Deciding the parameters of directors' personal liability for actions, or omissions, when a company continues to trade while it is or near insolvent requires a balance to be struck between allowing directors latitude to try to rescue the company and protecting the company's creditors.

Recently, in In re Moon Group Inc., a bankruptcy court said no, but the district court, which has agreed to review the decision on an interlocutory appeal, seems far less sure.

A recent decision of the New York Court of Appeals, Sutton v. Pilevsky held that federal bankruptcy law does not preempt state law tortious interference claims against non-debtors who participated in a scheme that caused a debtor—in this case a bankruptcy remote special purpose entity—to breach contractual obligations intended to ensure that the entity remains a Special Purpose Entity (SPE) and to facilitate the lenders’ enforcement of remedies upon a future bankruptcy filing, if any.

A recent decision of the New York Court of Appeals, Sutton v. Pilevsky held that federal bankruptcy law does not preempt state law tortious interference claims against non-debtors who participated in a scheme that caused a debtor—in this case a bankruptcy remote special purpose entity—to breach contractual obligations intended to ensure that the entity remains a Special Purpose Entity (SPE) and to facilitate the lenders’ enforcement of remedies upon a future bankruptcy filing, if any.

On September 29, 2020, the United States House of Representatives Committee on the Judiciary advanced a Democrat-backed bill to the full chamber that seeks to address perceived shortcomings in the Bankruptcy Code’s protections for employee and retiree benefits and to curtail the use of bonuses and special compensation arrangements for executives in bankruptcy cases.

The Supreme Court has recently released a decision on directors' duties, which should serve as a timely reminder to all directors of their duties under the Companies Act in circumstances of insolvency. Continuing to trade while insolvent will be a breach of your duties, even if you believe that overall creditors may be better off or the extent of losses will be reduced. It is however welcome confirmation for liquidators that the Courts will enforce the provisions of the Companies Act based on the clear wording of these sections.

Recently, in In re Tribune Company, the Third Circuit affirmed that the Bankruptcy Code means exactly what it says and that the enforcement of subordination agreements can be abridged when cramming down confirmation of a chapter 11 plan over a rejecting class entitled to the benefit of the subordination agreement, so long as doing so does not “unfairly discriminate” against the rejecting class (and the other requirements for a cramdown are satisfied).

Introduction

The concept of winding up does not exclusively apply to insolvent companies. Solvent companies can also be wound up, on the initiation of the company’s directors and shareholders (for example, as part of a corporate reconstruction or to close down non-operating or redundant entities). 

An overview of the two key procedures to effect the dissolution of a solvent Australian company, being Members’ Voluntary Liquidation and Deregistration, is set out below. 

In brief

Even with the fiscal stimulus and other measures taken by the Federal and State governments in Australia, corporate insolvencies are likely to increase in coming months.

Under Australia's insolvency regimes, a distressed company may be subject to voluntary administration, creditor's voluntary winding up or court ordered winding up (collectively, an external administration). Each of these processes raises different issues for the commencement and continuation of court and arbitration proceedings.

In summary

In our previous alert we discussed how Justice Markovic in the Federal Court of Australia had granted the administrators of retailer Colette Group relief from personal liability for rent in respect of 93 stores.