As reported in Building earlier this year (4 February) the construction industry experienced the highest number of insolvencies of any UK industry in 2018. Last year saw 2,954 firms become insolvent, an increase of 12% on the previous year and more than in any year since 2013. It is well known that the construction industry is particularly prone to insolvencies and there has been a great deal written about why that is the case and what can be done about it.
It has long been the law that creditors are rarely entitled to contractually prohibit a debtor from filing for bankruptcy, whether such restriction is contained in the debt instruments or in the corporate governance documents. In contrast, governance provisions which condition a bankruptcy filing on the vote or consent of certain equity holders that are unaffiliated with any creditor are frequently enforced. Many equity sponsors, for example, wear two hats: they are both shareholders and lenders to their portfolio companies.
According to the recent case of Sell Your Car With Us Ltd v Sareen [2019] – yes, they are.
Historically the courts have looked dimly on the use of insolvency proceedings as a method of debt collection. For this reason, where an individual or company appears to have the means to pay a debt but apparently refuses to do so, the courts have implied that the only proper legal recourse is through litigation. In this case, the judge explained why she considers this submission to have been taken too far.
Background
In French v. Linn Energy, L.L.C. (In re Linn Energy, L.L.C.), the United States Court of Appeals for the Fifth Circuit addressed the scope of Bankruptcy Code Section 510(b), settling on an expansive reading of the Section, holding that a claim for “deemed dividends” should be subordinated.
In the past five years, insolvency rates in the construction industry have increased more quickly than in other industries across the UK. This article considers the common causes of construction insolvency and how to protect your position if insolvency occurs.
Recent trends
On August 23, 2019, President Trump signed into law the “Small Business Reorganization Act of 2019.” The primary effect of the “SBRA” is the creation of a subchapter to Chapter 11 for small business debtors, i.e. those with no more than $2,725,625 in secured and unsecured debts combined, to address the unique issues faced by those companies in the bankruptcy process.
Transfers and transactions up to ten years old may be scrutinized, unwound and recovered by a trustee, the bankruptcy court sitting in Massachusetts recently held in the NECCO (think chalky wafer candy) bankruptcy case. The ruling, in a case of first impression in Massachusetts, expands the reach back period from the typical four-year period for fraudulent transfer recovery, so long as the IRS is a creditor in the case.
This past May, in a highly-anticipated decision, the Supreme Court held in Mission Product Holdings, Inc. v. Tempnology, LLC that a debtor’s rejection of an executory contract under Section 365 of the Bankruptcy Code has the same effect as a breach of contract outside of bankruptcy.
Over the last two years, much of the healthcare world has been watching the government’s prosecution of Insys Therapeutics for its sales and marketing practices related to its Subsys spray. Subsys is powerful and highly addictive fentanyl spray (administered under the tongue) that was approved by the FDA in 2012 for the treatment of persistent breakthrough pain in adult cancer patients who were already receiving, and tolerant to, regular opioid therapy.
Insolvency may seem an unlikely scenario for your pension plan's employer today and for the foreseeable future but the Pension Protection Fund (PPF) has recently published guidance recommending that defined benefit pension plan trustees should make contingency plans for employer insolvency "as with any sensible business continuity or disaster recovery planning".