(UK) What is misfeasance trading? What does this mean for directors and their advisors?

For those that are that way inclined (which includes us at #SPBRestructuring!), the 500 plus page Wright v Chappell judgment which sets out the BHS wrongful trading claim against its former directors makes for an interesting read.   It paints a colourful picture of the downfall of the BHS group, from the point that it was sold for £1 to its eventual demise into administration and then liquidation.  You can make your own mind up about the characters involved, but the story is a sorry one, with creditors ultimately suffering the most.

The liquidators of the BHS group brought a claim against the former directors for wrongful trading, two of those directors settled the claims against them, and three defended.  This recent decision relates to the findings against Henningson and Chandler, with the outcome of the claim against Chappell being dealt with separately. 

Ultimately the judge found that both Henningson and Chandler were liable for wrongful trading, but also that they were liable for misfeasance trading in breach of their director duties.   But what is “misfeasance trading”?  How does this impact director duties? Does this change how practitioners should be advising directors of distressed companies?

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“Should Have Known Better” – Bankruptcy Court Denies Relief to File Late Claims Despite Litigation Having Commenced After Bar Date (US)

File your proof of claim before the bar date.  That’s a principle every creditor in a bankruptcy case should adhere by.  But on June 7, 2024, the United States Bankruptcy Court for the Southern District of New York may have increased the degree of diligence parties need to conduct to determine whether they are a potential creditor in a case and therefore required to file a proof of claim.  The decision, which is on appeal, stands for the proposition that a party in interest should file a protective proof of claim when the party (a) has received notice of the bar date and (b) should recognize that there is some possibility that it could face liability in the future related to its prepetition relationship with the debtor.

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In Purdue Pharma, the Supreme Court Fires a Canon of Construction Through Non-Consensual Third-Party Releases (US)

On June 27, 2024, the Supreme Court ruled in a 5-4 decision that a bankruptcy court does not have the statutory authority to discharge creditors’ claims against a non-debtor without the creditors’ consent (except in asbestos cases).  The decision in Harrington v. Purdue Pharma settles a long-standing dispute in the bankruptcy world that will have significant impact on Purdue Pharma and its hundreds of thousands of creditors, and more generally on the bankruptcy practice itself.  

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(UK) The Court Considers the Question of Whether Secured Creditor Consent is Required to an Administration Extension Again. “Too Good” to be True?

No, it isn’t.  We now have two cases where the Court has confirmed that insolvency practitioners do not need the consent of paid secured creditors when extending an administration under para. 78 of Schedule B1 of the Insolvency Act 1986 (the “Act”).

In Boughey & Anor v Toogood International Transport and Agricultural Services Ltd [2024] EWHC 1425 (Ch) (“Toogood”)the judge agreed with the conclusions reached in the recent Pindar case – see our blog on this – concerning the interpretation of s248 of the Act.  Agreeing that is it clear that a secured creditor as defined in s248, is a creditor who “holds” (in other words still has) a security.  The judge in Toogood elaborated on this further saying that even if it was possible to construe “security” in s248 as referencing security for a debt of zero, s248 still refers to “creditor”, saying that a creditor who has been repaid is no longer such.

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A Committee May Survive Dismissal of a Debtor’s Chapter 11 Case (US)

This author—whose practice is heavily weighted toward representation of official committees in large chapter 11 cases—has previously penned articles relating to questions surrounding the permanency of an official committee. 

First, in an article entitled Does a Bankruptcy Court Have Authority to Disband an Official Committee?,[1] two then high-profile bankruptcy cases were examined—In re City of Detroit, Michigan, 519 B.R. 673 (Bankr. E.D. Mich. 2014) and In re Caesars Entertainment, 526 B.R. 265 (Bankr. N.D. Ill. 2015)—where bankruptcy courts reached opposite conclusions regarding whether a court has the authority to disband or vacate the appointment by the Unites States Trustee (the “UST”) of an official committee of creditors.  While there have been subsequent decisions addressing the issue—finding that such authority does exist—that question has yet to be answered on the circuit court level.[2] 

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Do you need the consent of paid secured creditors to an administration extension? 

This question was considered in the recent case of Pindar where the judge concluded that an administration had been validly extended where the consent of one of the secured creditors (who had been paid) was not obtained.

Many insolvency practitioners are likely to welcome this decision with open arms given that it can be problematic to obtain the consent of paid secured creditors, not only when it comes to consensual administration extensions but also when seeking remuneration approval.  In practice (and understandably) secured creditors who have been paid do not wish to agree matters where they no longer have any economic interest in the outcome of the process. 

But is this decision the answer? 

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Assume and Wait – Delaware Bankruptcy Court Approves Debtors’ Novel Lease Assumption Strategy (US)

When a liquidating debtor seeks to assume a lease, one of the lessor’s immediate questions is who will be the assignee.  But what happens when a liquidating debtor seeks to assume a lease and waits up to two years thereafter to determine who the assignee will be?  Although peculiar, the analysis of whether to grant the assumption rests on evaluating the three basic requirements under section 365 of the Bankruptcy Code.  By preserving the lessor’s ultimate ability to object to a proposed assignment, and with a considerable amount of discretionary liquidity, assumption can prove to be a value-maximizing decision for an estate notwithstanding a lessor’s opposition to such future uncertainty.

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Parties Beware—Noncompliance with Delaware ABC Statute Can Lead to Serious Consequences (US)

Last month the Delaware Chancery Court sent a clear message to Delaware companies that failure to strictly comply with the Delaware Assignment for the Benefit of Creditors (“ABC”) statute will result in severe consequences, including dismissal.

On December 27, 2023, WMT (an ABC) LLC (the “Assignee”) filed an assignment petition which provided that it had entered into an assignment agreement on March 13, 2023 with WindMIL Therapeutics, Inc. (the “Assignor”).  The petition noted that the assignment agreement was attached—it was not.  The assignment agreement was only provided to the Chancery Court in response to a scheduling order (the “Initial Order”) entered on January 3, 2024.  The Assignee also filed an affidavit in response to the Initial Order and provided two purported valuation opinions that had been obtained by the Assignee.  The first was an appraisal stamped “draft” from Redwood Valuation Partners (“Redwood”) dated November 21, 2023, which valued the intellectual property assigned to the Assignee at $409,000 based on a fair market value analysis.  The second was an appraisal prepared by Braun Co. (“Braun”) dated November 22, 2023, with a valuation date of October 31, 2023, which offered a speculative $100 value on the intellectual property. 

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(UK) What practical changes can IPs expect from the proposed amendments to FCA guidance?

The UK Financial Conduct Authority (FCA has issued a consultation about proposed changes to its Guidance for Insolvency Practitioners.  The aim is to clarify existing guidance and provide more information to insolvency practitioners (IPs) on how to deal with regulated firms.

The proposed amendments (shown as track changes in this document) intend to update the current guidance to reflect changes in the legal framework since it was first issued, and to clarify or provide further information to IPs which will assist IPs in dealing with regulated firms.

The more substantive changes intend to deal with, the Consumer Duty and the Court of Appeal decision in Ipagoo, but some of the most practical (suggested) changes to the guidance are these:

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Subchapter V Debt Limit: Don’t Get Caught Assuming Congress Will Act (It Probably Will…But Still) (US)

In my most recent blog post, I provided some tips for creditors who find themselves in the Subchapter V arena. This is somewhat of a follow-up to that one.

There is a general consensus that Subchapter V has been successful for debtors in smaller cases. The American Bankruptcy Institute recently commented that Subchapter V bankruptcies comprise nearly 30% of all Chapter 11 bankruptcy cases filed since enactment of the Small Business Reorganization Act (SBRA) in 2020.[1]  This is no surprise – the advantages that a Subchapter V brings are meaningful and often case dispositive relative to a standard Chapter 11.

Presently, Subchapter V is only available to debtors with less than $7.5 million in secured and unsecured debt.  However, the $7.5 million debt limitation is set to sunset (i.e., expire) on June 21, 2024. Upon expiration, the debt limit will be reduced to $3,024,725. There is, however, hope for prospective debtors. A bipartisan group in the United States Senate is sponsoring legislation (S. 4150, by Sen. Richard Durbin of Illinois) that would further extend the expiration of the current $7.5 million limit for an additional two years.[2] That would be welcome news to many prospective small businesses that may otherwise fall outside the debt limit if it expires soon.

But what if…bear with me here…what if Congress doesn’t get it done? 

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