What section 380A means for administrators

We recently achieved a significant milestone by obtaining permission from the Royal Court of Guernsey for Joint Administrators to make a distribution to unsecured creditors during an administration. This marks the first order granted under section 380A of the Companies (Guernsey) Law, 2008.

As we know, the past two years have been a difficult time for many businesses and with such continuing uneconomic uncertainly, it seems there is precious little light at the end of the tunnel yet.

In this article, we consider the potential claims that might be levied at directors of an insolvent company and matters of which directors should be aware.

"Zone of insolvency”

The Royal Court of Guernsey has recently considered an application under the Companies (Guernsey) Law 2008 (the Law) for the Court to approve a contract for the sale of the assets of a Guernsey company in compulsory liquidation. The decision provides helpful guidance for liquidators and creditors as to the issues the Court will take into account in deciding whether to grant such approval.

Background

In Shameeka Ien v. TransCare Corp., et al. (In re TransCareCorp.), Case No. 16-10407, Adv. P. No. 16-01033 (Bankr. S.D.N.Y. May 7, 2020) [D.I. 157], the Bankruptcy Court for the Southern District of New York recently refused to dismiss WARN Act claims against Patriarch Partners, LLC, private equity firm (“PE Firm“), and its owner, Lynn Tilton (“PE Owner“), resulting from the staggered chapter 7 bankruptcies of several portfolio companies, TransCare Corporation and its affiliates (collectively, the “Debtors“).

Joining three other bankruptcy courts, Judge Thuma of the District of New Mexico recently held that the rules issued by the Small Business Administration (“SBA“) that restrict bankrupt entities from participating in the Paycheck Protection Program (“PPP“) violated the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, P.L. 115-136 (the “CARES Act”), as well as section 525(a) of the Bankruptcy Code.

The Southern District of New York recently reminded us in In re Firestar Diamond, Inc., et al., Case No. 18-10509 (Bankr. S.D.N.Y. April 22, 2019) (SHL) [Dkt. No. 1482] that equitable principles in bankruptcy often do not match those outside of bankruptcy. Indeed, bankruptcy decisions often place emphasis on equality of treatment amongst all creditors and are less concerned with inequities to individual creditors.

Introduction

The impact of Covid-19 on businesses has already been significant, with several high-profile businesses in the UK and the Channel Islands ceasing to trade or entering administration. The sudden drop in custom as a result of restrictions imposed to protect the community from Covid-19 (the Restrictions) have resulted in businesses experiencing severe, if not crippling, cash flow issues.

In Autumn 2018 the States of Guernsey proposed changes to Guernsey’s corporate insolvency regime to come into effect in 2019.  On 15 January 2020 the States of Guernsey enacted these changes with the passing of the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020 (the Ordinance).

The Ordinance brings into effect the proposed changes to create a structured, flexible and transparent regime for company insolvency procedures in Guernsey, as is required in a modern jurisdiction.  A summary of the main changes is set out below.

Administration

In Wells Fargo Bank, N.A., f/b/o Jerome Guyant, IRA v. Highland Construction Management Services, L.P. et al., Nos. 18-2450-52 (4th Cir. March 17, 2020), the Fourth Circuit Court of Appeals recently upheld that a borrower’s indirect economic interests in a limited liability company (LLC) were not assigned to a lender under a conveyance in a security agreement assigning mere membership interests, pursuant to Virginia state law.

Facts