Hogan Lovells Publications | 17 February 2020
"The Net Short": U.S. and European High-Yield Covenant Trends in Response to Net Short Activism
In a unanimous 25 February panel decision, the Second Circuit Court of Appeals held that the trustee liquidating Bernard L. Madoff’s investment firm can claw back billions in Ponzi scheme proceeds from investors who received the proceeds indirectly through non-U.S. “feeder funds” (funds that aggregate investor capital to invest in funds such as Madoff’s).
The Second Circuit recently issued its decision on an appeal to the Momentive Performance Materials Inc. (“MPM”) bankruptcy case. Amongst other issues, the Court found that when determining the appropriate interest rate in a Chapter 11 cramdown, courts should consider market factors rather than strictly apply the Till formula. The Court’s decision will benefit secured creditors when a market rate is ascertainable, as they will no longer have to accept below-market take-back debt.
It has long been a bone of contention for landlords that tenants can simply file a notice of intention to appoint administrators in order to get an automatic moratorium against any enforcement action. This prevents a landlord from forfeiting, suing or exercising CRAR irrespective of whether the tenant goes into administration and, seemingly, whether it ever really had such an intention.
The English High Court yesterday sanctioned closure schemes of arrangement for The Orion Insurance Company PLC and The London and Overseas Insurance Company PLC, paving the way for the closure of these complex and long-running insolvencies stemming from 1994.
Speaking today, Hogan Lovells partner Joe Bannister said:
It is common practice to find directors of a company standing surety for the company in order to secure its debts. The consequence could be severe for the sureties, because if the company is unable to pay its debt, the creditor can take legal action against the directors or other third parties in their capacity as sureties, unless the company pays its debts and the sureties are released from liability.
The UK Supreme Court has recently overturned a much-criticised and controversial ruling of the Court of Appeal by finding an ambiguously worded advance payment bond effective in the case of insolvency. In doing so, it clarified the proper role and application of considerations of business common sense when interpreting commercial contracts. Where a clause is capable of two or more possible interpretations, Rainy Sky SA v Kookmin Bank held that the court should prefer the one which is most consistent with common business sense.
The Hong Kong court has sanctioned a scheme of arrangement for a Hong Kong-listed, Bermuda-incorporated fertilizer manufacturer based in the mainland. In doing so, the Honorable Mr Justice Harris also warned holders of U.S. denominated debt that where they use offshore schemes of arrangement, they run the risk of individual creditors presenting winding-up petitions in Hong Kong. The view has however been queried in recent U.S. authority.
The Supreme Court of New South Wales has recently handed down its decision in proceedings (“Arrium Proceedings”) brought by a number of lenders against former officers and employees of Arrium Limited and its subsidiaries (“Arrium”).
Introduction
Justice Ball’s landmark decision1 dismissing the lenders’ claims addressed various important issues that often arise when a borrower is facing financial distress in Australia, including:
In a pair of recent contrasting judgments, Re Agritrade Resources Ltd [2020] HKCFI 1967 and Re Rare Earth Magnesium Technology Group Holdings Ltd [2020] HKCFI 2260, the Hong Kong Court has once again confirmed its pragmatic approach towards applications by foreign liquidators and provisional liquidators for recognition and assistance in Hong Kong. The judgments emphasize the importance of adhering to the standard forms of order adopted by the Hong Kong courts in respect of such applications, and the need for any departure from the standard form to be fully justified.