Accountability is the major theme of the recent government consultation regarding ‘Insolvency and Corporate Governance’, which follows high profile failures such as BHS and Carillion. The consultation contains proposals relating to four main areas as set out below.

Sales of businesses in distress

The proposal represents a significant extension of the current duties owed by directors. Under the proposal, a director of a parent company may be held liable for losses following a sale of a subsidiary if:

The High Court has held that two director-shareholders of a company who were unsuccessfully prosecuted for fraud could not claim back the drop in the value of their shares when the company’s business failed.

What happened?

The Department for Business, Energy and Industrial Strategy (BEIS) has published a consultation on insolvency and corporate governance.

The consultation is aimed primarily at improving corporate governance in firms that are in or approaching insolvency. However, it also puts forward proposals for improving the wider framework of corporate governance.

The key proposals from the consultation are set out below.

Date

6/22/2017

Action

Testimony of Keith Noreika, Acting Comptroller of the Currency, before the Senate Committee on Banking, Housing, and Urban Affairs.

Key Provisions

The Comptroller made a series of recommendations for regulatory reforms directed at promoting economic growth and reducing regulatory burden. He stated that the OCC’s recommendations are consistent with the Treasury Report.

Key recommendations include:

The Bankruptcy Code allows trustees, as well as debtors-in-possession and in some circumstances creditors’ committees, to set aside and recover certain transfers for the benefit of the bankruptcy estate. The purpose of the avoidance powers is to maximize funds available for creditors and to ensure equality of distribution among creditors’ claims. The avoidance powers are not without bounds, however, as the Code sets forth a number of exceptions — most notably, the so-called “securities contract safe harbor” under Section 546(e) of the Bankruptcy Code.

The Delaware Bankruptcy Court recently dismissed a Chapter 11 bankruptcy case pending before it and recognized, under Chapter 15 of the Bankruptcy Code, the debtor’s bankruptcy proceeding in Belgium. Exelco NV (“Exelco”), a Belgian diamond distributor, owed KBC Bank NV (“KBC”) approximately US$14 million. KBC’s debt was secured by a pledge on essentially all of Exelco’s assets. Exelco’s debt was also guaranteed by an affiliated company and certain individuals. When Exelco defaulted on its debt obligations, KBC commenced a sort of involuntary insolvency proceeding in Belgium.

In recent months certain restructuring processes have gained quite some notoriety in press headlines in connection with a number of UK businesses. This article provides secured lenders with a brief recap on the key points to note in relation to CVAs (Company Voluntary Arrangements) and what Liquidation means in the context of Carillion.

Retail CVAs

The decision in Mezhprom v Pugachev, which was handed down on 11 October 2017, has potentially wide-ranging ramifications for trustees and the private client industry more generally.

Although the judgment is a first instance decision and may be appealed, the approach taken by the judge in this case to the analysis of powers conferred on protectors is an important development.

In trotting a path out of Chapter 11, debtors in most cases will need to engage various key stakeholders, some of whom are not entitled to a distribution in the bankruptcy. As a form of remuneration, non-debtors may insist on receiving a release of liability - not only from claims belonging to the debtor, but also the claims of third-parties - in exchange for their support and contribution to the case.

Chapter 15 of the Bankruptcy Code provides a framework through which representatives of foreign insolvency proceedings can commence ancillary U.S. proceedings and obtain relief from U.S. courts in aid of foreign restructurings. For a foreign insolvency proceeding to be recognized by a U.S. bankruptcy court under Chapter 15, the proceeding must, among other things, involve a “debtor” whose assets or affairs are subject to the control of the foreign court.