Borrower beware: in times of distress, your credit documents may give your secured lenders an opportunity to “flip” control of your board
Distress happens, even at companies that once appeared financially solid. When it does, the company, its board (which may be controlled by a sponsor in a public or private equity scenario), and its lenders often enter into restructuring discussions in search of a consensual path forward, typically under the terms of a forbearance agreement.
The UK government has updated the 30-year-old special administration regime for water companies making it possible to rescue water companies.
The new legislation (plus two draft instruments) aims to modernise water company insolvency legislation in the face of the growing challenges in the industry including higher operating costs, claims over sewage pollution and significant debt burden (Thames Water owes £18.3 billion).
New special administration regime
The English High Court has re-affirmed its jurisdiction where a disputed petition debt arises from a contract with an exclusive jurisdiction clause (EJC) in favour of a foreign court.
Background
The October 2023 insolvency statistics show that company insolvencies have risen by 17.6% from October 2022 to October 2023 and by 56.7% since pre-pandemic levels in October 2019. Total insolvencies have reached the highest levels since 2009.
The English court has (for the first time) given guidance on the long-established practice of substituting a creditor as petitioner in a winding up petition and hearing argument about the creditor’s standing later.
Background
In March 2021, Citibank petitioned to wind up Liberty Commodities (LCL). The petition was supported by two creditors, White Oak and NPS. Citibank settled with LCL and applied to dismiss the petition. The supporters applied to be substituted.
Federal appellate courts have traditionally applied a "person aggrieved" standard to determine whether a party has standing to appeal a bankruptcy court order or judgment. However, this standard, which requires a direct, adverse, and financial impact on a potential appellant, is derived from a precursor to the Bankruptcy Code and does not appear in the existing statute.
The court-fashioned doctrine of "equitable mootness" has frequently been applied to bar appeals of bankruptcy court orders under circumstances where reversal or modification of an order could jeopardize, for example, the implementation of a negotiated chapter 11 plan or related agreements and upset the expectations of third parties who have relied on the order.
On June 6, 2023, the U.S. Bankruptcy Court for the Southern District of Texas confirmed the chapter 11 plan of bedding manufacturer Serta Simmons Bedding, LLC and its affiliates (collectively, "Serta"). In confirming Serta's plan, the court held that a 2020 "uptier," or "position enhancement," transaction (the "2020 Transaction") whereby Serta issued new debt secured by a priming lien on its assets and purchased its existing debt from participating lenders at a discount with a portion of the proceeds did not violate the terms of Serta's 2016 credit agreement.
Section 546(e) of the Bankruptcy Code's "safe harbor" preventing avoidance in bankruptcy of certain securities, commodity, or forward-contract payments has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the application of the provision, including application to financial institutions, its preemptive scope, and its application to non-publicly traded securities.
Bankruptcy trustees and chapter 11 debtors-in-possession ("DIPs") frequently seek to avoid fraudulent transfers and obligations under section 544(b) of the Bankruptcy Code and state fraudulent transfer or other applicable nonbankruptcy laws because the statutory "look-back" period for avoidance under many nonbankruptcy laws exceeds the two-year period governing avoidance actions under section 548.