Recent headlines have starkly illuminated the headwinds facing health care providers struggling to recover from a host of financial pressures. Many providers have resorted to filing for bankruptcy protection as a way, among other things, to right-size their balance sheets or effect a sale of their assets or businesses.
The ability of a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to assume, assume and assign, or reject executory contracts and unexpired leases is an important tool designed to promote a "fresh start" for debtors and to maximize the value of the bankruptcy estate for the benefit of all stakeholders. Bankruptcy courts generally apply a deferential "business judgment" standard to the decision of a trustee or DIP to assume or reject an executory contract or an unexpired lease.
One difficulty encountered by creditors and trustees in bankruptcy is the use of one or more aliases by a bankrupt. Whether it is an innocent use of a nickname or an attempt to conceal one's identity, the use of an alias can often create problems for creditors seeking to pursue debts and for trustees seeking to recover assets held by a bankrupt.
How does it happen?
Courts sometimes disagree over whether provisions in a borrower's organizational documents designed to prevent the borrower from filing for bankruptcy are enforceable as a matter of federal public policy or applicable state law. There has been a handful of court rulings addressing this issue in recent years, with mixed results.
As concerns about illegal phoenix activity continue to mount, it is worth remembering that the Corporations Act gives liquidators and provisional liquidators a powerful remedy to search and seize property or books of the company if it appears to the Court that the conduct of the liquidation is being prevented or delayed.
When a person is declared a bankrupt, certain liberties are taken away from that person. One restriction includes a prohibition against travelling overseas unless the approval has been given by the bankrupt's trustee in bankruptcy. This issue was recently considered by the Federal Court in Moltoni v Macks as Trustee of the Bankrupt Estate of Moltoni (No 2) [2020] FCA 792, which involved the Federal Court's review of the trustee's initial refusal of an application by a bankrupt, Mr Moltoni, to travel to and reside in the United Kingdom.
What makes a contract an unprofitable contract which can be disclaimed by a trustee in bankruptcy without the leave of the Court under section 133(5A) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act)? Can a litigation funding agreement be considered an unprofitable contract when the agreement provides for a significant funder's premium or charge of 80% (85% in the case of an appeal)?
In a recent decision, the Federal Court of Australia declined to annul a bankruptcy in circumstances where the bankrupt claimed the proceedings should have been adjourned given his incarceration and solvency at the time the order was made: Mehajer v Weston in his Capacity as Trustee of the Bankrupt Estate of Salim Mehajer [2019] FCA 1713. The judgment is useful in reiterating what factors the Court will consider when deciding whether to order an annulment under section 153B(1) of the Bankruptcy Act 1966 (Cth) (the Act).
Generally, once a company enters into liquidation, litigation against that company cannot be commenced or be continued without the leave of the Court (Corporations Act 2001, s 471B). However, occasionally a liquidator may cause a company to commence or defend litigation after the commencement of the winding up. What happens if the company in liquidation is unsuccessful in that litigation and is subject to an adverse cost order? How will such an adverse cost order rank amongst other competing creditors?
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