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.

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.


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

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.