Contents at a glance... Editor’s Note Highlight of this Issue Australia: Further Support for the Model Law Case Decisions • Australia Retention of Title Clauses: Do They Require Registration as a Security Interest? • USA Trend of Increased Protection for Directors and Officers of Corporations in the Zone of Insolvency Legislation • Philippines Pending Legislation to Expedite Corporate Reorganisation in the Philippines Articles • Japan Pre-packaged Filings and Pre-filing Arrangements for Sponsorship in Japan • United Kingdom Legal Update on the Thorny Issue of Administration Expenses Publications • Treatment of Secured Claims in Insolvency and Pre-Insolvency Proceedings • INSOL World

In recent times, hardly a day goes by without us reading an article about the potential problems and fears associated with the current wave of private equity and hedge fund investments. Comparisons are made between the current situation and the buildups to the major international financial crisises experienced in world history.

To be sure there is an unprecedented level of acquisitions being made by private equity and some large positions being taken by hedge funds - all fuelled by the wealth of funds in the market searching for higher returns. The big question is - are the prices being paid getting too high? Is this surge in activity (and its upward influence on world stock markets) sustainable or will there be a correction which will undo the current high flyers in the investment world? Will rising interest rates crimp the flow of funds into private equity and can the funds meet investor demands for higher returns from existing investments?

Countering the doomsayers are those that point out the robustness of the world financial systems to external shocks, citing the economy’s ability to absorb everything from horrifying terrorist attacks, the collapse of major hedge funds, rapid increases in oil prices and the current sub-prime mortgage sector problems as evidence of this. In addition to this, some argue that wide-spread securitization of loans and the creation of layers of derivative products distributes risk so widely that the effect of even a major event will be diluted and absorbed by the economy.

Which camp is correct will only be known through future experience. The question for us as insolvency professionals is whether international insolvency systems have kept pace with the rapidly changing practices in the financial sector. The internationalization of investment and the spreading of risk through investment funds, securitizations and derivative products will certainly complicate administrations in the future. Our ability to quickly sort out any financial mess which does arise and efficiently return capital to the market for productive purposes might prove to be a key factor in determining the extent and duration of any damage. Any slowdown which does eventuate (whether it comes with a bang or a whimper) will certainly create some interesting and testing times for our profession.

Peter Gothard
Partner, Ferrier Hodgson, Japan

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Australia: Further Support for the Model Law

While to date only 13 countries have formally enacted the UNCITRAL Model Law on insolvency, that list includes the significant economies of Japan, the United States of America and the United Kingdom. Other countries, including Australia, Canada and Malaysia, have made positive statements supporting incorporation of the Model Law into their respective legal systems. The relatively slow adoption of the Model Law is not so much an indication of a lack of support for its principles, as a hesitation on the part of many governments to enact the Model Law before a critical mass of jurisdictions have done so.

Hopefully, the incorporation of the Model Law by the major economies of the USA and the UK in late 2005 will propel governments towards the view that we have reached the point of critical mass, and give greater impetus to the wider adoption of the Model Law in the global community.

In Australia, the adoption and enactment of the Model Law was considered as a part of the Government’s Corporate Law Economic Reform Programme — CLERP 8. In the Government’s October 2002 discussion paper, it set out 14 proposals for the reform of Australia’s cross-border insolvency regime and invited comments on the possible enactment of the Model Law by the Commonwealth Parliament. The paper argued that Australia had a responsibility to take a leadership role, as it had made significant contributions to the Model Law’s development. Acknowledging the need for just such leadership, the discussion paper emphasised that Australia’s adoption of the Model Law would act as a catalyst for its adoption by other, smaller economies in the Asia-Pacific region.

Legislation implementing the Model Law in Australia is currently being drafted. The Department of Treasury hopes to release an exposure draft of that Bill in July, and publish the Bill itself in August or September this year. While the forthcoming federal election may delay the process somewhat, the Bill should nevertheless be enacted in the near future.

There are many advantages to the UNCITRAL Model Law, including greater ease of access to courts for foreign practitioners, greater protection of assets and greater efficiency of gathering and realising assets. Accordingly, adoption of the Model Law is likely to promote greater co-operation and co-ordination in cross-border insolvencies. The extent to which this will occur will of course depend on how uniformly the Model Law is adopted worldwide; however the likely imminence of Australian legislation, along with its recent acceptance by several countries including the US and UK suggests that a successful regime is likely to emerge.

Michael Quinlan & Paul Nicols
Partners, Allens Arthur Robinson
Sydney, Australia

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ASIA & PACIFIC

Australia

Retention of Title Clauses: Do They Require Registration as a Security Interest?

General Motors Acceptance Corporation Australia & Anor v Southbank Traders Pty Ltd

In this case the High Court considered an appeal from the Victorian Court of Appeal arising out of a dispute between Southbank Traders Pty Ltd (Southbank), a motor vehicle wholesaler, and vehicle financier General Motors Acceptance Corporation Australia (GMAC).

Southbank sold 10 motor vehicles to a company called Kingstrate Pty Ltd (Kingstrate), a motor vehicle retailer. The sale agreement contained a “Retention of Title” clause (ROT clause), under which Southbank retained title to the vehicles until their purchase price was paid in full. After Kingstrate had taken possession of the vehicles, but before it had paid the purchase price to Southbank, Kingstrate on-sold them to GMAC. GMAC then entered into a floor-plan agreement with Kingstrate by which Kingstrate, as bailee, was entitled to display the vehicles to potential purchasers in its retail showroom. Kingstrate became insolvent, and GMAC registered its interest as bailor of the vehicles. Southbank later registered its interest in the vehicles, arising out of the ROT clause.

Southbank’s claim was dismissed by the trial judge on the basis that its interest in the vehicles under the ROT clause was an unregistered ‘security interest’ within the meaning of the Act, which was extinguished when Kingstrate on-sold the vehicles to GMAC. Southbank successfully appealed to the Victorian Court of Appeal, which held that Southbank’s interest in the vehicles under the ROT clause was not a ‘security interest’ and was not extinguished upon the on-sale of the vehicles to GMAC. GMAC appealed to the High Court.

• The High Court unanimously held that the supplier’s interest under a ROT clause was a ‘security interest’ within the meaning of the Chattel Securities Act 1987 (Vic). As the supplier had not registered its interest under the Act, its security interest was extinguished when the relevant goods were on-sold to a third party.
• The decision has an impact on suppliers of goods in Victoria who commonly enter into arrangements involving ROT clauses. Suppliers should review their arrangements with customers and ensure that where goods are supplied on terms including a ROT clause and the goods are caught by the Act, they consider registering their security interest or taking other steps to protect their interests.

For a case note please see Focus - Allens Arthur Robinson, June 2007

For the full judgment please click here.

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AMERICAS

United States of America

Trend of Increased Protection for Directors and Officers of Corporations in the Zone of Insolvency

North American Catholic Educational Programming Foundation, Inc. (NACEPF) v Gheewalla, et al., 2007 WL 1453705 at 7, (May 18 2007)

This is the appeal of the plaintiff-appellant, North American Catholic Educational Programming Foundation, Inc. (“NACEPF”) from a final judgment of the Court of Chancery that dismissed NACEPF’s complaint for failure to state a claim. The Court of Chancery had concluded that:

• creditors of a Delaware corporation in the “zone of insolvency” may not assert direct claims for breach of fiduciary duty against the corporation’s directors;
• the complaint failed to state a claim for the narrow, if extant, cause of action for direct claims involving breach of fiduciary duty brought by creditors against directors of insolvent Delaware corporations; and
• with dismissal of its fiduciary duty claims, NACEPF had not provided any basis for exercising personal jurisdiction over the defendants with respect to NACEPF’s other claims.

The Supreme Court held that:

• individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors.
• creditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation or any other direct non fiduciary claim that may be available for individual creditors.

The Court therefore concluded that the final judgment of the Court of Chancery must be affirmed.

For a case note please see Linklaters U.S Restructuring & Insolvency Briefing, 6 June 2007

For the full judgment of the case please click here.

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ASIA & PACIFIC

Philippines

Two Bills are pending before the Committee of Banks and Financial Intermediaries of the Congress of the Republic of the Philippines, either of which, if enacted, would markedly revise the insolvency and rehabilitation law for Philippine businesses. The most profound change would be an acceleration of corporate reorganisations, by option of the debtor under one Bill and by rigid statutory deadline under the other.

The “Corporate Recovery and Liquidation Act” would give veto powers to creditors, as a group, with regard to approval of a proposed rehabilitation plan. The absence of creditor veto powers in the current law has drawn criticism from some lenders and international finance agencies, even though, in practice, the Philippine courts have generally not approved plans lacking creditor support.

This Bill would also require conversion of the proceeding to liquidation by an independent party, if a plan is not approved within eighteen months of the commencement of the proceedings. Extensions would not be available, so cases would result in either a quick rehabilitation that is acceptable to most creditors or a liquidation, even where creditors would prefer a more thorough process to resolve effectively the corporation’s financial distress.

These reforms would, if adopted, indisputably transform the Philippines as a country with a legal system that facilitate corporate reorganisations expeditiously. The result, however, might be of overall benefit in very few cases.

For the full article by Frederick D. Holden, Jr. Orrick, Herrington & Sutcliffe LLP, please click here.

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ASIA & THE PACIFIC

Japan

Pre-packaged Filings and Pre-filing Arrangements for Sponsorship in Japan

Under current Japanese business recovery practices, the term “pre-packaged” is used more broadly than in Chapter 11 of the US Bankruptcy Code. This term is used for cases in which sponsorship has already been arranged prior to the filing of corporate reorganisation or civil rehabilitation proceedings. However, neither the Corporate Reorganisation Act nor the Civil Rehabilitation Act has any special provisions for such “pre-packaged” cases.

This articles includes a discussion that covers pre-arranged filings, conditions for effective sponsor agreements, advantages for pre-filing arranged sponsors, and break-up fees. The authors conclude that although a variety of proposals have been made to facilitate pre-packaged rehabilitation reorganisation plans, these issues remain yet unsettled under Japanese law and practice.

For the full article please see Global Insolvency & Restructuring Review 2007/08, P. 118

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EUROPE, AFRICA & MIDDLE EAST

United Kingdom

Legal Update on the Thorny Issue of Administration Expenses

There have been two recent judgments relating to administration expenses in the context of preand post Enterprise Act administrations. The first, Centre Reinsurances International Co. v Freakley relates to the ranking of claims handling costs incurred by a reinsurer in the exercise of rights under reinsurance agreements with a company in pre-Enterprise Act administration. The second, Re Trident Fashions plc relates to the priority of non-domestic rates in a post Enterprise administration.

This article discusses these two case decisions in detail and highlights the distinction between the treatment of expenses under old and new administrations.

For the full article please see Recovery, Summer 2007, P. 11

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(i) Treatment of Secured Claims in Insolvency and Pre-Insolvency
Proceedings (2007)

This publication by INSOL has a wide range of issues on the subject of treatment of secured claims that are important to insolvency practitioners. The book is divided into 12 country chapters and is presented in a question and answer format.

Each chapter includes information about the type of security rights available in each jurisdiction, how security rights are enforced, and grounds upon which security rights can be challenged or avoided if they are deemed to have given preferential treatment prejudicial to the rights of the debtor or third parties.

The chapters also deal with priorities over secured creditors and how they can protect their rights. Issues that are particularly relevant to secured creditors in the event of corporate reorganisations are also covered. Where the insolvency and security laws are being transformed, information of those pending reforms has also been included.

Individual copies of this publication have been posted to the members.

(ii) INSOL World

The 3rd Quarter of INSOL’s quarterly journal is due to be published at the end of this month. Some of the highlights of this publication are:

• In Re Radnor Holdings Corporation case in the USA
• Restructuring of Schieder Mobel in Germany
• Brazil’s first out-of-court restructuring
• Doing business in China – how to avoid the pitfalls

Individual copies will be sent to members when it is published. For editorial submissions and advertising enquiries contact Penny Robertson - pennyr@insol.ision.co.uk

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INSOL wishes to thank the ENL Committee members that are retiring from the Committee, for their valuable contributions to the newsletter and continued support throughout their term of office.

This issue was kindly sponsored by:

Please visit Clayton Utz by clicking here

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