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

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.Marijuana Cannabis Leafs

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.

There are several grounds upon which a bankruptcy petition can be presented in Hong Kong, one of which is where the individual is personally present in the country on the day the petition is presented. This could, in theory, capture an individual who is visiting as a tourist or on a short business trip.

In this article we consider the case of Re Dai Guoliang [2019] HKCFI 597 decided on 28 February 2019 by the Hong Kong Court of First instance, when the Court considered whether it should exercise its discretion to dismiss or stay a bankruptcy petition against a foreigner.

One of the interesting arguments relied on by the debtor, Mr Dai. Guoliang (“the Debtor”) was whether the Court should exercise that discretion to dismiss the petition by applying the principles applicable to the winding up of overseas companies.

The Court ultimately concluded that the Debtor had sufficient connection with Hong Kong and therefore did not dismiss the petition.

Facts

The facts of the case are as follows:-

Pursuant to a guarantee dated 20 February 2017 the Debtor owed a debt to the petitioner in excess of HK$10 million together with interest. The debt was not disputed.

Section 4 of the Bankruptcy Ordinance (Cap. 6) provides that a bankruptcy petition shall not be presented to the Court unless the debtor:

  1. is domiciled in Hong Kong (the “Domicile Gateway”);
  2. is personally present in Hong Kong on the day on which the petition is presented (the “Personal Presence Gateway”); or
  3. at any time in the period of 3 years ending with that day:
  • has been ordinarily resident, or has had a place of residence, in Hong Kong (the “Ordinary Residence Gateway”); or
  • has carried on business in Hong Kong (the “Business Gateway”)

The petitioner argued that the Domicile Gateway, the Personal Presence Gateway, the Ordinary Residence Gateway and the Business Gateway applied and as such the Court has jurisdiction to make the Debtor bankrupt.

The Debtor opposed the petition on the grounds that only the Personal Presence Gateway was satisfied, but argued that the Court should exercise its discretion to dismiss or stay the petition arguing that:

  • the Court should apply its discretion and not make a bankruptcy order because he did not have sufficient connection with Hong Kong; or
  • the Court should apply its discretion and not make a bankruptcy order by applying the principles in Section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), which apply to winding up petitions against overseas companies.

The Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 confirmed the dicta of Kwan J (as she then was) in Re Beauty China Holdings Ltd [2009] 6 HKC 351, by explaining the relevant self-imposed constraints adopted by the courts — being the three so-called core requirements which the Court shall consider before exercising its statutory jurisdiction to wind up a foreign company pursuant to section 327 of Cap 32. The three so-called core requirements for exercise of discretion are as follows:

  1. that there is sufficient connection between the company and Hong Kong;
  2. that there must be a reasonable possibility that the winding-up order would benefit those applying for it; and
  3. the Court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

What did the Court conclude?

After reviewing the parties’ affirmations and the petition, and having considered the approach taken for winding up of companies under section 327 of (Cap 32), the Court decided that in personal bankruptcy cases, there was no authority to support the argument that it should apply the rules applicable to winding up.

Deputy High Court Judge Maurellet SC (“the Judge”) heard this case, and concluded that any analogy between the two regimes is a loose one.   In particular, section 4 of the Bankruptcy Ordinance clearly sets out different jurisdictional gateways (as outlined above) including an express provision enabling a petition to be presented where the debtor is personally present in Hong Kong – the Personal Presence Gateway.

The Judge went on to state in paragraph 29 of the judgment that: “the legislature has seen fit to include this gateway to provide jurisdiction and there is no reason in principle why any discretion should be exercised in a way other than one which is flexible and fact specific.”

However, the Judge agreed that in certain cases, the Personal Presence Gateway alone may seem too exorbitant, for example, where a tourist is in Hong Kong for a fleeting period, but this would still be subject to the Court’s discretion.

In considering whether a bankruptcy order would be made against the Debtor in this case, the Court found that since the Debtor was:-

  1. a Hong Kong identity card holder;
  2. the former director and substantial shareholder of a company listed on the Stock Exchange of Hong Kong and with offices in Hong Kong; and
  3. had signed a guarantee with a Hong Kong law governing provision;

the Debtor’s connection with Hong Kong was not limited or tenuous and made a bankruptcy order solely on the basis of the Personal Presence Gateway. It did not need to consider the other gateways.

Comment

There may well be cases when a bankruptcy petition is presented against a tourist who is only travelling to Hong Kong for a short stay, with the petitioner relying upon the Personal Presence Gateway. Section 4 of the Bankruptcy Ordinance allows this.

However, as this case demonstrates the Court will look at more than just whether the debtor was personally present in Hong Kong on the day the petition was presented when deciding whether to exercise its discretion to dismiss a petition. What counts are real business and personal connections between the foreign individual and Hong Kong. These are amongst the factors that influenced the court in this case.

What is clear from this case is that satisfying the Personal Presence Gateway limb alone may not be sufficient to persuade the Court to make a bankruptcy order.

To better protect their interests, Hong Kong entities should ensure that agreements entered into with a foreign individual include a Hong Kong jurisdiction and choice of law clause. This, as it did in this case, will help support a bankruptcy petition presented to a Hong Kong Court which relies on the Personal Presence Gateway as the basis for jurisdiction.

Coupled with this, if the debtor has sufficient and real connections with Hong Kong the Court is less likely to exercise its discretion to dismiss the petition.

The Supreme Court Has Spoken: Victory for Trademark Licensees

Earlier today, the Supreme Court finally answered the question of whether a trademark licensee is protected when the trademark owner/licensor files a bankruptcy petition and rejects the trademark license in accordance with section 365 of the Bankruptcy Code.  To cut to the chase, trademark licensees won.

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Back to the future? The return of Crown preference

The proposal to reinstate Crown preference in insolvency has met resistance from all angles; the insolvency profession, turnaround experts, accountants, lawyers and funders. But despite HMRC’s bold statement in its consultation paper that the re-introduction of Crown preference will have little impact on funders, it is clear following a discussion with lenders that it may well have a far wider impact on existing and new business, business rescue and the economy in general than HMRC believes.

The intention to use Crown preference as a means to recover unpaid taxes for the benefit of the public purse fails on many levels. In fact it is likely to result in a far bigger dent to the Treasury’s pocket through loss of tax elsewhere.

The Government issued a consultation on the proposal in February this year (a copy of which can be accessed here) and comments on the paper are invited by 27 May 2019.

Squire Patton Boggs and R3 hosted a discussion group with representatives from across the restructuring and lending community and other key stakeholder groups. With the Government having largely dismissed the impact of the proposals on lenders, the discussion produced lively and interesting debate. Continue Reading

HMRC, preferential treatment and insolvency – uncertain times for funders

This morning Squire Patton Boggs in conjunction with R3 hosted representatives from across the business community to discuss the proposed return of Crown preference in insolvency.

Following the Government announcing in last Autumn’s Budget that HMRC’s preferential status will be restored in part in April 2020, Squire Patton Boggs together with R3 and representatives from creditor bodies, insolvency and restructuring professionals, banks, the funding community, government, and business representative bodies aired their views about the consultation which concludes at the end of this month.  The overwhelming conclusion was that the proposal creates significant uncertainty for funders impacting on existing lending, new business and the UK economy.

We will publish details highlighting the key areas of concern in the coming days.

For further reading please click here to read our previous blog.

Can directors file an out of hours administration appointment?

With the introduction of electronic filing which allows parties to file documents at court 24/7 we consider the recent case of Wright v HMV Ecommerce Limited (2019) in which the court was asked to confirm whether administrators were validly appointed following the directors filing a notice of appointment after the court office was closed.

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Ninth Circuit Gives A Partial Green Light to Cannabis Company Bankruptcies

Earlier today, the Ninth Circuit Court of Appeals issued its long-awaited ruling in the Garvin v. Cook Investments, NW, SPNYW case This opinion is certain to be of great interest to both companies operating in the cannabis space and those attorneys representing them.

In Garvin, the US Trustee appealed confirmation of a plan of reorganization under which one of the debtors leased property to a marijuana grower licensed under Washington law. The US Trustee argued that the plan should not have been confirmed because it was proposed by means forbidden by law in violation of section 1129(a)(3) of the Bankruptcy Code since the lease to the grower violated federal drug law, i.e., the Controlled Substances Act.

The Ninth Circuit rejected the US Trustee’s argument, holding that section 1129(a)(3) forbids confirmation of a plan that is proposed in an unlawful manner, but does not forbid confirmation of a plan that has substantive provisions that depend on illegality. In other words, section 1129(a)(3) requires the court only to look at the proposal of a plan and not the terms of the plan. Because there was nothing in the proposal of the plan at issue that was unlawful, the Ninth Circuit affirmed the orders of the District Court and Bankruptcy Court confirming the plan.

Nonetheless, the Court’s ruling is not a complete victory for the cannabis industry. Courts may still consider whether cannabis companies are engaged in “gross mismanagement” under section 1112(b) of the Bankruptcy Code by virtue of their cannabis-related work. In this case, the US Trustee had waived its argument under section 1112(b). Moreover, the Ninth Circuit made clear that confirmation of a plan does not insulate a debtor from prosecution for criminal activity, even if that criminal activity is part of the plan itself. Thus, while the Garvin opinion provides some comfort to cannabis companies and their insolvency counsel, it does not cure the tension that exists between state law legalizing cannabis and the Controlled Substances Act.

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