Contents at a glance... Editor’s Note Highlight of this Issue Judicial Co-operation in Cross-border Corporate Insolvency Cases: Whither the Caribbean Single Market Economy? Case Decisions • United States of America Lehman Court Orders Outline Rights of Counterparties to Safe Harbored Financial Contracts Legislation • United States of America Troubled Assets Relief Program: Q&A Articles • Australia Implications of Margin Lender Insolvency Publications • 2008 Turnaround & Corporate Renewal Special Report News • INSOL Shanghai This issue was kindly sponsored by: Please visit Davis Polk & Wardwell by clicking here

The global markets have continued to reel, following news on both sides of the Atlantic and beyond of the collapse of established financial institutions, and with authorities in Europe and the US ploughing in funds in an attempt to support the market and to prevent further meltdown.

Following Lehman Brothers Holdings Inc’s chapter 11 bankruptcy filing, it has become abundantly clear that this is not so much a credit crunch as a credit crush, resulting in unprecedented market upheaval.  Whilst the epicentre of the crunch lies within financial institutions, monolines and insurers, the resulting loss of liquidity in the marketplace has led to a lack of availability of finance to fund restructurings of entities in distress in other sectors.  The shock waves are spreading fast and far.

These are daunting times for all, which present challenges for insolvency professionals, whether that involves grappling with the unwind of complex financial products, getting up to speed with rafts of proposed new legislation, regulation and accounting standards or advising businesses or individuals on the solvency issues they face in the current market.

There has never been such a need for insolvency professionals to co-operate and communicate with each other with a view to the speedy resolution of often complex issues to arrive at the best value-preserving strategies.  In the global market much of this co-operation and co-ordination will take place cross-border.

The October edition of INSOL’s Electronic Newsletter includes as its highlight feature an article by Hon Ian R. C. Kawaley, Commercial Court Judge of the Supreme Court of Bermuda, which takes up the theme of cross-border co-operation within and relating to the member states of the Caribbean Single Market and Economy.

This edition also includes a summary of a key bankruptcy court decision concerning the Lehman broker/dealer liquidation proceedings in which the US Bankruptcy Court approved the sale of certain of Lehman Brothers Inc’s assets to Barclays Capital Inc. Information and documents concerning the chapter 11 filing of Lehman Brothers Holdings Inc can be found on http://chapter11epiqsystems.com/lehman. For information and documentation on the proceedings brought against Lehman Brothers Inc by the Securities Investor Protection Corporation under the Securities Investor Protection Act of 1970 see http://www.lehmantrustee.com.

An ammended version of the Emergency Economic Stabilization Act of 2008 has now been passed by the US House of Representatives. Included in this edition of the newsletter is a very useful summary and discussion of the Troubled Asset Relief Programme.

The newsletter also includes a very timely article by Jason Harris on ‘Implications of margin lender insolvency’. Although the article looks in particular at case law arising following the collapse of Opes Prime, a stock broking, asset management and financial services firm in Australia, the issues it raised are ones which are increasingly being raised and litigated in other jurisdictions.

Finally, members will also find a link to Financier Worldwide’s Turnaround & Corporate Special Report which contains a collection of interesting restructuring articles.

Sally Willcock
Weil Gotshal & Manges
London Office

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Judicial Co-operation in Cross-border Corporate Insolvency Cases: Whither the Caribbean Single Market Economy?

Most, if not all, Commonwealth Caribbean countries appear not to have statutory cross-border legal regimes. Although the common law is sufficiently flexible to facilitate an ample measure of judicial co-operation in cross-border insolvency cases, Caribbean jurisdictions wishing to attract investment from outside the region will, in the long term, probably find statutory rules to be a better solution. The UNCITRAL Model Law on Cross-border Insolvency offers a globally acceptable and easily identifiable set of rules, even if the COMI concept may be problematic for offshore entities whose management is substantially based onshore. The more internationally oriented economies will by dint of commercial necessity give more attention to their cross-border insolvency mechanisms than those economies which are not heavily involved in cross-border transactions. BVI was the first jurisdiction in the Atlantic and Caribbean region to adopt legislation based on the Model Law in 2003, although it is not yet fully in force.

This paper attempts to suggest possible future trends for cross-border insolvency regulation in the Commonwealth Caribbean, particularly in light of the recent birth of the Caribbean Single Market and Economy (CSME). This is a topic about which little appears yet to have been published.This article is being written in a jurisdiction which is peripheral to the centre of the CARICOM scene in both geographical and political terms and therefore, the views set out below are necessarily tentative in the extreme.

Nevertheless, it is suggested that the European Union example of a common regional legislative regime for judicial co-operation in cross-border insolvency cases appears to be a potential precedent for the CSME to follow. The rationale for following this precedent would be that commercial and legal logic must march together in any region whose states have elected to loosen the national boundaries which used to define and divide them, and which have (in economic terms at least) raised the national barriers altogether. Although corporate regulatory and substantive insolvency law differences in the EU have been retained, a common approach to cross-border insolvency issues has been seen as being required.

For the full article please click here.

Hon. Dr. Ian R.C. Kawaley
Commercial Court Judge
Supreme Court of Bermuda

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AMERICAS

United States of America

Lehman Court Orders Outline Rights of Counterparties to Safe Harbored Financial Contracts

Following a week of unprecedented market upheaval, players in financial contracts got some reassurance from the bankruptcy judge presiding over the liquidation of broker/dealer Lehman Brothers Inc. (“LBI”) and the sale of a portion of its assets to Barclays Capital Inc. (“BCI”). In an order issued after an extensive evidentiary hearing, the bankruptcy court affirmed that the order approving the LBI asset sale does not interfere with the exercise of contractual rights enjoyed by LBI counterparties under protected financial contracts such as securities contracts, repurchase agreements, forward contracts, commodity contracts, swap agreements, or master netting agreements (as each is defined under the Bankruptcy Code, “Protected Contracts”). Be cautioned, however: a companion district court order issued pursuant to the Securities Investor Protection Act imposes a stay of at least 21 days, during which counterparties to these agreements are prohibited from taking certain actions without permission of the SIPC Trustee.

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Americas

United States of America

On 3rd October, the U.S. Congress completed legislative action on the Emergency Economic Stabilization Act of 2008 (the “Act”) – far-reaching legislation addressing the economic crisis currently crippling credit markets. The President is expected to sign the measure immediately.

The Troubled Assets Relief Program (the “TARP”) is at the heart of the Act. The TARP affords broad authority to the Secretary of the Treasury (the “Secretary”) to purchase certain troubled assets from eligible financial institutions in an aggregate amount potentially reaching $700 billion outstanding at any one time. The TARP will be implemented through a new Office of Financial Stability, headed by an Assistant Secretary of the Treasury. The Act also provides for a Treasury program to offer financial institutions guarantees related to troubled assets.

The Act is designed to restore liquidity and stability to the U.S. financial system. At the same time, the purposes of the Act include protecting home values, college funds, retirement accounts and life savings, preserving home ownership, and promoting jobs and economic growth.

Key highlights of the Act include provisions:

• Defining parameters for the Secretary’s exercise of authority to purchase troubled assets, including the institutions eligible to participate in the program, the assets eligible for purchase, and pricing considerations;
• Requiring the U.S. Treasury to obtain debt or equity stakes in participating institutions;
• Regulating certain compensation practices of participating institutions;
• Establishing principles for asset management and servicing, including the role of the private sector and the implementation of foreclosure mitigation efforts;
• Requiring the Secretary to make recommendations for regulatory modernization;
• Authorizing the Securities and Exchange Commission (the “SEC”) to suspend mark to- market accounting; and
• Temporarily increasing the basic limit on federal deposit insurance from $100,000 to $250,000.

For more details of the key issues and other highlights please see Cleary Gottlieb Alert Memo, 3 October 2008.

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Asia Pacific

Australia

Implications of Margin Lender Insolvency

The past year has seen a dramatic tightening of global credit markets amid rising concerns about the valuation of corporate debt instruments and the secured assets and credit ratings underpinning the various instruments. In Australia, the resulting market volatility has played havoc with investors, who have witnessed dramatic falls in the Australian Stock Exchange (ASX).

Concerns about share valuations have driven up market trading volumes and put pressure on many companies, who have seen up to 30 or even 40 percent of their shares changing hands in a single trading day. The trading volatility has also put securities firms under significant strain, as demonstrated by a string of collapses of companies offering margin lending arrangements, including Lift Capital, Primebroker Securities (a division of Chimaera Financial Group) and of course, Opes Prime.

The pre-2007 boom in equity markets attracted many investors into leveraged share purchases through the use of margin lending services. Thousands of these investors have now been left in a difficult position as their shares held on margin have been sold out when the lending firms have gone into voluntary administration and/or receivership. These collapses raise many important insolvency issues, particularly the rights of investors under margin and other securities lending arrangements when the lender becomes insolvent.

For the full article please see Australian Insolvency Journal, September Issue, 2008, P.4

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2008 Turnaround & Corporate Renewal Special Report

We are pleased to have worked alongside Financier Worldwide Magazine on the production of their 2008 Americas Turnaround & Corporate Renewal Special Report. Distributed as part of the September 2008 issue of Financier Worldwide Magazine, this report tackles some of the most pressing issues affecting restructurings and bankruptcies worldwide.

Robert O Sanderson our current President wrote one of the lead articles for the report looking at emerging restructuring issues. Other key articles include:

For the full report, please click here. 

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INSOL Shanghai

INSOL held its annual regional conference in Shanghai from 14-16 September.  Over 440 delegates attended the main conference and the feedback from the delegates was very complimentary and positive. The technical programme was considered to be excellent, with a diverse range of topics discussed at a high level.

An ancillary meeting of the INSOL academics group was also held during this period. Candidates following the INSOL fellowship course were also present.

Everyone who attended these events had plenty of opportunities to net work to make new friends and establish new contacts.

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This issue was kindly sponsored by:

Please visit Davis Polk & Wardwell 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, Jelena Sisko at jelena@insol.ision.co.uk