Watershed Ruling in U.S. Rejects OW Bunker’s Maritime Lien Claims

In a watershed decision concerning the scope of maritime liens under the U.S. Commercial Instruments and Maritime Lien Act (“CIMLA”), the District Court for the Southern District of New York recently held that OW Bunker entities did not have valid maritime liens for the supply of bunkers to vessels. In the first decision by a U.S. court to hold that the OW Bunker entities do not have maritime liens under U.S. law, the Court underscored that maritime liens are an extraordinary remedy for suppliers of necessaries to vessels and cannot be assumed to apply in all circumstances. This ruling, together with previous rulings by other courts holding physical suppliers did not have valid maritime liens, may leave no party with a valid maritime lien arising from the OW Bunker collapse and bankruptcies. Without a maritime lien, suppliers of necessaries to vessels do not have a right to arrest. Read more about the new ruling.

Au revoir bailiff notifications for the assignment of receivables

Starting on October 1st , 2016 the French law on receivable acquisition has changed to become simpler. Before, a formal bailiff’s notification was required in order to render a receivable acquisition enforceable towards the debtor of such receivable.

Now a mere notification will achieve the same result. If no special form is imposed upon such notification, we would nonetheless recommend to use a registered letter in order to obtain a proof of delivery. In addition, any party may make the notification, so an agent under a loan agreement or similar arrangement may provide such assignment notification to the debtor, although we would recommend that parties only rely on the agent to make the notification when the agent has agreed to do so under a contract, so that evidence of the notification can be obtained if so required.

Default interest gets washed out of the waterfall

The degree to which certain elements of a recovery right under a contract, including a debt instrument, are assignable or transferable to a third party has been questionable under English law for some time. “Litigation rights” are one example. Many English legal practitioners regard litigation rights as personal rights, and personal rights are by their nature not capable of assignment or transfer. However, given the economic importance many assignees attach to “litigation rights” as a recovery right, such rights are commonly assigned or transferred to assignees “to the extent that they are capable of being or permitted to be assigned or transferred.” In this manner, the effectiveness of the assignment of any such any right is reserved. In the latest Waterfall IIC litigation, another element of a recovery right, default interest, may now be added to the list of items the ability of which to assign or transfer is questionable under English law.

On 5 October 2016, Mr Justice Hildyard handed down the judgment in the latest Waterfall IIC litigation. This case considered the entitlement of counterparties to default interest, as described in the 1992 and 2002 ISDA Master Agreement (ISDA), in particular covering the interpretation of the phrase ‘cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount’.

Of particular note is the ruling on the meaning of ‘relevant payee’. It is a common occurrence, and indeed was for numerous claims against LBIE, that counterparties to an ISDA assign their claims to default interest pursuant to the express right set out in clause 7 of the ISDA to third party purchasers. Thus, it would typically be considered to be the third party purchaser that has the interest in the claim against the defaulting party. However, Mr Justice Hildyard ruled that it was the original contractual counterparty, and not the third party purchaser, that was the ‘relevant payee’ for the purpose of assessing the cost of funding the relevant amount. This restriction on the right of transfer is to protect against unknown credit risks and that purpose is undermined if the ‘relevant payee’ is an unknown assignee of the original counterparty. Further, following the principles set down in Snell’s Equity 33rd ed. at 3-027, ‘an assignee cannot recover more from the debtor than the assignor would have. The purpose of the principle is to prevent the assignment from prejudicing the debtor. This would happen if, for example, he had to pay damages to the assignee that he would not have had to pay to the assignor if the assignment had not taken place’. To rule otherwise would pose a foreseeable risk of the third party assignee claiming a greater amount than the original counterparty would have claimed.

In light of this ruling, consideration must now be given by third party purchasers that have purchased, or had assigned to them, default interest claims pursuant to the rights set out in clause 7 of an ISDA. Further, it is unclear how this ruling will affect equivalent rights of assignment that arise under similar agreements – such application will likely only become clear when new cases are brought before the courts.

While this decision should be borne in mind when counterparties are considering the use of clause 7 of an ISDA, it is subject to appeal which may reinforce or overrule the application of all or some of Mr Justice Hildyard’s decision.

Reed Smith Prepares Enforceability Opinion for IECA New Master Netting Agreement

On October 7, 2016, Reed Smith assisted the International Energy Credit Association (“IECA”)  in preparing an enforceability opinion for the release its Master Netting Agreement (the “MNA”) under both English and U.S. law.1 The MNA is billed as a state-of-the-art solution designed to manage the termination, close-out, and netting of both physical and financial transactions, including in the bankruptcy context. These legal opinions allow parties to the IECA MNA to be confident that their exposure on covered transactions can be viewed on a net, rather than a gross, basis, thereby reducing credit risk and potentially conserving working capital.

Benefits to users of the new MNA include its ease of use, support by legal enforceability opinions under both English and U.S. law, flexibility of use under bespoke and traditional master trading agreements, and its intended use with a variety of energy-related commodities, metals, freight, and emissions and other environmental products.

Market participants that are party to multiple trading agreements with a single counterparty should review the MNA and consider its applicability where the importance of netting exposures is a priority under covered transactions.

  1. The Master Netting Agreement is available for download from the IECA’s website, http://www.ieca.net/education-resources/master-netting-agreement.

Court of Appeal considers the treatment of contingent assets in balance sheet test

Evans v Jones [2016] EWCA Civ 660

Executive Summary

The Court of Appeal recently considered an appeal from the liquidators of a property development company which went into creditors’ voluntary liquidation. The company had made an unlawful dividend to its shareholders and the Court of Appeal considered whether the unlawful dividend should be treated as an asset of the company (being “something other than a dividend”) for the purposes of considering whether the company was insolvent at the “relevant time” subsequent preferences were given. Continue Reading

UAE Bankruptcy law

Currently in the UAE, laws related to insolvency are unclear. Companies face harsh penalties in a bankruptcy scenario, and individuals can face criminal sanctions and penal sentences. However, a new bankruptcy law drawing from international best practice is expected to come into force in early 2017, in the wake of low oil prices since 2015. With the implementation of the new law, the UAE government seeks to create a robust legal insolvency framework, within which all businesses can operate and parties can be sufficiently protected.

Under the proposed new law, a number of options (including financial restructuring) will be available to insolvent companies with the aim of identifying ways to prevent bankruptcy. According to local news reporting, the law will apply to companies established under the commercial companies law, companies that are partly or fully owned by the federal or the local government, and also companies and institutions established in free zones that are not governed by existing bankruptcy laws. The proposed new law will not apply to companies in the UAE already governed by bankruptcy provisions, which include, for example, companies in the Dubai International Finance Centre (DIFC) and the Abu Dhabi Global Market (ADGM). These are two free zones which have their own insolvency regime.

It is believed that the law will particularly assist owners of small and medium sized companies in the UAE, who have recently faced challenging economic conditions. More generally, it should also provide comfort to those doing business in the UAE, as well as prospective investors. The law is expected to be published in the official gazette in the coming weeks.

A lifeboat with conditions: new guidance from the PPF

The Pension Protection Fund (“PPF”) has updated its approach to employer restructuring guidance and its general guidance for restructuring and insolvency professionals. These documents set out certain criteria that should be met when making proposals to the PPF in respect of a sponsoring employer suffering an insolvency event.

1. The PPF Approach to Employer Restructuring:

The PPF states that it will only take part in a restructuring if the below principles are met. Such principles are designed to ensure the pension scheme is in a significantly better position than it would be in through a normal insolvency process. There are seven principles that are applied when considering any entity, irrespective of the type of restructure or rescue. In summary, these are:

1) Insolvency must be inevitable;
2) The pension scheme will receive money or assets which are significantly greater than it would otherwise receive through normal insolvency;
3) What is offered to the pension scheme is fair in comparison to what other creditors and shareholders would receive;
4) The PPF will receive at least 10 per cent equity in the restructured company for the scheme if future shareholders are not currently involved or 33 per cent if the future shareholders are involved;
5) The pension scheme would not be better off it the Pensions Regulator issued a contribution notice of financial support direction;
6) Where there is a refinancing, bank fees are reasonable;
7) The party seeking to restructure pays the costs incurred by the PPF and the trustees.

2. General Guidance for Restructuring and Insolvency Professionals:

The overriding objective in dealing with pension scheme members, transferred into the PPF, is to ensure that the right amount is paid to the right person at the right time.
This general guidance sets out the criteria restructuring practitioners should incorporate in any proposals made to the PPF in respect of an insolvent pension scheme employer. The guidance further works to provide information on how IPs should interact with the PPF during the assessment process. During this assessment period, the role of creditor of the employer (on behalf of the pension scheme trustees) passes to the PPF in relation to the money due to the pension scheme; the rights and powers of the trustees to represent the pension scheme as a creditor generally cease during this period. In practice, the assessment period will typically last between a year and two years, although this will vary depending on the complexity off the financial situation being reviewed.

The PPF will only assume responsibility for a pension scheme where:
1) A qualifying insolvency event has occurred in relation to an eligible pension scheme;
2) A pension scheme has not been rescued;
3) There has not been a withdrawal event; and
4) The valuation of the pension scheme shows that the assets of the pension scheme are below the amount required to fund the PPF level of protected liabilities.

Where these conditions are not met, the PPF will cease to be involved with the pension scheme and the creditor rights will pass back to the trustees.
For further information, please consult the detailed guidance, accessible here.

Troubled Waters: The Raging Storm over Safe Harbors

A pair of recent decisions adds more fuel to the debate over forum shopping by debtors.  This time the issue involves application of the Bankruptcy Code’s safe-harbor provision in section 546(e).  Conflicting interpretations by the courts in several circuits are undermining the certainty that was intended to protect financial markets and creating jurisprudence that varies with geography.     Read the full Client Alert.

 

Court decides to ‘wait and see’ in its refusal to grant an administration order

Rowntree Ventures Ltd v Oak Property Partners Ltd [2016] EWHC 1523 (Ch)

Executive Summary

The High Court recently re-affirmed the discretionary nature of its right to grant an administration order. In this case, the court refused to grant an administration order even when it determined that the companies were insolvent and the statutory purpose of administration would likely be achieved if the order was granted. On reviewing the evidence before it, the court exercised its commercial judgment and considered it to be pre-mature to grant an administration order. Continue Reading

Second Circuit Raises a Caution Flag for Sales Free-and-Clear of Claims

The power of a bankruptcy court to authorize the sale of assets “free-and-clear” of liens and any other interests is a powerful tool that is used to realize value from distressed businesses.  Indeed, purchasers will occasionally insist that sellers file a chapter 11 case in order to “cleanse the assets” by conducting their sale under Bankruptcy Code § 363(b). But how far does this power reach?  Can bankruptcy be used to protect the purchaser from potential successor liability claims?  A recent decision from the United States Court of Appeals for the Second Circuit avoided answering the first question and gave a nuanced answer to the second.

Background

In a decision emanating from the government sponsored Chapter 11 case of General Motors, the Second Circuit held that a sale under section 363(b) could not shield the purchaser from liability to a known category of claimants that had not been given actual notice of the proposed sale. In re Motors Liquidation Company, No. 15-2844 (2d Cir. July 13, 2016).  In doing so, the Second Circuit reversed a decision by the Bankruptcy Court for the Southern District of New York enforcing the free-and-clear provision of a sale order to enjoin ignition switch defect claims against General Motors Corporation’s (“Old GM”) successor (“New GM”).

In June 2009, as part of a federal government rescue plan for the automobile industry, Old GM commenced a Chapter 11 case and immediately filed a motion to sell its assets to New GM free-and-clear under section 363 of the Bankruptcy Code. The Bankruptcy Court ordered Old GM to give notice of the proposed sale, requiring direct mail notice to numerous interested parties, including “all parties who are known to have asserted any lien, claim, encumbrance, or interest in or on, the to-be-sold assets.”  It also required publication notice.  Despite knowing about ignition switch defects and the possibility of future claims arising from the defects, Old GM did not provide direct mail notice to vehicle owners. To the extent that vehicle owners had actual notice, it came by way of the publication notice.  Shortly thereafter, the Bankruptcy Court approved the sale and entered an order (“Sale Order”) authorizing the sale with the requested free-and-clear provision.

Several years later, in February 2014, New GM began recalling cars due to the ignition switch defect. The recall was followed by dozens of class actions against New GM asserting successor liability claims and seeking damages.  Commencing in April 2014, New GM and several of the plaintiffs filed motions with the Bankruptcy Court seeking, respectively, enforcement of, or a determination that the Bankruptcy Court lacked jurisdiction to enforce, the Sale Order.   In each case, New GM argued that because of the free-and-clear provision in the Sale Order, the ignition switch claims could not be asserted against New GM.

In deciding these motions, the Bankruptcy Court found that the claims were known to, or reasonably ascertainable by, Old GM prior to the sale and therefore the plaintiffs had been entitled to actual notice, as opposed to mere publication notice. Nevertheless, the Bankruptcy Court concluded that — with the exception of claims relating to New GM’s post-sale failure to disclose the defect — the plaintiffs had not been prejudiced by the lack of proper notice.  As a result, New GM could not be sued for ignition switch claims that otherwise could have been brought against Old GM. The only surviving claims would be claims arising from New GM’s wrongful conduct after the sale. Continue Reading

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