In April 2010, we reported on the decision of the Ontario Superior Court of Justice (the “Superior Court”) in In the Matter of the Proposal of C.I.F. Furniture Limited (“CIF”) which dealt with the question of circular priorities. This decision was recently upheld by the Ontario Court of Appeal (“Court of Appeal”). The Court of Appeal’s decision will offer some comfort to lenders where intercreditor agreements exist between some but not all of the secured lenders of a borrower.

In the Ontario case of Re Xerium Technologies Inc., the Superior Court of Justice (the “Ontario Court”) was asked to recognize an order made by the U.S. Bankruptcy Court for the District of Delaware (the “U.S. Court”) approving a prepackaged plan of reorganization (the “Plan”) of the debtors, Xerium Technologies Inc. and its subsidiaries (collectively, “Xerium”), made under Chapter 11 of the United States Code (the “U.S. Bankruptcy Code”).

In our last Financial Services Flash, we emphasized the issue that lenders need to be aware of specific restrictions that may apply to the liquidation of inventory over which they have security. This Flash considers the general notion that a lender needs to be cognizant of some unique and sometimes unexpected liabilities of the borrower which may take priority over such lender’s security. There are, of course, many ‘priority payables’ which are commonly known, whether they relate to unpaid wages, certain sales taxes, pension plan obligations, etc.

Introduction

On 24 November 2009, ASIC released Consultation Paper 124 which provides guidance for directors on their duty to prevent insolvent trading which is imposed by section 588G of the Corporations Act 2001.

The economic climate over the past two years has seen a growing number of corporate insolvencies. There is also evidence that directors, and particularly directors of small to medium size enterprises, do not fully understand their duty to prevent insolvent trading.

Before 1993, the question of whether a creditor of a corporation being wound up had received an unfair preference from that corporation was determined under section 122 of the Bankruptcy Act 1966 (Cth). In 1993, a new Part 5.7B was inserted into the Corporations Act to deal with voidable transactions such as unfair preferences. Since then two lines of divergent judicial authority have developed:

Kookmin Bank v Rainy Sky

We have received a number of urgent enquiries about the outcome of the Kookmin Bank case, which was recently decided by the Court of Appeal, in London. The judgment was issued at the end of May 2010 and held, in effect, that refund guarantees -- relating to advance payments of about US$46 million -- were unenforceable by the Buyers to whom the guarantees had been issued. Given the importance of refund guarantees to our shipping and banking clients, we are issuing this summary of the judgment and its general significance.

Summary

The briefing provides an overview of the reorganisation plan introduced by the new Greek Bankruptcy Code. Its purpose is to set out the more important mechanics of the reorganisation plan and examine its more important ramifications within the bankruptcy process.

The new Greek Bankruptcy Code

The European Commission has published a paper on its study covering pre-insolvency, early intervention, reorganisation and liquidation.

On 25 March 2010, HM Treasury published a consultation paper which proposes improvements to the protection and payment of benefits for policyholders of insurers in financial difficulty. In particular, the proposals address certain gaps in the regime for insurers in administration in contrast to the regime applied in liquidation.