Introduction
In a recent article we considered the nature and extent of directors’ duties to take into account the interests of a company’s creditors when a company is in financial difficulty. A recent High Court decision (Mitchell & Krys v Al Jaber & ors [2023] EWHC 364 (Ch)) considered the issue of directors’ duties in the subsequent situation where a company has entered liquidation. Whilst the relevant company was based in the British Virgin Islands (BVI), the case includes analysis of the position in English law.
Introduction:
On 5 October 2022, the Supreme Court delivered a landmark judgement in BTI 2014 LLC v Sequana SA [2022]. The decision is the first from the Supreme Court to address when, and in what circumstances, company directors owe a duty to consider the interests of the company’s creditors (‘’the creditor duty’’).
It has long been the law that creditors are rarely entitled to contractually prohibit a debtor from filing for bankruptcy, whether such restriction is contained in the debt instruments or in the corporate governance documents. In contrast, governance provisions which condition a bankruptcy filing on the vote or consent of certain equity holders that are unaffiliated with any creditor are frequently enforced. Many equity sponsors, for example, wear two hats: they are both shareholders and lenders to their portfolio companies.
In Nortel Networks, Inc., Case No. 09-0138(KG), Doc. No. 18001 (March 8, 2017), the Delaware Bankruptcy Court ruled on the objections of two noteholders who asked the Court to disallow more than $4.4 million of the $8.1 million of the fees sought by counsel to their indenture trustee. Given the detailed rulings announced by the Court, the decision may establish a number of guidelines by which future fee requests made by an indenture trustee’s professionals will be measured.
Matters Handled by the UCC
“The question that he frames in all but words
Is what to make of a diminished thing.”
Robert Frost, “The Oven Bird”
In a significant expansion of the potential risk for distressed claims traders, the Delaware bankruptcy court has recently ruled1 that traders who engage in insider trading may have their claims subordinated to equity, and that traders who amass claims sufficient to block a plan of reorganization owe fiduciary duties to all other creditors and shareholders during plan negotiations.