In our previous bulletin we discussed the ‘safe harbour’ model in the Government’s suggested reforms to the current insolvency laws.

This bulletin considers another of the focus questions in the Proposal Paper: the voiding of ipso facto clauses relating to insolvency events.

Background

On 29 April 2016, the Federal Government released a Proposals Paper titled ‘Improving bankruptcy and insolvency laws’.

The Government is proposing these reforms to encourage entrepreneurship and investment. It hopes to reduce the stigma and detriment around failed business ventures, while still balancing the need to protect creditors.

The U.S. District Court for the Eastern District of New York recently held that a confirmable Chapter 13 plan cannot both “vest” title to real property and “surrender” that property to a secured lender, and that the secured lender may refuse to accept the vesting in satisfaction of its claim.

Thus, the Court held that a debtor may not force the transfer of title in collateral to a secured creditor in satisfaction of the secured creditor’s claim, without the consent of the secured creditor.

The U.S. Court of Appeals for the Fourth Circuit recently affirmed the dismissal of a borrower’s lawsuit against a bank, holding that the district court correctly found that sale orders entered in a prior bankruptcy case were res judicata and precluded the borrower’s new claims.

A copy of the opinion is available at:  Link to Opinion.

The U.S. Court of Appeals for the Sixth Circuit recently held that a bankruptcy court clearly erred in its finding that a debtor proposed a Chapter 11 plan in good faith, when the secured mortgagee would be paid only in part and very slowly after 10 years with no obligation by the debtor to maintain the building and obtain insurance, while a second class would be paid in full in two payments of $1,200 each over 60 days.

The U.S. Bankruptcy Court for the Southern District of Florida recently denied a mortgagee’s motion to reopen a Chapter 7 case to compel the surrender of real property, due to a five-year delay in filing the motion.

In so ruling, the court agreed with an earlier ruling from the U.S. Bankruptcy Court for the Middle District of Florida (In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014)), distinguishing “surrender” from “foreclosure,” and holding that a creditor cannot use the Bankruptcy Code to circumvent the obligations imposed by state law.

Where a court has ordered the winding-up of a company, a shareholder may be able to have the winding up terminated under section 482 of the Corporations Act 2001.

Relevant factors

The power of the court to terminate a winding-up is discretionary. Relevant factors to be considered, which are not exhaustive, include the following:

If a director can exercise a right of set-off against a company in liquidation for a debt owed to the director or for a liability of the company to the director (which may be unascertained in amount or contingent), it may help to cancel out or significantly reduce the director’s liability to the company for insolvent trading.

Two years ago, in Simon v. FIA Card Services, N.A., the Third Circuit held that alleged violations of the FDCPA resulting from conduct in a bankruptcy case were not precluded by the Bankruptcy Code.

In Allco Funds Management Limited v Trust Co (Re Services) Ltd [2014] NSWSC 1251, an inter-company loan transaction was challenged by a receiver appointed by the secured creditor to one of the companies. Common directors were involved in the transaction. The issue was whether the directors breached their fiduciary duties entitling the company via the receiver to have the transaction set aside.

The background to the case