When Financial Stress Turns to Distress–Restructuring Tools to Avoid Disaster

Parts 1 and 2: Chapter 11 Checklist and What Else Is in the Toolbox

Introduction

A recent decision from the United States District Court for the Southern District of New York (the District Court) in the bankruptcy cases of Sears Holdings Corp. may loom large in a day and age when shopping mall operators are seeking creative alternatives to the traditional, retail-oriented anchor-store business model.

The Grand Court of the Cayman Islands (the Court) recently ruled in favour of Primeo Fund (in official liquidation) (Primeo) in its ongoing representative proceedings with the Additional Liquidator of Herald Fund SPC (in official liquidation) (Herald).

On 4 June 2015 the Cayman Islands Grand Court ruled in favour of Primeo Fund (Primeo), in the ongoing Representative Proceedings between Primeo and Herald Fund SPC (Herald). The Court had to construe section 37(7)(a) of the Companies Law. Although the Court's detailed reasons are still awaited, it is clear from the Court's decision that section 37(7)(a) does not apply to redeeming investors whose shares have been redeemed prior to the commencement of the liquidation.

Strike off is the procedure of removing a company from the Register of Companies (the Register) following which the company will cease to exist.

Under the Companies (Guernsey) Law, 2008 (the Companies Law), a company may be struck off in one of three situations:

1. if the company is defunct;
2. if the company is defaulting; or
3. if the company itself applies to be voluntarily struck off.

Strike off by the Registrar of Companies

The Registrar of Companies (the Registrar) has the power pursuant to the Companies (Guernsey) Law, 2008 (the Companies Law) to strike off companies which are either defunct or defaulting.

Given the commonality in today’s marketplace of complex corporate capital structures that employ multiple layers of secured debt, existing and potential creditors need to be increasingly aware of the rights and limitations provided for in subordination or intercreditor agreements. These agreements are often entered into between the existing lender or debt holder and a new lender. They often restrict the actions of subordinated lenders upon the debtor’s filing for bankruptcy protection, including denying their right to vote on the debtor’s plan of reorganization.

In a recent decision¹, the United States Bankruptcy Court for the Southern District of New York found the standard for sealing under § 107 of the Bankruptcy Code was not met and declined to seal a settlement agreement, despite requests from the Chapter 7 trustee (the "Trustee") and the counterparties to the settlement agreement to do so. Confidentiality was an essential condition of the settlement. In addition, the United States trustee supported the motion to seal, arguing that the standard for sealing had been met.

Congress enacted the ordinary course of business defense to the avoidance of preferential transfers to protect recurring, customary transactions in order to encourage the continuation of business with and the extension of credit to a financially distressed customer.