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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Montana Court Refuses to Shift Venue of “Related to” CFPB Police Action to Texas Bankruptcy Court

On February 6, 2018, the District Court for the District of Montana refused a debtor’s request to change the venue of a post-petition “related to” police/regulatory action commenced by a federal agency in district court.  The decision will have important implications on how “related to” litigation is treated for venue purposes—especially in the context of police and regulatory actions.

The debtor, Think Finance, LLC, provided critical collection services to certain Native American Tribes engaged in consumer lending.  The company’s collection actions had raised the attention of the Consumer Financial Protection Bureau (CFPB).  Think Finance filed a Chapter 11 bankruptcy petition in the Northern District of Texas after mediation between the CFPB and Think Finance had broken down.  Three weeks after Think Finance filed bankruptcy, the CFPB filed a complaint against Think Finance in the District of Montana, alleging that the company, acting through tribal lenders, collected loan payments that customers did not owe because the loans themselves were void ab initio as being in violation of state law.  The CFPB further alleged that Think Finance acted knowingly and recklessly in assisting the tribal lenders and employed abusive collections practices. Continue Reading

Zombie High Street: Retail Casualties

Zombie Rising UpThere was a magical place that’s now in administration. It’s called ‘Toys R Us’, Toys R Us’, Toys R Us’.

This week has seen another two major retail casualties with the aforementioned much-loved toy shop and well-known electrical retailer Maplin going into administration within minutes of each other. As predicted in one of our recent blogs (‘We wish you a profitable Christmas’), retailers should hold on for what looks to be a rough ride this coming year. Continue Reading

Is the restaurant trade “dining out”?

Sorry We're ClosedJamie Oliver’s two flagship restaurants have hit the headlines this week, with the upmarket steak restaurant Barbecoa in London’s Piccadilly closing. This comes shortly after last month’s announcement that Jamie’s Italian was closing 12 of its 37 restaurants, following the 6 sites that closed in January 2017.

The Guardian reported that the number of UK restaurants “going under” jumped by a fifth in 2017 and it appears that 2018’s tough market will be just as relentless.

Jamie’s Italian has been reported as attributing the closures to a ‘tough market’ and that ‘post-Brexit, the pressures and unknowns have made it even harder’. With a large amount of ingredients being imported from the EU and the weak pound it is hardly surprising that the restaurant industry is suffering.

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Retention of title – Unpaid seller v the asset based lender

Financial SecurityThere are many issues that can hinder the collection of book debts and insolvency (of either the creditor or the debtor) is usually the catalyst for most them. Following an insolvency, those attempting to collect book debts are often faced with a number of reasons as to why a debtor can’t or won’t pay, including the set-off / contra arrangements, product warranty concerns, defective or non-delivery of goods or services and last, but not least, retention of title (“RoT”) clauses.

For financiers who have taken an assignment of such book debts (i.e. a factor or invoice discounter) or provided finance for the purchase of goods for onward sales, RoT clauses in its client’s supply chain can cause particular concern given a debtor is unlikely to pay for goods where it is not clear they will obtain good title or who they should pay to obtain good title. To understand the challenges the financier faces in such circumstances, it is helpful to briefly review the types of RoT clauses that are commonly used, the enforceability of them and the risks to the financier where valid RoT claims bite.

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German Court rejects the “bow wave theory” (“Bugwellentheorie”) in test for company illiquidity

Boat crashing into a waveUnder German law, there are strict legal obligations for the managing directors of an insolvent company to file for insolvency. Failure to comply exposes a managing director to civil and criminal liability. It is therefore important for managing directors to know how to test whether their company is insolvent. One of the legal reasons for insolvency is illiquidity and the second senate of the German Federal Civil Court (“BGH”) has, in a decision dated 19 December 2017 (II ZR 88/16), clarified a question regarding the illiquidity test. Continue Reading

Parent guarantees in the insolvency of a German subsidiary – claw back risks

Sign "Bundesgerichtshof"

A recent ruling of the German Federal Civil Court (Bundesgerichtshof (“BGH”)) is a reminder of the risks which shareholders of a German company can face in an insolvency of their German subsidiary.

Under the German Insolvency Code (“InsO”), claims for repayment of a loan granted by a shareholder who holds more than 10% of the shares in the debtor are subordinated and rank behind the insolvency claims of unsecured creditors (Sections 39 para. 1 no. 5, para. 5 InsO). Furthermore, pursuant to Section 135 para. 1 InsO, if the debtor has given the shareholder security for or satisfied such a shareholder loan within the 12 months immediately prior to the filing of insolvency, such security or repayment is subject to challenge by the insolvency administrator. If the challenge is successful, the shareholder will need to return such security or payments to the insolvency estate (Section 143 para. 1 InsO). Continue Reading

Are Trademark Licenses Protected In A Licensor Bankruptcy? The Circuits Are Split.

Certain licensees of intellectual property are expressly given expanded rights when their licensors file bankruptcy.  But what about trademark licensees?  Trademarks are not among the defined categories of “intellectual property” for bankruptcy purposes.  Nonetheless, are trademark licensees otherwise protected in a licensor bankruptcy?  Unfortunately for these licensees, a recent circuit court decision put the brakes on attempts to expand protection to licensees of trademarks.

The question before the First Circuit Court of Appeals in Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), No. 16-9016, was whether a trademark licensee could take advantage of rights granted intellectual property licensees under Section 365(n) of the Bankruptcy Code.  Under Section 365(n), if a debtor rejects an executory contract under which the debtor is a licensor of intellectual property, the licensee may either (a) elect to treat the contract as terminated (i.e., breached), and file a proof of claim for damages flowing from the debtor’s termination of the contract, or (b) retain its rights to use the intellectual property under the contract for the duration of the contract and for any extension periods provided for by the contract.  If it elects to retain its rights to the intellectual property, the licensee must continue to make all royalty payments due under the original term of the contract, and any term extensions that the licensee elects to exercise. The debtor-licensor must, upon written request of the licensee, (i) comply with any contractual requirement to provide the intellectual property to the licensee, and (ii) refrain from interfering with the rights of the licensee to the intellectual property. Continue Reading