose (or Win)

The Bankruptcy Code gives special protections to licensees of intellectual property when a debtor, as licensor, seeks to reject the license. However, the Bankruptcy Code does not include trademarks in its definition of “intellectual property.” So, are licensees of trademarks given any protection when debtors reject trademark licenses? If the Supreme Court grants a recent petition for writ of certiorari, we may get an answer.

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Is it time for Estate Agents to “move-on”?

Handing House KeysEstate agents’ fees (which often feel excessive on top of all the other costs of moving house) have been largely accepted as a normal cost of selling your house. Or at least they used to be. However this may not be the case anymore with property owners increasingly using online agents that offer low-cost fixed fees to try and reduce the overall costs of selling a house. The rise of online agents over the years such as ‘Purple Bricks’ and ‘Emoov’ has eaten away at the market share of traditional high street estate agents.

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Revised Insolvency Practice Direction Published

The revised Insolvency Practice Direction has been published and approved with effect from 4 July.  This replaces the PD published in April this year.  The revisions (primarily dealing with the distribution of specialised insolvency work) widen the scope of work which can be undertaken in local courts, whilst also giving the ability to transfer insolvency cases back to the local hearing centres if there is sufficient expertise to deal with the matter.

The revised PD also clarifies that out of court administration appointments cannot be made outside of court hours using the electronic working pilot scheme and that the rules as to filing outside of court hours in r3.20 to 3.22 of the Insolvency Rules (England and Wales) 2016 apply.

For further comment and to access the revised PD click here

Future EU Regulation proposed to address conflicts of law on the assignment of receivables


On 12 March 2018 the European Commission published a proposal for a Regulation to govern the law applicable to the third-party effects of assignments of claims (the “Assignment Regulation”).

The proposal of the Assignment Regulation adopted by the European Commission deals with which law applies to determine the effectiveness and perfection of the transfer of title – and the creation of other rights like pledges and charges – in relation to claims and receivables vis-a-vis third parties.

The principles set out in Article 4 of the Assignment Regulation are that the law of the habitual residence of the assignor will apply (Article 4 (1)) unless:

–           the claim is cash credited to a bank account or claims arising from financial instruments, in which case the law governing the account or the financial instrument will apply (Article 4 (2)), or

–           there is a securitization, in which case the assignee and the assignor can chose the law applicable to the assignment (Article 4 (3)). Continue Reading

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