To encourage vendors and other creditors to continue doing business with financially distressed entities, the Bankruptcy Code includes various defenses to litigation brought by a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") seeking to avoid pre-bankruptcy payments to such entities. One of these defenses shields from avoidance transfers made to pay debts incurred in the ordinary course of business of the debtor and the transferee.
Mitigating risk of loss associated with a bankruptcy filing should be an element of any commercial transaction, especially if it involves a sale or license of intellectual property rights. A ruling recently handed down by the U.S. Court of Appeals for the Third Circuit provides a stark reminder of the consequences of when it is not. In In re Mallinckrodt PLC, 99 F.4th 617 (3d Cir.
Section 546(e) of the Bankruptcy Code's "safe harbor" preventing avoidance in bankruptcy of certain securities, commodity, or forward-contract payments has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the scope of the provision, including its limitation to transactions involving "financial institutions" as transferors or transferees, its preemption of avoidance litigation that could have been commenced by or on behalf of creditors under applicable non-bankruptcy law, and its application to non-public transactions.
A bedrock principle underlying chapter 11 of the Bankruptcy Code is that creditors, shareholders, and other stakeholders should be provided with adequate information to make an informed decision to either accept or reject a chapter 11 plan. For this reason, the Bankruptcy Code provides that any "solicitation" of votes for or against a plan must be preceded or accompanied by stakeholders' receipt of a "disclosure statement" approved by the bankruptcy court explaining the background of the case as well as the key provisions of the chapter 11 plan.
The U.S. Supreme Court handed down three bankruptcy rulings to finish the Term ended in July 2024. The decisions address the validity of nonconsensual third-party releases in chapter 11 plans, the standing of insurance companies to object to "insurance neutral" chapter 11 plans, and the remedy for overpayment of administrative fees in chapter 11 cases to the Office of the U.S. Trustee. We discuss each of them below.
U.S. Supreme Court Bars Nonconsensual Third-Party Releases in Chapter 11 Plans
Courts disagree over whether a foreign bankruptcy case can be recognized under chapter 15 of the Bankruptcy Code if the foreign debtor does not reside or have assets or a place of business in the United States. In 2013, the U.S. Court of Appeals for the Second Circuit staked out its position on this issue in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), ruling that the provision of the Bankruptcy Code requiring U.S. residency, assets, or a place of business applies in chapter 15 cases as well as cases filed under other chapters.
Buying parts of a distressed company may offer great opportunities for buyers. When a company is struggling but not yet insolvent, external financing might dry up and the sale of non-core activities may be a last resort to generate fresh cash.
The Abu Dhabi Global Market (the “ADGM”) courts have recently handed down their decision in NMC Healthcare Limited & Others v Shetty & Others ([2024] ADGMCFI 0007). The decision deals with several important principles in relation to fraudulent/wrongful trading liabilities under ADGM law. Given the ADGM re-domiciliation (or continuation) regime, enabling companies incorporated elsewhere to be redomiciled to ADGM with relative ease, the decision is likely to be of interest beyond the borders of the ADGM.
In the recent decision Sian Participation v Halimeda (Sian), the Judicial Committee of the Privy Council (the Privy Council) held on a BVI appeal that a winding-up petition should not be stayed or dismissed merely because the underlying debt is subject to a generally-worded arbitration agreement.
In the most significant decision of the decade on a matter of U.S. bankruptcy law, the U.S. Supreme Court rendered its highly anticipated decision in Harrington v. Purdue Pharma L.P., 603 U.S. ____ (2024) on June 27, 2024, striking down the non-consensual third party releases that were the cornerstone of Purdue Pharma's Chapter 11 Plan of Reorganization by a vote of 5-4. In doing so, the Court said: