Contents at a glance... Editor’s Note Highlight of this Issue Australia: Long Tail Personal Injury Liabilities in Australia Case Decisions • Canada Distressed Debt Purchasers in Canadian Restructuring Proceedings – The Quebec Court’s Recent Consideration of Rogue White Knights Legislation • Hungary New Hungarian Bankruptcy Law Protects Secured Loans • Italy The Protection of Creditors in Italy Articles • Australia Private Equity's Role in Turnarounds, Workouts and Insolvencies Publications • Technical Papers Securities Law Claims in Insolvency Proceedings • INSOL World This issue was kindly sponsored by: Please visit Clayton Utz by clicking here

October 2007 will be the two-year anniversary of the effective date of Chapter 15, the United States analog of the UNCITRAL Model Law. I thought it worthwhile to make some observations and general comments about the Chapter 15 experience during this brief period. Prior to Chapter 15’senactment, ancillary assistance in the United States to a foreign insolvency proceeding was governed by section 304 of the Bankruptcy Code. Based on a review of case filing data immediately before and after the effective date of Chapter 15, it appears that despite its arguably broader and more clearly defined regime within which ancillary relief may be granted, there has not been an increase in the use of Chapter 15 as compared to the use of section 304. And similar to that of section 304, the venue of Chapter 15 cases is generally in jurisdictions that are the predominant recipients of multinational Chapter 11 cases. On the substantive side, much of the relief granted in the various Chapter 15 cases I have seen could arguably have been granted under a broad interpretation of section 304. Whether or not, however, my observation is correct does not take away from the fact that Chapter 15 provides a clearer path and more predictable structure within which to grant such relief than section 304 provided.

Chapter 15 effectively, in many respects, codified the case law and policy considerations that evolved under section 304. By its stated policy and context, Chapter 15 provides a statutory operational structure that guides the consideration of relief to be granted. It remains an open question whether Chapter 15 will be used in a manner and frequency similar to section 304. The level of corporate insolvency filings since the effective date has not, in my opinion, provided a significant number of cases to make an in depth analysis and draw well-founded conclusions as to the effectiveness and employment of Chapter 15. However, in my opinion, the sampling of cases to date indicates that Chapter 15 has succeeded in providing a more predictable structure that is more easily applied to achieve comity and respect for the foreign jurisdictions public policy.

As a general comment regarding the continuing efforts to encourage the enactment of the Model Law, there is no doubt that its structure provides a predictable mechanism within which issues arising in multi-national insolvencies can be resolved. Whether the debt structure and needs of such companies will require ancillary proceedings will be determined case by case. It may well be that in the current market environment multi-nationals have created debt structures and operational relationships that lessen the need for filings in multiple jurisdictions. Nevertheless, the presence of the Model Law and its continued adoption can only augment and help navigate in the environment within which global entities, institutions and structures operate.

Hon. Mr. Justice Arthur Gonzalez
United States Bankruptcy Court, Southern District of New York, USA

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Long Tail Personal Injury Liabilities in Australia

Asbestos diseases are probably the most high profile long tail liability faced by companies in the developed world. In Australia, the issue was recently brought to the fore by what has become known as the James Hardie case.

James Hardie was an Australian-domiciled manufacturer of asbestos products. Several years ago, it relocated to Holland (for tax reasons). It left behind in Australia what was essentially a corporate trust fund for the purpose of meeting claims for asbestos related illnesses from Australians. It subsequently emerged that the quantum of claims would far outweigh the funds available to the trust fund. As this unfolded, it became clear that, given the long tail nature of asbestos related diseases, many putative sufferers would not have any standing as a current or contingent creditor.

Naturally, there were calls for various types of governmental intervention. At the Federal level, the Commonwealth Government (which has responsibility for company law, including corporate insolvency) released a detailed proposal under which companies, liquidators and voluntary administrators would be required to take account of (and make provision for) long tail personal injury liabilities even where the individual claimants were not identifiable. The proposed name for this class of contingency is "mass future claim".

Where a mass future claim was afoot, existing creditor protections could be extended to future unascertained creditors. Among other things, this would restrict company transactions which adversely affect share capital, including reductions of share capital and share buy backs.

The Government referred the proposal to its corporate law reform review body (CAMAC). On 17 July 2007, CAMAC released a detailed discussion paper. As might be expected, the CAMAC discussion paper reveals some significant issues arising out of the proposal.

CAMAC has called for submissions on these and other issues raised in its discussion paper. This would normally be followed by a report to the Government, which itself would be followed by a further discussion paper and/or draft legislation. The only thing which is certain, therefore, is that any legislative change, if any, is still a long way away.

For the full article please click here.

For the CAMAC discussion paper on long tail liabilities plase click here.

David Cowling
Partner, Litigation and Dispute Resolution
Clayton Utz

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AMERICAS

Canada

Distressed Debt Purchasers in Canadian Restructuring Proceedings –
The Quebec Court’s Recent Consideration of Rogue White Knights

Minco-Division Construction Inc. v. 9170-6929 Québec Inc., [2007] Q.J. No. 449

Minco-Division Construction Inc. was an owner-developer of a mixed residential and commercial condominium project in Québec and while the first of three phases was under construction, Minco filed for court protection under the Canadian Companies' Creditors Arrangement Act, owing its creditors of more than $32 million, including construction liens, hypothecary loans and a hypothec. An interim receiver was appointed at the bank’s request, to determine whether it was prepared to fund the sums required to complete construction. Over the course of the restructuring process, the DIP loan grew to approximately $5 million.

The debtors had sought a "white knight" to buy out the bank’s interest at a steep discount in order to allow the debtor to seek permanent financing to fund a plan of arrangement and complete construction of its project. The Court concluded that no party intended that the white knight would take over the project; rather, its initial role was confined to putting the bank claim in friendly hands while looking for longer term financing to complete the project.

The Court held that white knights usually have an interest when intervening to save a debtor from its creditors, and here, the white knight investor was to have profited from its intervention at least to the extent of 30% or a fifty-fifty basis; instead the white knight used its position to try to take over the debtor on the strength of the giving in payment option contained in the security provisions of the bank claims. It was in this sense that the Court described it as a "rogue white knight". The Court held that the rogue white knight had turned on its benefactors.

In finding that the distressed debt buyer was a "rogue white knight", the Court held that "threatening to hijack the project and frustrate a plan intended to bring a measure of relief to many creditors, including the purchasers of units, does not square with the good faith conduct required of contracting parties by article 1375 Code civile du Québec (CCQ).

For a case note by Janis Sarra, INSOL Scholar, please click here.

For the full judgment please click here.

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EUROPE, AFRICA & MIDDLE EAST

Hungary

An amendment to the Hungarian Bankruptcy Act came into effect on 1 January 2007, entitling secured creditors (other than floating charge holders) to a privileged position in the event of the debtor's insolvency.

In recent years, creditors have been faced with uncertainty about the most effective manner in which to take security under Hungarian law. This lack of clarity has led to creditors adopting a range of methods in an attempt to overcome what has been seen as a rather unsatisfactory regime. Such methods have included the invention of new "atypical" forms of security – or quasi security – that do not involve taking a mortgage, charge, pledge or lien. However, the use of atypical security is not universally accepted and has been the subject of much doubt both in academic circles and among practitioners.

The aim of the new regulation was to offer secured creditors (floating charge holders to a lesser degree) a prioritised position in the event of a debtor's insolvency and to ensure that enterprises are able to raise credit on more favourable conditions. The Hungarian legislature also hopes that, in reliance on the new provisions, creditors will feel more secure in granting credit in return for smaller levels of collateral.

This article discusses the key changes that have been introduced and the policy behind those changes.

For the full article please see ABI Journal, June 2007, Vol. XXVI, No. 5, P.30

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Italy

Between 2005 and 2006, the Italian Parliament and Government enacted extensive changes to the Italian insolvency regulations, starting with the reform of the clawback actions. On 16 July 2006, they updated domestic legislation to the standard of other countries, where the trend is to consider the insolvency proceedings aimed to preserve and rescue the business as a relevant protection for the creditors.

The main changes that were enacted relates to composition with creditors, debt restructuring agreements, bankruptcy orders and discharges, and claw back provisions.

The Italian Government is expected to issue a decree containing amendments to the current laws. Rumours are that the main changes of this new legislative intervention will probably be that there will be new requirements to satisfy for businesses to be subject to bankruptcy, and the introduction of a new crime regarding the professional falsification of data in order to obtain from the court the validation of a debt restructuring agreement or a composition with creditors.

For the full article please see Europhenix, Summer 2007, P.28

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ASIA & THE PACIFIC

Australia

Private Equity's Role in Turnarounds, Workouts and Insolvencies

Under current Japanese business recovery practices, the term “pre-packaged” is used Private Equity (PE) can play an extremely constructive role in many turnarounds, work-outs or insolvency situations (turnarounds).

In a turnaround, PE can bring three valuable attributes to the table: risk capital, a three to five year view, and clear and active assistance and governance. PE has also demonstrated that it can participate in virtually any industry, and that it is highly experienced in successfully merging businesses – which can often be of real benefit for a business that is struggling standalone.

However the insolvency process is not well understood within the PE community, and relationships could be strengthened, particularly in preparation for when the business cycle turns. PE is prepared to tackle very complex situations and invest substantial time and resources, provided it can see a clear path to a transaction occurring.

This article explores these themes in more detail.

For the full article please see Australian Insolvency Journal, 2007, Vol. 19, No. 2, P. 6

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INSOL PUBLICATIONS

(i) Securities Law Claims in Insolvency Proceedings – By Professor Janis Sarra

This is the second paper to be published under INSOL's “Technical Papers Series”.

The paper explores the contours of the intersection between securities law and insolvency regimes at a time when a corporate entity is in financial difficulty. In particular, the paper deals with:

• the subordination of equity claims during insolvency
  
• special provisions for bankruptcy of securities law firms
  
• concluding policy options

Within this context, the paper also discusses a number of leading case law developments in jurisdictions like Australia, USA, Canada and the UK. The paper will sent out electronically to INSOL members this month.

(ii) INSOL World

The Third Quarter of INSOL World has just been published. Articles include:

• In Re Radnor Holdings Corporation case in the USA
• Restructuring of Schieder Mobel in Germany
• Brazil’s first out-of-court restructuring
• The Australian corporate recovery market: the only constant is change

To view INSOL World click here.

Editorial submissions and advertising enquiries contact pennyr@insol.ision.co.uk

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INSOL Contacts

If you would like to send an article for inclusion in one of our forthcoming issues please contact our Technical Manager, Sonali Abeyratne at sonali@insol.ision.co.uk

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