The insolvency of the borrower is a standard event of default in facility agreements. As well as covering the borrower's cash flow insolvency, these clauses also often cover other, earlier signs of distress. Two recent cases have seen lenders try to exploit these outer reaches of their insolvency event of default clauses. Hayley Çapani and Adam Pierce explain why these cases are significant for parties negotiating new deals, and for lenders considering their enforcement options on existing deals.

Negotiations with creditors for rescheduling

In Morning Mist Holdings Limited v. Krys (In re Fairfield Sentry Limited), Case No. 11-4376, 2013 WL 1593348 (2d Cir.

In a corporate system based in part on the separation of ownership and control, the relationship between principals and agents is riddled with agency problems: Among them are potential conflicts of interest where agents may abuse their fiduciary position for their own benefit as opposed to the benefit of the principals to whom they are obligated. Delineating the agents' fiduciary duties is thus a central focus of corporate law, and the dereliction of those duties often comes under scrutiny in the bankruptcy context.

The U.S. Court of Appeals for the Third Circuit, in In re Philadelphia Newspapers LLC,1 has ruled that secured creditors do not have a right, as a matter of law, to credit bid their claims when their collateral is sold under a plan of reorganization. The Third Circuit held that secured creditors may be barred from credit bidding where a debtor's reorganization plan provides secured creditors with the "indubitable equivalent" of their secured interest in the assets. The court's ruling follows a similar ruling last year by the U.S.