Many businesses continue to experience unprecedented pressure on their cash flow given, among other things, the continued fall-out from the global pandemic, the war in Ukraine, the cost of living crisis, rising interest rates, the end of cheap debt and the expected global downturn.
To mitigate their exposure to personal liability, it's important that directors of insolvent companies or companies in the zone of insolvency comply with their duties to act in the best interests of the company as a whole. This includes the interests of creditors as a whole.
Background
The Cayman Government has restricted entry to the Island since mid-March and is currently operating a curfew system day and night for residents other than essential workers, with the exception of exercise or essential trips such as to the supermarket or for medical reasons.
On February 5, 2016 the IRS released Chief Counsel Advice Memorandum Number 201606027 (the IRS Memo) concluding that “bad boy guarantees” may cause nonrecourse financing to become, for tax purposes, the sole recourse debt of the guarantor. This can dramatically affect the tax basis and at-risk investment of the borrowing entity’s partners or members. Non-recourse liability generally increases the tax basis and at-risk investment of all parties but recourse liability increases only that of the guarantor.
On August 11, a United States bankruptcy judge denied motions to dismiss the Chapter 11 cases of 21 special purpose entity (“SPE”) subsidiaries (the “Subject Debtors”) of General Growth Properties, Inc. (“GGP”). A final order denying the motions was entered on August 28. The decision raises a number of issues, primarily with respect to the role of independent managers, that are of particular interest to the commercial mortgage-backed securities (“CMBS”) industry.
Lessons from the GGP Cases
The Chapter 11 filings on April 16, 2009 by General Growth Properties, Inc. (“GGP”), GGP Limited Partnership (“GGP LP”) and 166 of their shopping center subsidiaries, many of which were formed as bankruptcy-remote, special purpose entities (“SPEs”), raised concerns for the commercial mortgage-backed securities (“CMBS”) industry.