The appointment of an independent director is a powerful tool for private credit lenders. The appointment is designed to introduce a voice of neutrality and fairness into the board’s decision-making process with the hope and expectation that independence from the controlling shareholder enables the board to drive toward viable value-maximizing strategies. Often times, the independent director is vested with exclusive authority (or veto rights) over a range of significant corporate decisions, including a sale, restructuring and the decision to file a bankruptcy case.

In a recent ruling (NMC Health PLC (in Administration) v Ernst & Young LLP [2024] EWHC 2905 (Comm)), the High Court declined to order disclosure of witness statements and transcripts of interviews conducted by administrators during their initial investigations, citing litigation privilege.

Litigation privilege

One common denominator links nearly all stressed businesses: tight liquidity. After the liquidity hole is identified and sized, the discussion inevitably turns to the question of who will fund the necessary capital to extend the liquidity runway. For a PE-backed business where there is a credible path to recovery, a sponsor, due to its existing equity stake, is often willing to inject additional capital into an underperforming portfolio company.

In a much-anticipated decision, the United States Court of Appeals for the Third Circuit recently held that unsecured noteholders’ claims against a debtor for certain “Applicable Premiums” were the “economic equivalent” to unmatured interest and, therefore, not recoverable under section 502(b)(2) of the Bankruptcy Code.

In March 2015 the major high street retailer British Home Stores (BHS) was acquired for £1 by Retail Acquisitions Limited (RAL), a company owned by Mr Dominic Chappell. Mr Chappell became a director of the BHS entities upon completion of the purchase, together with three other individuals.

What happens to a company at the end of an administration is a question that probably only keeps insolvency anoraks up at night.

There are a limited number of potential options, with the rescue of the company as a going concern being the number one objective to which all administrators aspire. However, more often than not, an administration will end with the company entering liquidation or, where the company has no property to permit a distribution to creditors, the dissolution of the company.

While franchising has typically been a more robust business model than others, it remains susceptible to broader economic and sectoral pressures, as The Body Shop’s recent entry into administration demonstrates.

In the unfortunate event that a franchisor or franchisee becomes insolvent, disruption is inevitable. However, insolvency doesn’t necessarily spell a terminal outcome. In this article we consider some of the key considerations for both franchisors and franchisees.

Handling franchisee insolvency: the franchisor’s approach

As you know from our prior alerts, creditors of borrowers formed as Delaware LLCs (as opposed to corporations) lack standing under Delaware law to sue directors for breaching fiduciary duties even when, to the surprise of many, the LLC is insolvent. See our prior Alert. The disparity of substantive creditor rights depending entirely on corporate form results from two aspects of Delaware law.

The High Court has handed down an important decision confirming that an unrecognised foreign judgment can be used to form the basis of a bankruptcy petition.

In rejecting the bankrupt’s appeal, the court confirmed that a debt arising pursuant to such a judgment is capable of constituting a “debt” for the purposes of section 267 Insolvency Act 1986 (the Act), despite the fact that the underlying judgment had not been the subject of recognition proceedings in England.

Facts

There is a growing trend of bankruptcy courts approving structured dismissals of chapter 11 cases following a successful sale of a debtor’s assets under section 363 of the Bankruptcy Code. A structured dismissal is a cost‑effective way for a debtor to exit chapter 11 and is an alternative to (a) confirming a post‑sale liquidating plan, which is expensive and not always viable, or (b) converting the case to chapter 7, which introduces significant uncertainty and unpredictability with the appointment of a chapter 7 trustee to replace management.