In the latest chapter of more than a decade of contentious litigation surrounding the 2007 leveraged buyout ("LBO") and ensuing bankruptcy of media conglomerate Tribune Co. ("Tribune"), the U.S. Court of Appeals for the Third Circuit affirmed lower court rulings that Tribune's 2012 chapter 11 plan did not unfairly discriminate against senior noteholders who contended that their distributions were reduced because the plan improperly failed to strictly enforce pre-bankruptcy subordination agreements. In In re Tribune Co., 972 F.3d 228 (3d Cir.
A basic tenet of bankruptcy law, premised on the legal separateness of a debtor prior to filing for bankruptcy and the estate created upon a bankruptcy filing, is that prepetition debts are generally treated differently than debts incurred by the estate, which are generally treated as priority administrative expenses. However, this seemingly straightforward principle is sometimes difficult to apply in cases where a debt technically "arose" or "was incurred" prepetition, but does not become payable until sometime during the bankruptcy case.
In Hafen v. Adams (In re Hafen), 616 B.R. 570 (B.A.P. 10th Cir. 2020), a bankruptcy appellate panel from the Tenth Circuit ("BAP") held that the bankruptcy court is the only court with subject-matter jurisdiction to decide whether a claim or cause of action is property of a debtors' bankruptcy estate. As a consequence, the BAP held that the bankruptcy court abused its discretion by permitting a state court to determine whether creditors had "standing" to sue third-party recipients of allegedly fraudulent transfers.
Postpetition financing provided by pre-bankruptcy shareholders or other "insiders" is not uncommon in chapter 11 cases as a way to fund a plan of reorganization and allow old shareholders to retain an ownership interest in the reorganized entity. The practice is typically sanctioned by bankruptcy courts under an exception—the "new value" exception—to the "absolute priority rule," which prohibits shareholders and junior creditors from receiving any distribution under a plan on account of their interests or claims unless senior creditors are paid in full or agree otherwise.
In Short
The Situation: With effect from 1 December 2020, Her Majesty's Revenue and Customs ("HMRC") ranks ahead of floating charge holders and unsecured creditors with respect to recovering certain pre-insolvency taxes from an insolvent business (Crown preference). Directors can also now incur personal liability for the unpaid taxes of an insolvent company where they are involved in tax avoidance, evasion or phoenixism.
- The hospitality industry has been fighting back against the Government's lockdown measures due to the lack of financial support, but there is absolutely no doubt that the worst is yet to come as having weathered lockdown 2.0, Government policy now looks set to deny many operators the ability to trade properly in the run up to Christmas, with hard hit businesses set to miss out on circa £7.8bn of trade.
- The majority of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 may have been extended, but directors remain mindful of their statutory duti
The UK government has published draft regulations providing that sales by administrators to connected persons will be subject to compulsory scrutiny.
Company Voluntary Arrangements (CVAs) are an insolvency procedure established under the Insolvency Act 1986 which allow a struggling company to reach a compromise on debts due with a sufficient majority of creditors, thereby avoiding a formal insolvency. They have primarily been used only by large high street retailers and are not often considered, particularly in Scotland, a realistic option for small and medium companies (SMEs).
In the face of the COVID-19 pandemic and with a new model available, we believe it is time for a rethink.
Almost 20 years ago the Government decided to abolish Crown Preference bringing it into step with other western jurisdictions such as Germany and Australia. It was considered at the time "inequitable" to elevate the public purse above ordinary unsecured creditors for whom the impact was potentially far greater.
Astonishingly, in the midst of a global pandemic and a looming "No Deal" Brexit, absent a dramatic last minute "U-turn" by the Government (let's face it, it wouldn’t be the first !), Crown Preference will return with effect from December 1st 2020.