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.

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.