In this article Leon Breakey explains some of the issues that can arise when an English bankruptcy order is issued and the debtor owns property in Scotland.

When an English debtor with an interest in heritable property in Scotland is made bankrupt under English law, a crucial question arises: how can the English bankruptcy order be enforced in Scotland? This article explores this issue, highlighting the potential risks for trustees and the solution provided by Section 426 of the Insolvency Act 1986.

The Issue: English Bankruptcy Orders and Scottish Property

A recent decision of the Commercial Sheriff Court at Perth in the case of Priority Construction UK Limited v Advanced Material Processing Limited, reported at [2024] SC PER 48, has confirmed the position in relation to the proper basis for liquidation petitions to be brought against debtor companies. The moral of this story is that liquidation petitions should not be used to try to recover a validly disputed debt - something that all creditors and practitioners should be alert to.

The facts

In most bankruptcies, the company decides to file for relief. In involuntary bankruptcies, creditors force the company into bankruptcy. Involuntary petitions are an extreme remedy, and therefore the requirements and standards to meet for filing such petitions are strictly construed and applied. If creditors meet the requirements under the Bankruptcy Code for filing an involuntary petition, it can serve as a powerful tool to use against a debtor.

Key Issues

Unlike traditional Chapter 11 bankruptcy cases, sometimes called "free fall" cases, where a debtor files for bankruptcy and determines its path out of bankruptcy over the course of the following months, some debtors enter into bankruptcy with a plan entirely (or mostly) drafted, with an emergence strategy already completed. In these cases, debtors enter bankruptcy with pre-packaged plans or pre-negotiated plans (sometimes called pre-arranged plans) ready to file on or just after their petition date.

In a bankruptcy case, a preference action1 is often asserted pursuant to Section 547 of the Bankruptcy Code against a creditor to claw back funds paid to the creditor in the 90 days prior to the bankruptcy. While the most common defenses to a preference action are the ordinary course of business defense2, the new value defense3, and the contemporaneous exchange for new value defense4, there are other defenses that a savvy creditor should consider to reduce or even eliminate preference liability.

Key Issues

Sales pursuant to Section 363 of the Bankruptcy Code have become commonplace in bankruptcy cases as a mechanism to liquidate a debtor's assets and maximize value for creditors. Selling the debtor's assets to a third party provides a new go-forward business partner for the debtor's vendors and customers, and likely provides continuity of jobs for the debtor's former employees. Due to the benefits associated with a sale of the debtor's assets, creditors or parties-in-interest may be under the misconception that they need not pay attention to the sale process.

Pursuant to Section 341 of Title 11 of the U.S. Code (the Bankruptcy Code), the U.S. Trustee is required to convene and preside over a meeting of the creditors of a debtor (the 341 Meeting). The purpose of the 341 Meeting is to examine the debtor's financial position and to confirm facts stated by the debtor in the bankruptcy filing. While creditors are not required to attend the 341 Meeting, creditors have an opportunity to examine the debtor and ask questions related to the debtor's financials and the bankruptcy case.

A disclosure statement and a plan are critical documents in Chapter 11 cases, representing the culmination of a case and a roadmap of the debtor's path forward. A Chapter 11 plan can be either a plan of reorganization, pursuant to which a debtor emerges from bankruptcy as a new, reorganized entity, or a plan of liquidation, pursuant to which a debtor's remaining assets are liquidated and the proceeds are distributed to creditors. Plans of liquidation are common in Chapter 11 cases, where the debtor sells substantially all of its assets.

Preferences are a common issue in bankruptcy proceedings. A general overview of preferences in bankruptcy can be found here.

The Bankruptcy Code provides several affirmative defenses to assist creditors in mitigating or eliminating their preference exposure. We have previously addressed the new value defense2 and the ordinary course of business defense3. This article will briefly address another common affirmative defense: the contemporaneous exchange defense.

Serving as the stalking horse bidder in a Section 363 sale1 can provide a buyer with financial and legal protections, as well as better position the buyer to ultimately acquire the debtor's assets.

General Overview