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Editor's Note Who Carries the Can? The phenomenon of securities class actions has finally arrived in Australia. A colleague recently looked overseas for some pointers as to how this type of litigation may play out. As part of that exercise, he totted up the amount of money that had been recovered from Enron's professional advisers and non-executive directors - more than $US7 billion. Although it's still early days in terms of actual court decisions or settlements, the number of new litigation proceedings by disgruntled Australian shareholders is rapidly rising. We may not reach the giddy heights of Enron, but the potential for substantial money sums is clearly evident. How does this affect the insolvency profession? We are all familiar with the complaints of creditors and directors of failed companies about the actions of liquidators, receivers and administrators. Directors complain about how the company's business could have been saved if only ...
By and large, however, these complaints usually come to nothing. Even if they end up in litigation, the Courts recognise that insolvency practitioners have to balance a lot of competing interests and they cannot be judged solely from the point of view of one of those interest groups. Securities class actions - the complaints of shareholders of failed companies - are not usually directed at insolvency practitioners per se. Of course, insolvency practitioners can be drawn into them in a professional capacity if the action is directed against the company itself, but generally speaking, the main game is directed against third parties (such as advisers) who have deep pockets that can be accessed fairly quickly. Despite this, “off balance sheet” securities class actions against advisers and directors do merit some attention. Do they perform a useful function, by diverting investors' attention (and claims) away from the already-fraught corporate insolvency? On the other hand, do they muddy the waters for liquidators and for creditors in general? How, for example, does one ensure that a securities class action hasn't bankrupted the company's directors, thus negating any recovery action by the liquidator on behalf of the company's creditors? Conversely, would subsuming securities class actions to the overall liquidation of the company increase the chance of BCCI-type litigation against the company's advisers? For that matter, could or should individual creditors be allowed to pursue actions against third parties? These issues are currently bubbling away under the surface and the way they are currently dealt with is clearly very dependant upon jurisdiction-specific insolvency regimes. Nevertheless, in the face of what is rapidly becoming the global phenomenon of securities class actions, they are issues that would benefit from being addressed in a systematic manner. David Cowling |
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Lazarus Companies For many companies, the end does not come with a bang or even a whimper. They simply cease operations and, like Keats' nightingale, “leave the world unseen, /And ... fade away into the forest dim”. In Australia, we have a special regime for dealing with these defunct companies: Pt 5A.1 of the Corporations Act 2001. The company's directors can ask to have the company deregistered by the corporate regulator, the Australian Securities & Investments Commission ( ASIC) [which it will do if it believes that the company has only nominal assets and isn't leaving its creditors in the lurch]. The other route into the forest dim starts when ASIC notices that the company hasn't been filing returns. It then sends out a letter to the last-known address of the company and its directors and, if there's no response, deregisters the company. Deregistration is not just the removal of the company from the register of companies. It also means that the company ceases to exist. Its assets (if there are any) vest in ASIC. The world of business being what it is, there will inevitably be situations in which someone wants to have a deregistered company restored to life. This could be for a number of reasons, most of which involve either enforcing the company's legal rights or enforcing rights against the company. Both ASIC and the Courts have the power to re-register companies. An ASIC application would usually be cheaper and faster, but a couple of recent cases point out that sometimes an application to the Court may be the wiser path. For the full article please click here. David Cowling |
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AMERICAS Seventh Circuit Rules Borrower is Third Party Beneficiary of Trust Agreement to Whom Indenture Trustee Owes a Duty of Good Faith and Fair Dealing In Re United Air Lines, Inc., 438 F.3d 720 (7th Cir. 2006) In this case, a majority of a panel of the Seventh Circuit Court of Appeals ruled that a bond indenture trustee US Bank National Association (“US Bank”), breached its contractual obligations to United Air Lines, Inc. (“United”) when it failed to honour a draw request submitted by United when United was clearly on the brink of bankruptcy. Further, because of this breach and other “key policy” considerations of not rewarding an indenture trustee for “speculating on the bankruptcy of a debtor,” the Seventh Circuit denied US Bank the ability to set off the damages it owed United as a result of the breach against the sums United owed on the underlying bonds. Pivotal to the decision in United was the Seventh Circuit’s determination that United was a third party beneficiary of the trust agreement between the issuer of the bonds and US Bank, and that US Bank therefore owed United a duty of good faith and fair dealing that was not “trumped” by US Bank’s fiduciary obligations to the bondholders. For a full article on this case please see White & Case Insolvency Notes, July 2006, P. 1 EUROPE, AFRICA & MIDDLE EAST Grand Court of Cayman has Jurisdiction to Set Guidelines for the Fixing of Remuneration for Court Appointed Liquidators of Cayman Islands Companies Attorney General of The Cayman Islands v James Cleaver & Co., [2006] UKPC 28 On an application by the respondents, the Grand Court of the Cayman Islands issued a set of guidelines for fee rates in respect of the remuneration for court-appointed liquidators of Cayman Island companies. The Court of Appeal of Grand Cayman however disagreed with the lower court decision and set aside the judgment. The appellant appealed to the judicial Committee of the Privy Council on the grounds that: (1) The matter was one of general public interest in the Cayman Islands and (2) The decision of the Court of Appeal was wrong The Committee concluded that it is appropriate to grant leave to the Attorney General to intervene and to pursue the present appeal. It also concluded that the Court of Appeal based its decision on an erroneous understanding of the role of the Grand Court and the correct view is that the Grand Court had power to set guidelines and procedures for the fixing of liquidators’ remuneration. Therefore, the Attorney General’s application for leave to intervene and pursue these appeals should be granted, and the appeals should be allowed. For a case note please see 3/4 Digest, July Edition, P. 4. |
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ASIA & PACIFIC RIM Extending Corporate Responsibilities The Australian Corporations Act 2001 requires directors and officers to exercise care and diligence, act in good faith in the best interests of the corporation and act for a proper purpose. It also requires that officers and employees not misuse their positions, or corporate information, to gain an advantage for themselves or someone else, or to cause detriment to the corporation. In 2003, Justice Owen in his report on the HIH Royal Commission recommended inter alia that the definition of the class of personnel on whom duties are imposed under the Corporations Act be amended to focus on the function performed by the person, as opposed to the classification of their legal relationship to the corporation. As a direct consequence to this issue that was raised in the HIH report, the Federal Corporations and Markets Advisory Committee (CAMAC) looked into this matter and in its report has recommended that certain duties and obligations currently confined to company directors be extended to apply to managers, contractors and consultants. For the full article, please see Allens Arthur Robinson, Focus: Insolvency - July 2006 |
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EUROPE, AFRICA & MIDDLE EAST Insolvency Administrator Selection and Quality Criteria in International Comparison In Germany, between the years 2002 to 2005, the number of insolvencies increased from 3,564 to 40,000. This led the Federal Constitutional Court to conclude that “insolvency administrators” were an independent profession which triggered considerable discussion about appointing insolvency administrators. This article discusses the selection criteria considered in Germany as well as the position in 12 other jurisdictions namely, France, UK, Ireland, Austria, Belgium, Sweden, USA, Italy, Switzerland, Finland, Denmark, Slovakia and Hungary. For the full article by Christian Köhler-Ma please click here. AMERICAS Financial Entities in Argentina: Their Impossibility to Request the Approval of an Out of Court Plan of Arrangement In Argentina, financial entities are not entitled to request the approval of an Out-of-Court Plan of Arrangement (OPA) which is governed by the provisions of the bankruptcy law as a bankruptcy subtype. This article raises two interesting issues that render inadmissible any petition filed by a financial entity requesting court recognition of an OPA, namely: |
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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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