On May 2, 2023, the US District Court for the Southern District of Indiana reversed a bankruptcy court’s ruling that read limitations into the application of Bankruptcy Code Section 546(e)’s safe harbor to a stock purchase transaction. Specifically, the District Court relied on the plain language of Section 546 in determining that a chapter 7 trustee could not avoid the transfer of $24.9 million by the debtor to repay a bridge loan in connection with a financed acquisition of the debtor’s stock two years prior to its bankruptcy filing.

On April 17, 2023, the Fifth Circuit issued an opinion holding that a senior lender who uses economic leverage and exercises its statutory and contractual rights upon a borrower’s default, including the right to credit bid as part of a bankruptcy sale process—despite adverse impact on a junior lender—remains a “good faith” purchaser entitled to the protections under Section 363(m) of the Bankruptcy Code.

Directors resign for many reasons. For example, there may be disagreements among stakeholders about the future course of the company, they may be concerned about the risks associated with financial difficulty/insolvency, or they may just wish to retire.

A bankruptcy court’s recent decision in Bailey Tool & Mfg. Co., et al. v. Republic Bus. Credit (In re Bailey Tool & Mfg. Co.), Adv. No. 16-03025-SGJ (Bankr. N.D. Tex. Dec. 23, 2021) serves as a reminder for lenders that they should avoid certain actions when dealing with distressed borrowers. Specifically, in Bailey, a bankruptcy judge found a lender squarely at fault for its borrower’s bankruptcy and subsequent liquidation, and held the lender liable to the borrower’s bankruptcy estate for various breach of contract, tort, and bankruptcy claims.

Within the past 18 months, two bankruptcy courts have used the same factors, but reached opposite conclusions, about the characterization of two merchant cash advance funding transactions as either a “true sale” or not a “true sale” – and instead, a disguised financing. In doing so, the courts’ decisions confirm the importance of appropriate structuring to achieve true sale treatment.

This is one of a series of articles we at Morton Fraser are producing to guide our clients through the wholesale change proposed in Scots law in relation to security over goods, intellectual property and shares, on the one hand, and invoice finance or the purchase of receivables, on the other. For a general introduction to what the Bill covers, see here.

UK Government introduces a temporary increase to minimum debt level required for a winding up petition

Restrictions have been in place since the start of the pandemic to prevent creditors taking steps to wind up debtor companies. Those restrictions are due to expire on September 30, 2021. To lessen the risk of October seeing a mass rush by creditors seeking to wind up their debtors, the UK Government has introduced a further temporary measure in connection with liquidation petitions.

On August 16, 2021, the US Court of Appeals for the Fifth Circuit held that an individual guarantor remained liable for more than $58 million in commercial debt, despite the individual’s claims that the lenders induced him to provide the guaranty under duress. See Lockwood International, Inc. v. Wells Fargo, NA, et al., Case No. 20-40324 (5th Cir. Aug. 16, 2021).

In this two part article we highlight for directors some of the main ways in which the general protection of limited liability does not apply or can be lost.

Part one of this article discusses those exceptions to the principle of limited liability that arise in insolvency or distress situations. Part two deals with the provisions that have more general applicability.

Breach of duties

Limited liability is one of the fundamental concepts in our understanding of company law. Even people who know very little about the working of limited companies may know that directors and shareholders are not liable for the debts of their companies. For the last 160 years, the protection of limited liability has been a key factor in economic growth and commercial activity as it has allowed entrepreneurs to speculate and take risks that they might not have been willing to do if the risk of personal liability overshadowed their decision-making.