In the wake of recent bankruptcy filings by several prominent financial institutions, there’s a growing interest in changing standard credit documentation to address the risks of defaulting lenders and nonperforming administrative agents. Here are credit agreement provisions that financial institutions, acting as swingline lenders and letter of credit issuers, can require to protect themselves against the risk of a defaulting lender.
Recently, in In re Northwest Airlines Corp.,1 Bankruptcy Judge Allan Gropper issued an opinion requiring a group of hedge funds that had formed an ad hoc committee of equity security holders (the “Ad Hoc Equity Committee”) to disclose “the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof” in order to comply with Rule 2019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).
Background
The High Court yesterday held that a Chairperson of a shareholder scheme meeting may reject votes cast against a scheme of arrangement in circumstances where the shares were acquired through an artificial share-splitting exercise designed to frustrate the scheme. It is the first English case to consider this issue and while it arose in the context of a shareholder scheme, the impact is also significant for debt restructurings implemented by way of a creditor scheme of arrangement.
Background
Pensions and insolvency legislation uses the test in the Insolvency Act 1986 for assessing whether a person is ‘connected’ or ‘associated’ with another. This test is important because various statutory provisions use it, especially in limiting the persons whom the Pensions Regulator can make responsible for pension scheme deficits under the ‘moral hazard’ powers in the Pensions Act 2004. This briefing gives an outline of the statutory provisions and points to some difficult areas.
Why is this relevant?
A company went into administration and company voluntary arrangements were entered into to effect a rescue of viable parts of the group. As part of that process, a valuation of the liabilities of the companies as at 1 October 2001 was required. They included claims arising under section 75 of the Pensions Act 1995. However, those debts were not triggered until July 2004 and the scheme actuary for did not sign the section 75 certificates and apportion shares amongst the various companies until March 2006.
Summary
Background to Re Permacell
Historically, the United Kingdom has not had a specialised bankruptcy regime for dealing with the failures of financial institutions. Rather, these were handled under the same rules that applied to ordinary corporations.
The Bankruptcy Code sets forth the relative priority of claims against a debtor and the waterfall in which such claims are typically paid. In order for a court to confirm a plan over a dissenting class of creditors – what is commonly called a “cram-down” – the Bankruptcy Code demands thateither (i) the dissenting class receives the full value of its claim, or (ii) no classes junior to that class receive any property under the plan on account of their junior claims or interests. This is known as the “absolute priority rule.”
Secured creditors with an unsecured shortfall cannot claim a share of the prescribed part of the floating charge realisations set aside for unsecured creditors under Section 176A of the Insolvency Act 1986. This applies whether the secured creditor is the holder of a fixed or a floating charge (or both).