Issue No. 4

Contents at a glance This issue covers a wide range of current information on •   Case decisions •    Legislation •    Articles •    News For the purpose of easy reference, the information is then set out under a region covering Europe, Africa and Middle East, Asia & Pacific Rim, or the Americas.

Elsewhere in this edition of the Newsletter you will find two examples of recent law reforms in Europe: one admirable; one less so. The admirable reform comes from France, where major changes have been implemented to the French insolvency regime after much consultation and thought. The less worthy reform comes from Italy, and again emanates from the Parmalat collapse. Like most law reforms of dubious long term value, these changes to Italian law were hastily put in place as a direct result of a high profile, and highly political, financial collapse. It always pays to count to ten!

Sandy Shandro, Partner and head of restructuring and insolvency Freshfields Bruckhaus Deringer, London

Insolvencies of groups of companies are fascinating, and all the more so when a domestic court, in making its decision, takes us back to first principles both in its own jurisdiction and in other countries which share similar legal traditions. The English Court of Appeal dealt with just such a case a few days ago in the SSSL Realisations case. The case involved the collapse of a petrol retailer with some 400 stations. As is commonly the case in such situations, one of the companies purchased the petrol and sold it on to other group companies. That same company also obtained bank borrowings for the whole group and lent that money on to subsidiaries. The case has important ramifications for lenders generally, providers of performance guarantees or indemnities, for liquidators seeking to get out of onerous contracts and for all those interested in the process of proving claims in liquidations generally.

As an aside, the judgment was delivered to a packed courtroom: there was standing room only! It is fervently to be hoped that one day the UK fall into line with the practice in other significant economies of making judgments, court orders and pleadings of all sorts available via the internet.

For further information on the “SSSL Realisations case” please click here.

Sandy Shandro, Partner and head of restructuring and insolvency Freshfields Bruckhaus Deringer, London

Americas
 
United States
 
S-Till Undecided? : The Determination of Interest Rates for the Cramdown of Secured Claims in Chapter 11

Re American Homepatient, Inc.,

In recent months, there has been a significant amount of discussion in academic and legal circles regarding the Court of Appeals for the Sixth Circuit's decision in this case. Much of the debate stems from the fact that the Court declined to apply the Supreme Court's reasoning in a Chapter 13 case, Till v SCS Credit Corporation to determine the interest rate to apply to a secured claim that is “crammed down” under a Chapter 11 plan. (Cramdown is a term used to describe the judicial power to confirm a plan in spite of the rejection of the plan by certain classes of claim or interest holders, provided certain conditions are met.)

This article briefly explains the respective methodologies employed by the Supreme Court in the Till case and the Sixth Circuit in the American Homepatient case for determining the appropriate cramdown interest rates to be applied to restructured claims under a plan, and considers several of the questions that remain unanswered in the wake of these decisions.

For the full article please see White & Case Insolvency Notes, November 2005, P. 6

EUROPE, AFRICA & MIDDLE EAST
 
Italy 
 
Italy: Parmalat Clawback Actions

The special administrator of Parmalat commenced clawback actions against various banks with a face value of Euros 7.5 billion. A recent decision by the Court of Parma in the clawback action against one major bank (which is a test case to establish a precedent for all of the claims against the banks) has resulted in these proceedings being suspended. The Parma Court has referred the question of the constitutionality of Article 6 of the Marzano law (under which the clawback actions are made) to the Constitutional Court.

The date for the Constitutional Court hearing has not yet been set, but it is expected that it will take place in mid-2006.

For the full article please click here.
 
United Kingdom

Re T&N Ltd., & Others [ 2005] EWHC 2870 (Ch)

The administrators of T&N Ltd., and other companies in the group applied to court for directions in relation to the following issues:

i) Whether a claimant in respect of a future asbestos claim against a T&N company would be a “creditor” of that T&N company so as to be capable of being bound by a scheme of arrangement or a CVA; and
ii) Whether such a claimant would be entitled to prove for a debt in the liquidation of that T&N company.

For the key points in David Richards J's ruling please see: 3/4 Digest, December 2005, P. 5

EUROPE, AFRICA & MIDDLE EAST
 
France
 
(1) French Insolvency Law Reform

In 2003, nearly 90% of the insolvency proceedings in France resulted in liquidation. As a result, the French government has overhauled French insolvency law with a view to:

1. Promoting voluntary arrangements between the debtor and its creditors;
2. Anticipating the debtor’s financial difficulties by allowing it to commence insolvency
proceedings before the traditional insolvency test is met. The traditional insolvency test is
known as cessation des paiements and is basically a simple cash flow test;
3. Simplifying proceedings; and
4. Reducing the length of the insolvency proceedings. In 2003, the average length of insolvency proceedings commenced in France was approximately four years.

The legislation was approved in July 2005 and came into force on 1 January 2006.

For more details please click here.

(2) Lender Liability Under the New French Insolvency Law

The new French Insolvency law that came into force on 1 January 2006 contains a new provision that fundamentally changes the law of lender liability. While the new law is designed to clarify and limit the scope of lender liability under French insolvency law, it is likely to have the opposite effect when applied to some of the most common types of loans made by commercial financial institutions.

According to the new Article L 650-1 of the French Commercial Code, a judge may avoid a security interest of a lender that is deemed disproportionate to the amount of the financing extended to the borrower.

This provision therefore increases uncertainties and risks in the areas of working capital, acquisition and project financing, where lenders ordinarily takes a security interest in substantially all present and future assets of the borrower.

For the full article please see White & Case Insolvency Notes, December 2005, P. 6

ASIA & PACIFIC RIM
 
Australia
 
Creditors v Voluntary Administration

In Australia, it is quite common for companies to appoint an administrator in the face of a creditor's court application to have the company wound up in insolvency. Once that happens, the court must adjourn the winding up application if it believes that the creditors' interests are better served by administration than by winding up. Large creditors, however, are increasingly seeking to persuade courts that a winding up is preferable to administration.

This trend was clearly seen in the case of KJ Consulting [2005] FCA 1827, which involved an application by the Commissioner of Taxation to be allowed to continue with a winding up application notwithstanding that the company was in administration. The judgment contains an excellent examination of the competing interests that the court has to balance in this type of situation.

For the full article please click here.

Americas
 
United States
 
Guide to the Bankruptcy Law of the United States, Published by White & Case, 2005

This publication includes comments on the latest Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 which makes it most up to date on USA bankruptcy developments. The book discusses the bankruptcy system, commencement, and administration of a case generally, powers to avoid transfers followed by individual sections on Chapters 7, 11, 13, 15 of the Bankruptcy Code.

These chapters cover respectively liquidation, reorganisation, adjustment of debts, ancillary and cross-border cases.