Lehman Court Changes Course on Flip Provisions and Financial Safe Harbors

A Flip on the Flip Clause: New York bankruptcy judge dismisses claims to recover approximately $1 billion that had been distributed to noteholders following commencement of the Lehman Brothers chapter 11 proceedings in September 2008.

To continue reading more about the re-examining the controversial decision of Lehman Bros. Special Fin. Inc. v. BNY Corp. Trustee Servs. Ltd., 422 B.R. 407 (Bankr. S.D.N.Y. 2010) (“BNY”), please click here.

 

German Federal Court Ruling Important for Future Contractual Netting Arrangements

In a decision of 9 June 2016, the German Federal Court of Justice (Bundesgerichtshof, “BGH”) has ruled that the determination of the close-out amount in a netting provision based on the German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte or DRV) is not legally effective in the event of insolvency to the extent that it deviates from section 104 of the German Insolvency Code.

The reasoning of the decision has now been published and provides a number of answers to questions which are important for future contractual netting arrangements.

To read more about the decision, please click here.

Concerned about a going concern? New standards on accounting standards

Following on from our recent blog post on Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch), in which Mr Justice Snowdon discussed the issues around wrongful trading under section 214 of the Insolvency Act 1986 and the quantum of liability that may be placed on directors who continue to trade when they knew, or ought to have known, that the company was insolvent, the Financial Reporting Council (“FRC”) has issued new guidance on the going concern basis of accounting and reporting on solvency and liquidity risks.

This new guidance, issued on 18 April 2016, replaces the FRC’s ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ and ‘An Update for Directors of Companies that Adopt the Financial Reporting Standard for Smaller Entities (FRSSE): Going Concern and Financial Reporting.’

The guidance is aimed at directors of companies that do not apply, mandatorily or otherwise, the UK Corporate Governance Code and is designed to summarise important aspects of law, accounting and auditing standards, together with existing FRC guidance, relating to reporting in a company’s financial statements on a going concern basis and also taking into consideration ‘material’ financial uncertainties, including solvency and liquidity risks, that should be disclosed.

While the need to provide a true, fair and honest view of the circumstances of a company are necessary, the FRC recognises that there are often realistic alternatives to liquidation or cessation of a business and, therefore, as a general rule, companies should file accounts on a going concern basis, except where the directors determine that, as at the date of the financial statements, the company should be placed into liquidation or cease trading, with no realistic alternatives. This is a high threshold and a rule that should not be departed from lightly.
The guidance sets out various factors that should be used to determine which disclosures are necessary to be made in the company’s financial statements. These include:

• Identification of risks and uncertainties, including those relating to solvency and liquidity and other potential threats to the company’s ability to continue in operation;
• Determining which of the identified risks and uncertainties are ‘principal’ and thereby require disclosure in the strategic report;
• Considering whether there are material uncertainties that require disclosure in accordance with accounting standards;
• In extreme circumstances, considering whether it is inappropriate to adopt the going concern basis of accounting; and
• Considering whether disclosures additional to those explicitly required by law, regulation or accounting standards are necessary for the financial statements to provide a true and fair view.

The guidance focuses on such disclosures that are material. The FRC states that information is material if its omission or misrepresentation could be reasonably expected to influence the economic decisions of users. Further detail is provided in FRS 102, which states that ‘information is material, and therefore has relevance, if its omission or misstatement, individually or collectively, could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.’

It is important to assess the materiality of disclosures fully and properly as the inclusion of immaterial information can obscure key messages and impair the desired clarity and openness provided in an annual report.

The guidance published is just that – all assessments and disclosures should be proportionate to the size, complexity and particular circumstances of the company.

For the full FRC Guidance, click here.

Ralls Builders Limited Clarification

In February 2016, Mr Justice Snowden handed down his judgment in the High Court proceedings concerning Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch). This matter concerned an application by the liquidators of Ralls Builders Limited (in liquidation) (the company) for a declaration regarding the alleged wrongful trading of the company by its directors, under section 214 of the Insolvency Act 1986 (the Act).

The detailed and considered judgment sets out the historical case law regarding wrongful trading, and addresses some of the uncertainty in this area.

Mr Justice Snowden considered, as is usual, the dates from which it was alleged that the directors knew, or ought to have known, that there was no reasonable prospect of avoiding an insolvent liquidation (the usual threshold for a finding of wrongful trading). The directors were found to have been in a position whereby they knew (or ought to have known) by 31 August 2010 that there was no such reasonable prospect. The company went into administration on 13 October 2010, and was since placed into liquidation.

Read more at our client alert here.

Modeling the Model Law – what not to do

OGX Petroleo E Gas S.A., Re [2016] EWHC 25 (Ch)

In a recent judgment, Mr Justice Snowden sounded a cautionary note for applicants seeking recognition of a foreign insolvency proceeding under the UNCITRAL Model Law, advising applicants to make full and frank disclosure to the court in relation to the effect that such recognition might have on third parties. Continue Reading

To submit or not to submit – questions of jurisdiction

This appeal arose out of the litigation fallout from the Bernard Madoff Ponzi scheme. In the appeal, the Privy Council considered whether, at common law, an agreement to submit to jurisdiction must be express or whether it could be implied or inferred. The Board of the Privy Council found that an agreement to submit to jurisdiction need not be express but could be implied or inferred. In this instance the appellant was able to show that it had not agreed to submit to the jurisdiction of the New York bankruptcy court, whether expressly or by implication. Continue Reading

COMI and get it: international approaches to cross-border insolvencies

In our increasingly global world, cross-border insolvencies have become relatively commonplace. Lehman Brothers and Nortel Networks are just two of the matters where parallel proceedings in multiple jurisdictions were necessary in order to effectively administer the debtors’ estates. Neither the Regulation nor the Model Law seek to address or harmonise the substantive differences among insolvency regimes in different jurisdictions, but both are similar in that they are based on the premise that a debtor’s “centre of main interest” (COMI) is the proper jurisdiction for its primary insolvency case or “main proceeding”.

Click here to read the full article, COMI and get it: international approaches to cross-border insolvencies, first published in Corporate Rescue and Insolvency, Vol. 8, No. 6, December 2015.

January Newsletter

Reed Smith’s global Commercial Restructuring & Bankruptcy team have recently published the January issue of their quarterly newsletter. The newsletter provides a detailed review of some of the most important legal developments in the sector.  The January issue includes the following:

In this Issue:

  • Deed-In-Lieu, or Not
  • Ninth Circuit Reverses Lower Courts, Finds Substantially Completed Plan Is Not Equitably Moot
  • The Inconsequential Value Exception to the Section 1111(b) Election: Analyzing the When and  How
  • Chapter 7 Trustee’s Claim of Breach of Fiduciary Duty Based on Failure to Comply with the WARN Act Survives Motion to Dismiss
  • Section 303 Requirements Not Enough – Involuntary Chapter 7 Petitioner Must Also Demonstrate Good Faith in Filing
  • Regardless of Claim Priority, State Department of Revenue Entitled to Adequate Protection Thanks to Bulk Sales Act
  • Separate Agreements Comprising One Unitary Contract Must Be Assumed or Rejected Cum Onere
  • Issues of Material Fact Preclude Summary Judgment on Whether Lender Impliedly Assumed Liability to Return Membership Deposits
  • Sale of Substantially All of Debtor’s Assets Cannot Be Approved in a Final Cash Collateral Order
  • Counsel’s Corner: News From Reed Smith

Download the .PDF to learn more:  Commercial Restructuring & Bankruptcy Alert – January 2016

Collective redundancies – can directors of financially distressed companies breathe a sigh of relief?

In October we issued an article on the criminal charges that had been brought against the former directors of City Link Limited (in administration) for their failure to notify the Secretary of State of proposals for collective redundancies under section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992. This section applies where an employer is proposing to dismiss 100 or more employees as redundant within a period of 90 days or less.  In any such case notification has to be given before any notices of dismissal are given and at least 45 days before the first dismissal takes effect. Although the provisions under which the directors were prosecuted had been on the statute book for many years but they had not tended to be used but in this case a prosecution had been recommended by the Insolvency Service.

Following a two-day trial earlier this month, the former directors were acquitted of those charges.  Continue Reading

Extra-territorial effect of section 236 – the debate continues

Re Omni Trustees Ltd (In Liquidation) [2015] EWHC 2697 (Ch)

In an interesting judgment, the High Court in Manchester has decided not to follow the ruling from earlier this year of Mr Justice Richards in Re MF Global (UK) Ltd[1], deciding instead that section 236 of the Insolvency Act 1986 (the “Act”) does indeed have extra-territorial effect. The decision in MF Global was covered in our blog in August (click here for article) but the judgement of Judge Hodge in Omni Trustees Ltd (in liquidation) illustrates that the question continues to be open for further debate. Continue Reading

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