The Bankruptcy Appellate Panel for the Sixth Circuit (BAP) recently held that a mortgagee that held a collateral assignment of rents on property in which the debtor had no equity was not adequately protected by cash collateral orders entered by the bankruptcy court that granted the lender a "replacement lien" on post-petition rents.

In nearly every bankruptcy proceeding there is some constituency that ends up having its claim or interest impaired. Not surprisingly, therefore, these same constituencies would like to avoid that outcome by restricting the debtor’s ability to commence bankruptcy in the first place.

Creditors of insolvent Delaware corporations have recourse against corporate directors and officers whose disloyal or self-dealing conduct reduces the corporation’s assets available for distribution. Delaware courts have held that directors and officers of insolvent corporations owe fiduciary duties to creditors as the principal stakeholders in the remaining corporate assets. Where those duties are breached, creditors have standing to bring actions derivatively on behalf of the corporation for damages to the corporation. However, in a recent decision by Vice Chancellor J.

The court has held that a statutory demand is valid despite the high default interest rate on an underlying loan.

The case of Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (in administration) highlights that care needs to be taken to ensure that Retention of Title (RoT) clauses are effective. More information on ROT clauses is available in our 'Litigation survival guide - part 3. Retention of title: sellers beware!'

The facts

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 company, through its receivers, brought and prosecuted an unsuccessful claim against the defendants. The claim was financed from funds subject to the receivers’ control but the receivers had no beneficial or personal interest in those funds or the outcome of the proceedings. The first defendant sought to recover his costs of the proceedings from the receivers from funds realised in the course of the receivership on the basis that they were the real claimants, and had conducted the proceedings for the benefit of themselves and the bank that had appointed them.

If Peter Morton and Cinitel Corp. had their way, every lender would have a distinct duty to a guarantor to permit the sale of a defaulting borrower’s assets as a going concern. In their view, a lender should be required to maximize its recovery from the borrower and to minimize any claim made on a guarantee. Fulfilling that duty would also obligate a lender to keep funding a borrower while that asset sale was negotiated and completed. It is enough to make any lender cringe.

Fortunately, the Ontario Court of Appeal disagreed with Morton and Cinitel’s view of the lending world.

In an earlier edition of Fully Secured (June 27, 2012 – Volume 3, Number 2), we reported on the Ontario Court of Justice decision in Snoek ⁷ where security granted by a borrower (“HSLP”) to a group of individual creditors (“B”) was held to constitute an improper preference and declared invalid following a challenge by the trustee in bankruptcy. B had been one victim of a Ponzi scheme involving numerous unsecured creditors of HSLP.

Having enforceable security over all of a borrower’s assets is obviously of primary importance to a lender.  However, where a borrower occupies leased premises, ensuring the lender has quick and reliable access to the collateral is equally important, especially if the landlord proves to be unco-operative after a borrower’s default.  Although court-ordered access to a borrower’s leased premises can be sought after a borrower’s loan default, a landlord waiver obtained prior to an initial advance of a loan can bring some added certainty to the realization process outside of a bankrup