The Alberta Court of Appeal recently ruled on a case1 dealing with the priority of claims to the bank accounts of a petroleum operator which had gone into receivership, where the operatorship was governed by the 1990 CAPL Operating Procedure. The operator had failed to pay to the non-operators revenues of approximately $300,000, having only $58,000 left in the commingled account. The Operating Procedure imposes a trust on the production revenues but also expressly allows intermingling of these funds with the operator's general funds.

In the current economic climate, there are a number of key issues facing borrowers in the event of lender insolvency or default.

Committed facilities/term loans

Provided they are fully drawn and the borrower is not in breach itself, the impact in the short term may not be too severe.

The defendant was the sole director of a company which went into liquidation. Almost six years after his appointment as liquidator, the claimant commenced proceedings seeking an order pursuant to s 212 Insolvency Act 1986 that the defendant contribute to the company’s assets on the basis that he had acted in breach of duty of care and skill and in breach of fiduciary duty owed to the company, which had resulted in the company’s deficiencies.

The claimant and defendant both lent money to a company (Y) under a credit facility. Y’s financial position deteriorated, the parties appointed investigating accountants and put Y into “workout”. Following an assignment of Y’s indebtedness to the claimant to the defendant’s subsidiary, the claimant brought proceedings against the defendant for breach of an anti-claim clause in the assignment.

Although this case is about a trustee in bankruptcy’s fight to realise his interest in a property by virtue of a debtor’s bankruptcy, the facts (though extreme) are not untypical of a finance company’s position when a hirer refuses to return goods to it despite the fact the court has ordered the hirer to do so.

In this case Mr Canty was made bankrupt in relation to a relatively small debt and he never accepted the position. There followed a number of appeals and challenges over the following years in which he attempted to reopen and relitigate earlier proceedings.

The claimant obtained a judgment against the defendant for breach of a guarantee. The defendant entered into an IVA with his creditors, which included his liability to the claimant. The defendant paid the judgment sum to the claimant, but not the interest awarded on it. The claimant contended that the award of interest was a post-IVA claim, and threatened to bankrupt the defendant which would lead to a termination of the IVA. The defendant applied for a stay of execution of the interest part of the judgment, on the ground that it was within the IVA.

After a lengthy consultation period, the Pre-Action Protocol for Debt Claims (PAPDC) has now been finalised and will come into force on 1 October 2017. This protocol will apply to lenders who are seeking payment of a debt from an individual/ sole trader, as a debtor or guarantor. Now is the time to update your systems and procedures to accommodate the new protocol requirements.

What is required?

The Australian government is working to significantly reform Australia’s current insolvency laws by mid-2017.

The reforms are intended to achieve greater likelihood of business preservation by introducing the flexibility to achieve real turnaround of businesses in crisis.

The proposed changes include:

A district court judgment dismissing a $500 million fraudulent transfer and breach of fiduciary duty suit against Campbell Soup Co., the former parent of Vlasic Foods International (“VFI” or “the debtor”), was affirmed by the United States Court of Appeals for the Third Circuit, on March 30, 2007. VFB, LLC v. Campbell Soup Co., 2007 WL 942360 (3d Cir. 3/30/07).

A lender’s (“Lender”) derivative breach of fiduciary duty claims on behalf of Chapter 7 guarantor-Debtors cannot be time-barred because of Lender’s knowledge of the “[d]efendants’ conduct,” held the U.S. District Court for the District of Delaware on June 22, 2016. In re AMC Investors, LLC, 2016 U.S. Dist. LEXIS 80861, *16 (Del. June 22, 2016).