In its recent decision in Belmont Park Investments PTY Ltd v BNY Corporate trustee Services Ltd and Lehman Brothers Special Financing Inc,[1] the Supreme Court ruled in favour of investors, clarifying the limits of the anti-deprivation rule and holding that a commercially sensible transaction entered into in good faith and without the intention to evade insolvency laws should not infringe the anti-deprivation rule.

Background

The Insolvency Act 1986 makes provision for, amongst other things, bankruptcy and Debt Relief Orders.

When a person is made bankrupt, his property vests in the trustee in bankruptcy. Some items, however, are excluded from the estate, including any assured or secure tenancy (s283). Once a bankruptcy order has been made, no creditor in respect of a debt provable in the bankruptcy may have any remedy against the property of the bankrupt 'in respect of that debt' (s285(3)(a)).

MF Global, one of the world's leading broker/dealer firms entered into insolvency proceedings in both the US and the UK on 31 October 2011. US entities MF Global Holdings Ltd. and MF Global Finance USA Inc. filed voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. Also on 31 October, the US Securities Investor Protection Corporation ("SIPC") initiated the liquidation of MF Global, Inc. a jointly registered futures commission merchant and broker-dealer, under the Securities Investor Protection Act ("SIPA").

In the current economic climate, there has been increased interest from clients and their advisers in using offshore companies in cross-border restructurings. The use of offshore companies in restructurings is often driven by tax and structuring advice, where there is a desire to continue the group operating as a going concern and to achieve a favourable outcome for creditors (usually outside of formal insolvency proceedings).

Such companies can offer a number of advantages when used as part of a restructuring plan, including:

HMRC is leading an increasingly tough stance against owners of businesses that have failed to pay their taxes before going bankrupt, says City law firm Wedlake Bell.

Figures from the Insolvency Service reveal that in the last year Bankruptcy Restriction Orders (or equivalent undertakings) were obtained against 443 bankrupts because of neglect of their business - a majority of which were alleged to have consistently failed to pay taxes to HMRC. This was an increase of 21% on last year and concern actions taken against sole traders and partnerships (Year ending March 31).

Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and another [2011] UKSC 38.

The Supreme Court has clarified the extent to which it is possible for a contract to provide for a company or individual to lose assets on insolvency.  

Summary

Well-established rules are unchanged, so landlords can still forfeit leases on insolvency. In other cases, if a transaction is entered into in good faith and for valid commercial reasons, it is likely to be upheld.

The UK Supreme Court, which is the UK's highest court, has handed down its long-awaited decision in Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38, in which the Court considered the validity and enforceability of so-called "flip" clauses under English bankruptcy law.

Structured finance transaction documents have typically included subordination provisions in their post-default waterfalls, effectively changing a swap counterparty’s right to get paid from above that of the noteholders to below that of the noteholders.

The Pensions Regulator announced this week that it will not  pursue action to impose a Financial Support Direction against US company, Chemtura Corporation and members of its group after a funding settlement, involving the payment of expedited contributions to the pension scheme of its UK subsidiary, was reached with the scheme's trustees.

The Pensions Regulator (TPR) has announced that it has withdrawn moral hazard proceedings against Chemtura Manufacturing UK Limited and its US parent, Chemtura Corporation. This follows an agreement being reached by Chemtura with the trustees of the Great Lakes UK Limited Pension Plan (the Plan) over its funding package.