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Editor's Note This edition of the Newsletter covers a number of significant recent decisions that touch on important points of principle. First, how far should courts go in providing assistance to foreign insolvency proceedings, to what extent should approaches adopted by other bankruptcy courts be used as a guide and, at least in the European context, what is the interrelationship between the various sources of the court’s power to provide assistance (in Great Britain, for example, it is necessary to consider the inherent jurisdiction, or common law, power of the courts, the statutory authority under section 426 of the Insolvency Act 1986, the Cross-Border Insolvency Regulations implementing the Model Law and the EU Insolvency Regulation)? Secondly, to what extent can directors or third parties who deal with an insolvent corporation be made liable for the tort of deepening insolvency? This is a controversial topic in US bankruptcy law and the subject of a variety of conflicting opinions and academic discussion. In the UK, the Privy Council (in Cambridge Gas) and the Court of Appeal (in HIH Casualty) have recently considered the ambit and limits of the courts’ power to provide assistance to foreign insolvency proceedings. While the two cases in question considered different and specific aspects of the jurisdiction to assist (one dealt with the common law jurisdiction and the other with the statutory jurisdiction under section 426 of the UK’s Insolvency Act 1986) they both, as David Cowling points out in his note, demonstrate the continued strength of the internationalist approach to dealing with cross-border cases and support the exercise of a flexible judicial discretion to facilitate co-operation in the interests of creditors. In the US, there has been much case law considering the wrong of deepening insolvency. The CITX Corporation decision is significant because it represents an attempt by an important Court of Appeals to limit the availability of the deepening insolvency tort. First, because the court holds that, despite the fact that some other courts have held that deepening insolvency does not require intentional conduct, as a matter of Pennsylvania law, only fraudulent conduct will suffice to support a claim and also secondly because the court hints that its previous decision in Lafferty, which established the availability of the tort, will be narrowly interpreted and applied. And, in this context the recent opinion of Judge Gropper in Re Verestar Inc. (June 9, 2006) is also worth considering. For a more detailed view of these recent developments please click here. Nick Segal | |
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The Scylla and Charybdis of Transnational Insolvency On 16th May an important judgment in respect of judicial co-operation was given by the Privy Council in Cambridge Gas Transport Corporation Appellant v The Official Committee of Unsecured Creditors (of Navigator Holdings PLC and others). In this case the Privy Council held that the Isle of Man court, having recognised a US Chapter 11 proceeding, had a broad discretion to assist in the implementation of that Chapter 11 plan, notwithstanding that this involved the transfer of shares in an Isle of Man company. Three weeks after the Privy Council decision, the English Court of Appeal showed that there is still a way to go in its ruling on HIH Casualty & General Insurance Ltd & Ors v McMahon & Ors [2006] EWCA Civ 732. Although some commentators reportedly regard the HIH case as a giant leap backwards, it's really more like a half a step to the side. At first instance, the High Court relied on s 426 to hold that the mere existence of s 562A prevented its ordering the transfer of the English assets to Australia and ruled that: “[I]n an English liquidation of a foreign company, the court has no power to direct the liquidator to transfer funds for distribution in the principal liquidation, if the scheme for pari passu distribution in that liquidation is not substantially the same as under English law.” The Court of Appeal agreed that no transfer should be ordered, but was prepared to be more flexible on the significance of the differences in the statutory regimes. It thought that the High Court had overstated the effect of s 426: Unfortunately for the Australian liquidators, this was not a case where there was such a countervailing benefit. There is a considerable degree of institutional willingness to make transnational insolvency administration work but, at the end of the day, cultural and policy differences between jurisdictions will continue to throw up the occasional insurmountable barrier. The challenge for practitioners is to continue to steer a middle course between the Scylla of thinking that institutional goodwill will offset the adverse effects of national differences in the substantive law of insolvency and the Charybdis of regarding cases such as HIH as evidence of the futility of continuing to press for reform. For the full article please click here. Please click below for the full judjment of: • HIH Casualty & General Insurance Ltd & Ors v McMahon & Ors David Cowling, Partner, Litigation & Dispute Resolution Clayton Utz, Australia |
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AMERICAS A Claim of Negligence Cannot Sustain a Deepening Insolvency Cause of Action In Re CITX Corporation, Inc., - Case No. 05-2760 The bankruptcy trustee of CITX Corporation, sued its accounting firm, along with the partner responsible for compiling the financial statements, inter alia, for malpractice and “deepening insolvency”. The District Court granted summary judgment for the defendants on both claims and the bankruptcy trustee appealed. The United States Court of Appeals for the Third Circuit affirmed the decision of the lower court and held that:
For the full judgment please click here. For a client note by the Corporate & Restructuring Group of Shearman & Sterling please click here. ASIA & PACIFIC RIM Australian High Court to Rule on Creditors v Shareholders Sons of Gwalia Limited v Margaretic [2006] FCAFC 17 - Court Announcement on 16 June 2006 Should some shareholders be allowed to rank equally with creditors in a company liquidation? This is the question which will be considered by the High Court of Australia in coming months. On 16 June 2006, the Court announced its intention to hear an appeal from the Full Federal Court decision in Sons of Gwalia that concerns a person who bought shares, on market, in a company which later went into voluntary administration. The share purchaser essentially claims that he was misled into buying the shares by the company's alleged failure to disclose its financial situation to the market. He is now claiming as a creditor against the company, for the amount that he lost as a result of the collapse in the value of the company's shares. Both the Corporations Act and previous High Court authority clearly postpone any such claim if the shareholder has acquired the shares on an allottment from the company. The High Court will now have to decide whether the Full Federal Court was correct to hold that this rule did not apply where the shareholder acquired his shares, on market, from another shareholder. The decision of the Federal Court was covered in Issue No. 7. Please click here. The Impact of Liquidation on “Beneficial Ownership” Revisited ITS Inc., v The Convenience Container In this case, a High Court judge of the Hong Kong Admiralty Court provided some clarification on the interaction between admiralty jurisdiction and insolvency law, and the cross-border effect of liquidation on beneficial ownership of a company's assets. The judge considered
For a case note please see Johnson Stokes & Master - Legal Updates ( 07 June 2006). |
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ASIA & PACIFIC RIM Liability and Liquidation Orders in PRC Bankruptcy Legislation In China, the process of the new bankruptcy legislation has been put off since 2004, because of the debate on priority of workers’ claims against secured claims represented by banks. It is commonly recognised that the conflict between the two types of claims is an insurmountable obstruction to the promulgation of the new bankruptcy law. This article discusses the conflict between these claims and suggests two permanent mechanisms to be included in the proposed legislation. The first is to impose liability for defaulting workers' claims and the second is for timely commencement of bankruptcy cases with imposing liabilities where the enterprise fails to pay its workers. |
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ASIA & PACIFIC RIM Spider Hole for Insolvent Trading Directors A director's duty to prevent insolvent trading is currently stated in section 588G of the Australian Corporations Act 2001. Despite significant redrafting and amendments to the statute, it appears that there presently remains a loophole under this Act whereby directors who have allowed their companies to trade whilst insolvent can escape being pursed by creditors for breaching the relevant statutory provisions. This article provides an overview of the current forms of liquidation permitted under the Act, the termination of liquidation, the ability for creditors to sue directors for insolvent trading claims, explores the current flaws in the Corporations legislation and offers suggested amendments to the Act which would prevent directors escaping liability. For details please see the Australian Insolvency Journal, June 2006, P. 1 EUROPE, AFRICA & MIDDLE EAST The Gate Gourmet Restructuring - A UK Perspective In the period leading up to April 2005, the Gate Gourmet Group’s financial performance was suffering from the culmination of industry-wide pressures on the airline industry. This lead to difficulties in the Group including Gate Gourmet London meeting its obligations under existing financing agreements. The restructuring strategy of the UK business had many complex issues and was further complicated by recent legislative changes brought in by the Pensions Act 2004. This article discusses the impact of the UK Pensions Act 2004 and other recent legislative changes that came into force during the restructuring, and how the changes to the UK pension regime had serious knock on implications on the ability of Gate Gourmet to use a pre-pack sale to save the UK business. For the full article by Weil Gotshal & Manges, London please click here. |
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ASIA & PACIFIC RIM The Asia-Pacific Restructuring & Insolvency Guide 2006 This guide explains the restructuring and insolvency frameworks of key jurisdictions in the Asia- Pacific Region. Each country chapter is based on a standardised question-and answer format which ensures consistency and ease of reference to the subject matter covered in relation to each country. The publication covers 16 jurisdictions and has useful practical information for insolvency practitioners. The Guide is available in hard copy format from the publishers (info@globewhitepage.com) and online at www.asianrestructuring.com. |
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This issue was kindly sponsored by:
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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 If you would like to introduce a new member to INSOL International please contact our Communications Manager, Penny Robertson at pennyr@insol.ision.co.uk |
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