Given the current pressure all businesses face dealing with the effect of Covid-19, it is important that directors understand what their duties are in respect of insolvent companies or companies that are at risk of heading towards insolvency.
In this blog we briefly remind directors what their duties are, the potential claims that could be brought against them in the event of insolvency and how they might arise. To mitigate against these risks it is critically important that directors:
In its recent decision in Rodriguez v. Federal Deposit Insurance Corp., No. 18–1269 (Sup. Ct. Feb. 25, 2020), the Supreme Court held that federal courts may not apply the federal common law “Bob Richards Rule” to determine who owns a tax refund when a parent holding company files a tax return but a subsidiary generated the losses giving rise to the refund. Instead, the court should look to applicable state law.
General Legal Background
The Bottom Line
In this three part blog we highlight three recent court decisions concerning landlord rights and insolvency, which provide cautionary warnings and surprising twists. The questions we consider are:
- Does a company voluntary arrangement (“CVA”) permanently vary the terms of a lease?
- Can a landlord be forced to accept a surrender of a lease?
- What are the consequences of taking money from a rent deposit if the tenant company is in administration?
In part 1 we consider the first question.
The hair salon Regis announced recently that the company has entered administration. The news might not come as a surprise because the chain, prior to the company’s administration, was subject to a company voluntary arrangement (“CVA”) whose validity was challenged by landlords.
The joint administrator of Regis commented: “trading challenges, coupled with the uncertainty caused by the legal challenge, have necessitated the need for an administration appointment”.
Can a CVA bind a landlord in respect of future rents? Is the landlord a creditor in respect of future rent? What about the right to forfeit; can a CVA modify that right? Is compromising rent under a CVA automatically unfair to landlords when other trade creditors are paid in full?
These were some of the points considered by the Court in determining whether the Debenhams’ CVA (which had been challenged by landlords) should fail.
One point of particular interest is whether reducing rents below market value in a CVA is automatically unfair to landlords?
The Bottom Line
In CMH Liquidating Trust v. National Union Fire Insurance Company of Pittsburgh, PA, Case No. 16-cv-14434 (E.D. Mich. 2019) (“CMH”), the District Court for the Eastern District of Michigan held that an insurance policy that was renewed post-petition was still an executory contract, and thus, a provision denying coverage for acts leading to bankruptcy was a prohibited ipso facto clause.
What Happened?
The Bottom Line
In In re PT Bakrie Telecom Tbk, Ch. 11 Case No. 18-10200 (SHL) (Bankr. S.D.N.Y. May 30, 2019), the Bankruptcy Court for the Southern District of New York denied a noteholder group’s request for summary judgment seeking denial of recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code because the debtor had sufficient property in the United States, the appointment of the foreign representative was effective and the Indonesian proceeding was a collective one.
What Happened?
The Bottom Line
In Gavin/Solmonese LLC, Liquidation Trustee for the Citadel Creditors’ Grantor Trust, successor to Citadel Watford City Disposal Partners, L.P., et al. v. Citadel Energy Partners, LLC, et al., Ch. 11 Case No. 15-11323; Adv. Proc. No. 17-50024 (Bankr. D. Del. May 2, 2019) (“Citadel”), the Bankruptcy Court for the District of Delaware held that creditors of insolvent limited partnerships and limited liability companies do not have standing to sue derivatively on behalf of the company under applicable state law.
There has been an influx of company voluntary arrangements (“CVAs”) in recent times, as retailers fight to rescue their UK high street stores. Retail CVAs accounts for the highest proportion of CVAs at 19%. As more and more CVAs are approved, we consider some of the recent trends seen in the retail sector which showcase the flexibility of a CVA and reflect the demands of landlords whose support is vital to the continuing viability of a business.
What is a CVA?