Deal structure matters, particularly in bankruptcy. The Third Circuit recently ruled that a creditor’s right to future royalty payments in a non-executory contract could be discharged in the counterparty-debtor’s bankruptcy. The decision highlights the importance of properly structuring M&A, earn-out, and royalty-based transactions to ensure creditors receive the benefit of their bargain — even (or especially) if their counterparty later encounters financial distress.

Background

Dispute Resolution analysis: An application by a Russian trustee in bankruptcy has succeeded in striking out some parts of a defence to a claim that a share transfer was a sham or a transaction defrauding creditors. Other parts of the defence were not, however struck out.

Kireeva (as trustee and bankruptcy manager of Bedzhamov) v Zolotova and Basel Properties Limited [2024] EWHC 552 (Ch)

What are the practical implications of this case?

Dispute Resolution analysis: An application by the former administrators of a company for an increase in their remuneration has been dismissed, despite the Court concluding that they had standing to bring the application itself.

Frost and another v The Good Box Co Labs Limited and others [2024] EWHC 422 (Ch)

What are the practical implications of this case?

In early February, a Delaware bankruptcy judge set new precedent by granting a creditors’ committee derivative standing to pursue breach of fiduciary duty claims against a Delaware LLC’s members and officers. At least three prior Delaware Bankruptcy Court decisions had held that creditors were barred from pursuing such derivative claims by operation of Delaware state law, specifically under the Delaware Limited Liability Company Act (the “DLLCA”).

A Massachusetts Bankruptcy Court’s recent appellate decision in Blumsack v. Harrington (In re Blumsack) leaves the door open for those employed in the cannabis industry to seek bankruptcy relief where certain conditions are met.

It is a rare occasion that one can be assured with certainty that, if they file a motion with a bankruptcy court, it will be granted. But, in the Third Circuit, that is exactly what will happen if a creditor or other party in interest moves for an examiner to be appointed under Section 1104(c) of the Bankruptcy Code. Once considered to be within the discretion of a bankruptcy court “as is appropriate,” the appointment of an examiner is now guaranteed if the statutory predicates are fulfilled according to the Third Circuit Court of Appeals.

Dispute Resolution analysis: In November 2023, Mr Justice Miles sanctioned restructuring plans under section 901F of the Companies Act 2006 in respect of two companies within the Atento group. The plans had significant creditor support, did not involve any cross-claim cram down and achieved a demonstrably better outcome for creditors than the alternative, a group-wide liquidation.

Re Atento UK Ltd [2023] EWHC 3076 (Ch))

What are the practical implications of this case?

In a recent case, the Victorian Supreme Court said that an accountant ‘would know well that a statutory demand involves strict time frames for response and potentially very significant consequences for a company’. The accountant failed to take appropriate steps to inform the company of the statutory demand.

The statutory demand process

If a company does not comply with a statutory demand within 21 days of service, it is deemed to be insolvent and the creditor may proceed to wind up the company.

A recent court decision considers the legal principles and sufficiency of evidence when a court-appointed receiver seeks approval of their remuneration.

A court-appointed receiver needs court approval for the payment of their remuneration. The receiver has the onus of establishing the reasonableness of the work performed and of the remuneration sought.

Dispute Resolution analysis: In a second appeal, the Court of Appeal has upheld the decisions of two lower Courts in concluding that due to the conduct of a bankrupt and his insolvency, his bankruptcy should not (on an exercise of discretion) be annulled, despite concluding that the bankruptcy order should not have been made.

Khan v Singh-Sall and another [2023] EWHC 1119 (Ch)

What are the practical implications of this case?