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Informal Creditors’ Committees in Chapter 11 Bankruptcies – There has been much discussion in recent years of the changes to the restructuring process caused by the significant increase in claims trading and the active participation in restructurings and bankruptcy proceedings of distressed investment funds and other unregulated investment entities. These developments, as is the case with so much in the restructuring world, started in the US and have been exported to other parts of the globe. Those wishing actively to participate in a restructuring or bankruptcy proceeding, including those adopting a “buy to own” strategy, often do so through creditors’ committees, both formal and informal. The committee is a key vehicle through which parties organize and co-ordinate their participation. Informal or ad hoc committees play an important role in many cases. But recently a decision in the Northwest Airlines bankruptcy proceeding in the Southern District of New York has questioned the manner in which ad hoc committees seek to comply with the disclosure requirements of the US Bankruptcy Code, and the practices adopted by such committees in chapter 11 cases, and in doing so has raised concerns that many creditors will in future be unwilling to serve as members of such committees with consequential damage to the organization process. Bankruptcy Rule 2019 requires ad hoc or unofficial committees and their counsel to disclose, among other things, “the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof. ”In practice, this information is never provided given the sensitivity most investors have to disclose such proprietary information. In an apparent effort, however, to quiet and limit the activities of a litigious ad hoc committee of shareholders, the debtors in the Northwest Airlines case moved to require the ad hoc committee to supplement its Rule 2019 statement to provide this information. Judge Alan Gropper, a highly respected judge of the Bankruptcy Court in the Southern District of New York, granted the debtors’ motion and ordered the committee to file an amended Rule 2019 statement, reasoning that Bankruptcy Rule 2019 plainly requires such disclosure and there was no basis for failing to apply it as written.1 In response to this ruling, the ad hoc committee moved for an order that would permit the portion of the amended statement that disclosed the specifics of the purchases and sales of the debtors’ securities by committee members to be filed under seal, available only to the Court and the US Trustee. In a subsequent decision Judge Gropper denied the committee’s sealing motion.2 The court reasoned that Bankruptcy Rule 2019 is a disclosure rule that contemplates public dissemination of the required information. The potential protection recognised in other cases for information that is “confidential” and “commercial in nature” did not apply to “trading strategies”. Any individual interest in keeping confidential prices at which committee members bought and sold the debtors’ securities was overridden by the interests that Bankruptcy Rule 2019 sought to protect - other shareholders of the debtors had a right to know “where their champions are coming from”. Members of the ad hoc committee have filed a reconsideration motion inviting Judge Gropper to reconsider his decision and, in view of the significance of the case, The Loan Syndications and Trading Association and The Securities Industry and Financial Markets Association have joined the motion to reconsider as amici curiae. There seems little doubt that if, as is likely, Judge Gropper refuses to change his mind, there will be an appeal. In the meantime, there seems to be a real risk that the decision will have a chilling effect on the collective participation of activist creditors in reorganizations and cause hedge funds and other distressed debt investors to have to rethink the way they can play a role in a bankruptcy case. Watch this space for further developments! 1 In re Northwest Airlines Corporation No.05-17930 (Bankr. S.D.N.Y. Feb. 26, 2007). Nick Segal |
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Are Licences or Rights Derived from Licences Personal Property Realisable in Bankruptcy? On February 8, 2007, the Supreme Court of Canada granted leave to appeal a judgment of the Nova Scotia Court of Appeal to consider the question of whether rights relating to fishing licences constitute property within the meaning of Canadian bankruptcy and personal property security legislation (Royal Bank of Canada v.Saulnier [2006] S.C.C.A. No.351). The Nova Scotia Court of Appeal’s judgment, which is being challenged, held that the beneficial interest in the earnings from a fishing licence was property under the Bankruptcy and Insolvency Act (BIA) and personal property security legislation (Royal Bank of Canada v.Saulnier [2006] N.S.J. No. 307 (N.S.C.A.). Licences in the fishing industry, as well as other related areas of natural resource and agricultural commercial development are traditionally very valuable and a significant benefit in the Canadian economy. The issue therefore has been whether the licences or rights derived from them are property that vests in the bankrupt estate for the ultimate benefit of creditors. Canadian superior and appellate courts have adopted an uneven approach to the question of the property status of a licence holder's powers of renewal. For example, in National Trust Co. v. Bouckhuyt, the Ontario Court of Appeal held that tobacco quota under provincial legislation was not intangible personal property under Ontario's Personal Property Security Act, given that the quota represented the granting of a privilege and was by nature subject to such discretionary control and so transitory and ephemeral in its nature that it could not be considered to be property. (National Trust Co. v. Bouckhuyt (1987), 43 D.L.R. (4th) 543 (O.C.A.) The different approaches to beneficial interest in licences as property in a bankruptcy are likely to be resolved by the Supreme Court of Canada later this year when it determines the appeal in Saulnier. For the full article please click here Professor Janis Sarra |
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ASIA PACIFIC High Court of Australia Gives Litigation Funders the Go Ahead Campbell Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 A tobacco retailer launched a representative action to recover tobacco licence fees. The legal proceedings had been commenced with the assistance of a litigation funder and the agreement was that the litigation funder would take one-third of any money received by the retailers as well as all costs awarded. The primary judge found that the litigation funding arrangements were against public policy and were an abuse of process but the New South Wales Court of Appeal reversed that decision. On appeal to the High Court of Australia the Court considered litigation funding as a principle and specifically the terms of the litigation funding agreement. The High Court observed that "fears about adverse effects on the processes of litigation" as a result of these sorts of arrangements were not enough to establish a rule of public policy to prohibit representative actions financed by litigation funders. This landmark decision therefore indicates that it is possible for litigation funders to control class action litigation with the purpose of profiting from it. For a case note by Sally Nash, Sally Nash & Co, please click here EUROPE, AFRICA & MIDDLE EAST Protection for the Defendant is Essential Before Granting a Freezing Order Fourie v Le Roux [2007] UKHL 1 The liquidator of a company appointed by the South African Court applied to the English Court for a freezing order against the respondents, alleging that they had misappropriated the assets of the Company. The freezing order was made by the English Courts pursuant to section 426 of the UK Insolvency Act 1986. On appeal by the respondents, the Appeal Court held that the order should be discharged and the applicant liquidators' then applied to the House of Lords. The House of Lords held that in the strict sense it had jurisdiction to make the freezing order since the court had jurisdiction to grant an injunction in relation to any person over whom it has in personam jurisdiction. However as a matter of practice and procedure, the court will insist on protection for the defendant before granting a freezing order and in this case there was none. Therefore the court was entitled to discharge the freezing order. The court had no jurisdiction in the wider sense and the appeal was dismissed. For a case note in 3-4 Digest, February 2007 please click here |
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ASIA PACIFIC On the Horizon: Insider and Insolvent Trading Law ReformTwo papers recently released by the Australian Federal Government could result in reforms that will make life more difficult for insolvency practitioners. The reforms include the repeal of an exemption from the insider trading law for liquidators and bankruptcy trustees, and the creation of a new defence for directors facing an insolvent trading claim. This article argues that repealing the exemption from the existing insider trading law for liquidators and bankruptcy trustees would increase the personal exposure of insolvency practitioners and considers what practices and procedures are in place to manage that exposure. Further, creating a new defence to an insolvent trading claim would make it more difficult for liquidators to pursue claims against company directors. For more details on these reforms please see Allens Arthur Robinson Focus: March 2007 EUROPE, AFRICA & MIDDLE EAST Reform of the French Securities Law: A Revolution in Half-toneFrench law on secured transactions needed to be modernised drastically as the rules originated from the Napoleonic Code in 1804. Modernisation was essential as the laws needed to be made more attractive and competitive to stand up to strong international competition. Reforms were introduced on 23 March 2006 with the adoption of a governmental ordinance relating to security rights in general. This article provides an overview of the reforms that were introduced in respect of securities over movables as well as immovables, and looks at the deficiencies that are clearly seen in some of these reforms. Clearly, in spite of some welcome innovations, the reforms still appear to be unfinished and there seems to be a hesitancy from the legislators to introduce further reforms. |
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AMERICAS Hedge Funds: Lessons Learned from the Radnor Decision Many hedge funds are very active traders of debt and equity securities and have been showing up more often in the market for distressed investments, which leads them to be involved in bankruptcy proceedings. Hedge funds can participate in a bankruptcy case in a variety of ways, including members of bank syndicates holding first and second lien debt, buyers of distressed unsecured debt, debtor in possession lenders, purchasers of claims or equity, or sponsors of a reorganisation plan. Hedge funds therefore are new players seated at the bankruptcy table. While some demonize hedge funds, others view hedge funds as particularly useful in the restructuring context because they are not constrained to make only one single type of investment and are not bound by banking regulations. This makes them much more nimble than traditional lenders and able to adapt their strategies to the particularities of a debtor and its creditor constituencies. This article seeks to explore the nature of hedge funds, their participation in the bankruptcy For the full article please see American Bankruptcy Institute Journal, February 2007, P. 30 |
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INSOL Cape Town 18 - 21st March 2007 INSOL International held its Annual Regional Conference for Europe, Africa and the Middle East in Cape Town. In addition to the main technical programme, there were two ancillary programmes on Turnaround and Reorganisation and Insurance Insolvency. The INSOL Academics' Group also held a meeting. The Seventh Multinational INSOL/UNCITRAL/World Bank Judicial Colloquium which is a closed meeting for judges was also held during this period. Reviews of the technical sessions will be published in our next edition of INSOL World. |
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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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