When a debtor files for bankruptcy, it’s axiomatic that all creditors, wherever located, must immediately cease their efforts to collect on debts owed to them by that debtor, right? Not necessarily so, says the United States Court of Appeals for the Seventh Circuit, insofar as those creditors and their collateral are located outside of the United States.
The Bankruptcy Protector
Envision a scenario in which you purchased a right of first refusal for a parcel of real estate. That right, as bargained for, would let you purchase the parcel if it was put up for sale by matching any competing bidder’s offer. As a diligent prospective purchaser, you would naturally record that right of first refusal in the appropriate land records. So far so good.
A person in possession of a debtor’s property upon a bankruptcy filing now has more guidance from the Supreme Court as to the effect of the automatic stay. In City of Chicago, Illinois v. Fulton, 141 S. Ct. 585 (2021), handed down on January 14 of 2021, the Court was faced with the issue of whether the City of Chicago (the “City”) was liable for violation of the automatic stay for refusing to return vehicles it impounded pre-petition. Issuing a narrow decision under Section 362(a)(3) of the Bankruptcy Code, the Court held that it was not.
The Grand Court of the Cayman Islands (the "Grand Court") recently considered the statutory moratorium against commencing proceedings against a Cayman Islands company which has been placed into liquidation. In the case of BDO Cayman Ltd. and BDO Trinity Ltd. v Ardent Harmony Fund Inc.
Rumours that a company is in the zone of insolvency may create a race to the assets, with potential creditors or interested parties commencing proceedings in an attempt to secure payment from the company before its assets are fully dissipated or tied up in the insolvency process. This can destroy the collective value in the enterprise or scupper a restructuring and result in significant duplicative costs.