The UK's bank regulatory and insolvency law structures were unprepared for the global financial crisis. As a result, the UK government's response to intense bank stress in the immediate aftermath of the crunch led to a number of somewhat unsatisfactory ad hoc solutions ranging from nationalisations to encouraging otherwise healthy institutions to take over weaker banks. Generally speaking, there was a criticism, fairly made perhaps, that profits were privatised and losses had been socialised.
Fundamental restructuring of insolvent companies—in any sector— is a fight for survival.
Given the global nature of the industry, it is perhaps no surprise that shipping companies and their advisors have sought appropriate court protection to alleviate creditor pressure and a possible break-up of the business where a consensual restructuring is not possible.
Oregon’s $29 million corporate excise tax claim against the taxpayers’ parent company was held to violate both the Due Process and Commerce Clauses of the U.S. Constitution by the U.S. Bankruptcy Court for the District of Delaware. Oregon claimed that Washington Mutual, Inc. (WMI) was liable for its subsidiaries’ tax because WMI had (as the parent corporation) filed consolidated corporate tax returns on behalf of itself and its subsidiaries and therefore could be held jointly and severally liable for the tax due.
On January 4, 2013, the U.S. District Court for the Northern District of Illinois issued an opinion that strikes a significant blow against the rights of futures customers that might otherwise enjoy the Bankruptcy Code’s safe harbor protections. The opinion, arising out of the Chapter 11 bankruptcy case of Sentinel Management Group, Inc. (Sentinel), fashions a new exception to the safe harbor protections in the event of distributions or redemptions to customers of a failed futures commission merchant (FCM).
The U.S. Court of Appeals for the Third Circuit took a bite out of a bagel store’s bankruptcy petition by holding that sales taxes are non-dischargeable “trust fund” taxes rather than excise taxes. In Re: Michael Calabrese, Jr., No. 11-3793 (3d. Cir. July 20, 2012). After not having enough dough to pay their debts, Don’s What a Bagel, Inc. and its individual owner both filed for bankruptcy protection.
PwC, the administrators in the Lehman Brothers administration in the UK, have made several applications to the Court seeking directions on their approach to the distribution of clients’ money and assets. On 29 February 2012 the Supreme Court gave judgment on issues that are central to the interpretation and application of the rules for the protection of client money made by the Financial Services Authority. The issues raised are ones that have divided judicial opinion.
German Insolvency Law – a Leap Forward
Creditors have often complained that German insolvency law does not give them sufficient influence in insolvency proceedings. On 1 March 2012 new amendments to the German bankruptcy code came into force which go some way towards ameliorating this concern and make a host of changes which should improve German insolvency law to facilitate an insolvency culture which facilitates reorganisation rather than liquidation of assets.
Clarification on the jurisdiction of the English courts to sanction schemes of arrangement for overseas companies
Providing further evidence that schemes of arrangement (“schemes”) are an increasingly useful tool in the restructuring of overseas companies, on 20 January 2012, the High Court sanctioned a scheme proposed by PrimaCom Holding GmbH (“PrimaCom”), a German incorporated company, with its centre of main interests (or “COMI”) in Germany and whose affected creditors were domiciled outside the UK.
On October 31, the MF Global enterprise collapsed into bankruptcy and a number of related insolvency proceedings. Amid allegations of improper commingling of customer accounts and rumors of misbegotten proprietary Eurobond trades, two unregulated entities – MF Global Finance USA Inc. and MF Global Holdings Ltd. (the Unregulated Debtors) – filed voluntary bankruptcy petitions on October 31, 2011. Later the same day, the Securities Investor Protection Corporation filed a complaint in the U.S.
It will be almost Christmas before we know, at least for portfolio companies that can file in the Delaware Bankruptcy Court. The case that will provide guidance is Friendly Ice Cream Corp., where Sun Capital, which is both equity owner and term lender, put Friendly into Chapter 11 on October 5, 2011. It did so after agreeing to a Section 363 purchase agreement with Friendly that would allow a Sun affiliate to buy assets (including desirable lease locations) free and clear by credit bidding outstanding pre-petition term debt owed to Sun.