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Editor's Note As the World Turns….. There can be no doubt that the pace of insolvency reform globally has increased over the last decade. This is due, in part, to the pressures of the global marketplace, which demands stable, predictable and reliable legal systems which creditors can review and understand in advance of making loan facilities available. However, this reform could not have developed without an enormous effort by many insolvency practitioners world wide, willing to give of their personal time to assist in developing model laws, best practises, local laws, guides on court to court communication and the like. In addition, it could not have been implemented without countless professionals being involved in education and training sessions for legislators, judges, lawyers, lenders, investors, turnaround professionals, liquidators and others involved in the insolvency and restructuring process, all who were willing to share their experiences and expertise and to assist in formulating practises and procedures. INSOL International has been at the forefront of many of these efforts, including working with UNCITRAL in developing the Model Law on cross border insolvency. The United States is one of the growing number of countries that has adopted the UNCITRAL Model Law (as Chapter 15 of the US Bankruptcy Code). While it is in its infancy, a body of case law has already started to develop under Chapter 15. One of the articles in this issue discusses some of the recent cutting edge developments in the US in this area (see article by Stephen Shimshak & Margaret Philips). At the same time, other jurisdictions are involved in reforming their insolvency laws. Tanzania has recently updated its corporate insolvency legislation (see article by Sashi Rajani and Frederick Ringo). Other jurisdictions are reforming their personal property security regimes; Australia has proposed legislation for a unified system (see article by Angela Flannery & Greta Burkett) and several Canadian jurisdictions have recently enacted amendments to their personal property security regimes. It is important that consideration be given to the effect that this globalization and pace of change has on both businesses and people. This issue contains a discussion of this on how it affects the Chinese manufacturing sector (see article by Nick Gronow). We owe a debt of gratitude to the professionals that have been involved in conceiving, developing and implementing these reforms, and to the many organizations, both local and international that have encouraged and assisted. Steven G. Golick |
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Chapter 15: What's Happening? While most of the Chapter 15 petitions filed thus far have gone uncontested, there have been a handful of noteworthy decisions, two of which deal with issues surrounding what constitutes a debtor’s “centre of main interest” or “COMI.” The decision that has drawn by far the greatest attention was the September 2006 decision of the Bankruptcy Court for the Southern District of New York, In re SphinX, Ltd. In this case joint-liquidators winding up a Cayman Islands hedge fund filed Chapter 15 petitions requesting that the bankruptcy court recognise voluntary winding-up proceedings filed in the Cayman Islands as foreign main proceedings. In addition, the joint liquidators sought interim provisional relief among other things, to prohibit the commencement or continuation of litigation or other proceedings against or involving the foreign representatives. After declining to recognise the cases as “Main” proceedings, the court recognised the cases as “Non- Main” proceedings, without directly discussing whether SphinX satisfied the definition for “Non- Main” proceedings and even when there was no other foreign main proceeding pending. Less than one week after the SphinX decision, in a case with facts less complicated than SphinX, the Bankruptcy Court for the Eastern District of California issued a decision in In re Tri-Continental Exchange Ltd. finding that a foreign entity’s “principal place of business” under applicable United States jurisprudence constitutes the centre of main interest for purposes of Chapter 15. Finally, in addition to SphinX and Tri-Continental, there is the intriguing decision rendered in the Chapter 15 case of In re MuscleTech Research and Development Inc. This case involved a Canadian entity which until 2002 had manufactured and sold ephedra-based products. By 2004, class action and product liability litigation over these products had spread throughout the United States, including litigation filed in the District Court for the Southern District of New York. These class actions lawsuits named a variety of defendants, including MuscleTech – then only a corporate shell along with its affiliates and unrelated third parties. The District Court found that the Canadian procedures were fair despite being different than those under United States law in the context of the foreign insolvency proceeding and the standards of Chapter 15. As the decisions suggest, United States courts are still in the early stages of developments under Chapter 15. The relevance of the highly developed jurisprudence under former Section 304 and the ultimate influence of foreign courts applying and interpreting other “versions” of the Model Law such as the European Union Insolvency Regulation remains to be seen. It appears that there will clearly be more cases that struggle over the “gating” issues of recognition—both main and nonmain, with the eventual appellate decisions in SphinX undoubtedly influencing the debate. Courts in the United States will soon likely confront the questions of COMI and corporate group already faced to some degree in Europe. As a case like MuscleTech demonstrates, the creative are beginning to push the boundaries of Chapter 15 foreign proceedings into territory uncharted under its predecessor, Section 304. For the full article please click here. Stephen Shimshak & |
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| Case Decisions | ||||||
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ASIA & PACIFIC Administrator's Discretion Not to Vote is Not Unfettered Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 289 Apex Sports Pty Ltd executed a Deed of Company Arrangement (DOCA). The major creditor by value, Ausino International Pty Ltd went to court with a complaint that some of the material given to creditors had been misleading and that some creditors' claims hadn't been properly valued. The administrator obtained an adjournment of the court proceedings, to allow a properly informed second meeting of creditors to be held. At the meeting, the majority-by-number creditors supported a resolution to continue the DOCA, while the majority-by-value supported a resolution to terminate it. The administrator then declined to use his casting vote for a number of reasons. The question for decision by the court was whether the court should make an order that has the effect of displacing or overturning the DOCA. The court held that:
For a case note by David Cowling, please click here. For the full judgment of the Supreme Court please click here. EUROPE, AFRICA & MIDDLE EAST Powerhouse Decision: The CVA was Unfairly Prejudicial to Landlords Prudential Assurance Co Ltd., & Others and Luctor & Others v PRG Powerhouse Ltd., & Anthony Murphy [2007] EWHC 1002 Ch Powerhouse, a company in financial difficulties closed some of its stores but decided to keep some of its stores opened by proposing a Company Voluntary Arrangement (CVA) to all its creditors. In particular, the CVA had a clause whereby its parent company PRG would be released from guarantees provided to landlords of premises let to Powerhouse - a process known as “guaranteestripping”. The CVA was approved by the majority of the creditors and therefore binding on all the creditors but a group of landlords issued proceedings against Powerhouse to have the CVA declared invalid. The issue for the court to decide was whether the CVA was effective to release Powerhouse's parent company, PRG Group Limited from liability in respect of guarantees provided by it to its landlords of premises let to Powerhouse. The High Court (Etherton J) held that:
For a case note please see Addelshaw Goddard Business Support and Restructuring Briefing, May 2007. |
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| Legislation | ||||||
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ASIA & PACIFIC Personal Property Securities Reform in AustraliaThe Federal Government of Australia is working continuously towards reforming its personal property securities laws. Over the past 18 months the Federal Government has held seminars and issued a number of discussion papers for public comment. The Governments’ commitment to introducing these reforms is reflected in its recent Federal Budget where $113.3 million was allocated for the implementation of the reforms over the next five years. The key aim of the reforms in Australia is to introduce a single registration system for security interests over personal property (though there will be some personal property exclusions, potentially including ships). The achievement of this aim is supported throughout the banking and financial services sector in Australia. The Australian legislative model for the reforms is the New Zealand Personal Property Securities Act 1999 and, as the New Zealand legislation is a comprehensive personal property securities regime, the proposed Australian reforms go substantially beyond a proposal to create a single national register. For the full article by Angela Flannery & Greta Burkett please click here. EUROPE, AFRICA & MIDDLE EAST Tanzania Updates Corporate Insolvency LegislationThe number of corporate insolvencies per year in the Republic of Tanzania has been relatively low but, with the increase in the commercial and economic activity in recent years, inspired and assisted by the country’s enlightened legislative approach to attracting foreign investment and large joint venture projects, the size of assets and liabilities involved in actual or potential insolvencies has grown by leaps and bounds. Greater professional involvement in dealing with financially distressed businesses has also helped develop sophisticated corporate rescue techniques. It is as part of such enlightened legislative approach, and recognition of the important role of professionals, that Tanzania’s companies legislation, including its provisions relating to company insolvencies, until recently largely based on the UK’s former Companies Act 1929, has now been updated in the form of the Companies Act 2002 on the model of the UK’s Companies Act 1985 and Insolvency Act 1986. Having such legislation which compares well with the existing legislation of more developed countries can only enhance Tanzania’s standing in the global market. An administrative receivership, particularly a bank-generated administrative receivership, is an important and popular feature of Tanzania’s corporate insolvency scene. Unlike the UK’s Enterprise Act amendments to the Insolvency Act 1986 which have imposed severe restrictions on this process, Tanzania’s new legislation has chosen, at least for the time being, not to incorporate such restrictions in its new legislation. For the full article by Shashi Rajani and Frederick S. Ringo please click here. |
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AMERICAS Fraudulent Transfer Challenge to Leveraged Spin-Off For almost two decades spin-offs have been a favoured restructuring mechanism for business entities seeking to enhance their value. In a typical spin-off, a parent company divests a wholly owned subsidiary through the distribution of the subsidiary's stock to the parent's stockholders in the form of a dividend. A number of these transfers, however, are later challenged both under the U.S. Bankruptcy Code and / or state version of the Uniform Fraudulent Transfer Act as constructive fraudulent transfers on the grounds that (i) the transaction was made for less than “reasonably equivalent value” and (ii) the transferor was insolvent or had unreasonably small capital at the time of the transaction or as a result of the transaction. Because neither the Bankruptcy Code nor the Uniform Fraudulent Transfer Act offers clear guidance as to what constitutes “reasonably equivalent value” for transfer purposes, it is often difficult to determine beforehand whether a spin-off will be avoided as a constructive fraudulent transfer on “reasonably equivalent value” grounds. Further, because this issue is a question of fact determinable on a case by case basis, courts have been given wide latitude to determine equivalency. This article discusses the issue of spin-offs as fradulent transfers with reference to the recent decision of the US Court of Appeals for the Third Circuit in VFB LLC v Campbell Soup Company. ASIA & THE PACIFIC Chinese Manufacturers Experience Growing Pains The unsophisticated accounting systems, poor management strategies and lacklustre financial management abilities that form the backbone of many Chinese manufacturing concerns, have left these businesses struggling to cope with the competitive global environment into which they have been thrust. The future of China’s struggling manufacturers rests with their ability to improve efficiency and raise their standards to match the pace and flexibility of the best in the industry. A key step in achieving this will be the education of management and the introduction of modern manufacturing systems. Cleverly conceived operational restructuring and new investment could mean the difference between the collapse of manufacturers stuck in the inefficient methods of the past and China retaining its place as the leader of global manufacturing. |
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INSOL International New York Seminar - Thursday 21st June 2007 INSOL is hosting a one-day educational programme on current hot topics that will be of great interest to insolvency and turnaround professionals. The topics covered are:
Please click here for the registration brochure. For further details please contact: Tina McGorman |
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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. |
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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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