Recently, the Court of Appeal upheld the High Court's decision in the Nortel Networks and Lehman Brothers disputes. The judgment confirms that liabilities under Financial Support Directions (FSDs) and Contribution Notices (CNs), which are issued by the Pensions Regulator, will rank ahead of almost all other claims when a company becomes insolvent. The discussions in the case focused on whether FSDs and CNs are classed as 'provable debts', expenses of the insolvency or, indeed, neither.

Summary

FSA is consulting on the need for certain financial services firms to prepare and maintain Recovery and Resolution Plans (RRPs) and in addition for some of these firms, and others, to make further preparations for their investment client money and custody assets (CMA) holdings.

Why now?

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.

In 2002 a European subsidiary of Lehman Brothers created a complicated synthetic debt structure called Dante, which was intended to provide credit insurance for another subsidiary, LBSF, against credit events affecting certain reference entities, the obligations of which formed the reference portfolio. A special purpose vehicle issued notes to investors, the proceeds of which were used to purchase collateral which vested in a trust. The issuer entered into a swap with LBSF under which LBSF received the income on the collateral and paid the issuer the amount of interest due to noteholders.

In Finnerty v Clark the appellants were the sole shareholders and substantial unsecured creditors of St George's Property Services (London) Ltd (St George).  The respondents were administrators of St George.  The High Court decision was reviewed in our December 2010 insolvency legal update.

The story of the restructuring of carpet-maker, Brintons has featured in the press recently, with emphasis on the role of Carlyle, one of the world's biggest private equity firms. The facts are similar to the Silentnight pre-pack which we featured in a previous bulletin. In each case, the Pensions Regulator is said to be considering using its anti-avoidance powers under the Pensions Act 2004 to compel senior debt holders to pay towards the deficit of the defined benefit pension scheme operated by the company.

Payless Cash & Carry Limited v Patel and Others [2011]

The decision of Mr Justice Mann in the High Court in Payless Cash & Carry Limited v Patel and Others [2011] exemplifies the detailed investigation which can be carried out by the appointment of a provisional liquidator or a liquidator in cases of suspected fraud. It also contains some useful comments on the extent of the liquidator’s evidential burden in such cases.

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:

Key Issues

The transaction documents (eg ISDA, GMRA or prime brokerage agreements) for derivatives transactions (or other transactions involving netting provisions) are usually governed by English law or New York law. However, there are a number of local law issues which our clients should consider when proposing to enter into such transactions with offshore counterparties, including the following key issues:

In this DechertOnPoint, we summarise HM Treasury’s work to establish effective resolution arrangements for investment banks and firms, which resulted in the introduction of a special administration regime (“SAR”) earlier this year.