A common defense to a fraudulent transfer claim in bankruptcy concerning a securities transaction is the “safe harbor” defense under section 546(e) of the Bankruptcy Code. In a unique twist, a post-confirmation trust in Delaware recently argued that the safe harbor defense should not be available if the underlying transaction was illegal under the law where the debtor/transferor was incorporated. As discussed below, both sides present thoughtful and well-reasoned arguments, and the bankruptcy court is now set to rule on whether a fraudulent transfer complaint should be dismissed for three defendants.
On 7th February 2024, Mr Justice Richards heard closing submissions in the English High Court for a contested sanction hearing for Aggregate Group’s Part 26A restructuring plan. This hearing presented one of the first opportunities to analyse how the Adler decision will affect restructuring plans going forward.
Aggregate are a German real estate group whose plan proposes to restructure three classes of debt to extend the maturity of senior debts by two years and discharge junior debts. The group hope this plan will secure €190 million in new money, which will be used to recommence development of an prominent unfinished shopping boulevard in Berlin.
Aggregate’s holding company, Project Lietzenburger Straße Holdco (PLSH), represented by Tom Smith KC and two senior creditors of the project, represented by David Bayfield KC argued for the sanction of the modified plan. While J. Safra Sarasin, a tier 2 debtholder represented by Charlotte Cook and Chapelgate Credit Opportunity Master Fund, a junior creditor represented by Adam Al-Attar KC questioned the legitimacy of sanctioning the plan. The interpretation of Adler was a hotly contested topic throughout closing submissions, with all four counsels dissecting Lord Justice Snowden’s judgement, in an effort to support their arguments.
Changes are afoot to the statutory regime governing special administrations for regulated water companies (the SAR) following the publication of a suite of new legislation.
Impact of the changes on pension trustees
Further details of the changes are set out below, but perhaps the most significant change for creditors generally, and pension trustees in particular, is the update to the insolvency waterfall to allow for priority payment of government funds. In a nutshell, this means that any funds provided by the Secretary of State to the special administrator by way of loan or grant will be paid out in priority to any s75 debt that may be owed to pension trustees. Given the potential size of such government grants, this could have a sizeable impact on recoveries for pension schemes and all unsecured creditors.
In March 2022, the International Monetary Fund (the “IMF”) assessed Sri Lanka’s public debt to be unsustainable after the country entered the pandemic with thin reserve buffers, high debt levels, and no fiscal space. The IMF’s determination prompted Sri Lanka to begin restructuring its debt the following month. As part of that process, Sri Lanka adopted an “Interim Policy” of suspending debt service on the following affected debts:
- outstanding series of bonds issued in international capital markets;
- all bilateral credits excluding swap lines between the Central Bank of Sri Lanka and a foreign central bank;
- all foreign currency-denominated loan agreements or credit facilities with commercial banks or institutional lenders for which Sri Lanka or a public sector entity is the obligor or guarantor; and
- all amounts payable by Sri Lanka or a public sector entity following a call upon a guarantee issued in respect of a third party’s debt.
On 23 January 2024, the Court of Appeal handed down its much anticipated judgment on the appeal of the Adler restructuring plan pursuant to Part 26A of the Companies Act 2006 (“RP”), which was sanctioned by the High Court on 12 April 2023, with judgment setting out the reasoning for that decision handed down on 21 April 2023.
For those new to the world of RPs, we refer you to our overview here as a “beginner’s guide” to the terminology and basic process involved in an RP.
In allowing the appeal, Lord Justice Snowden (with whom Lord Justice Nugee and Sir Nicholas Patten agreed) provided a helpful framework for those looking to implement a RP, in particular highlighting where the principles applied to schemes of arrangement will differ where the cross-class cram-down (“CCCD”) feature of the RP is, or is likely to be, engaged. In practice, this will mean that restructuring professionals should apply these principles to every RP situation as it is not always clear when CCCD will be required at the outset.
Following the Court of Appeal’s judgment, we set out below some practical take-aways, and questions to consider, when preparing an RP.
As we reported in a previous blog the German legislator in November 2022 introduced the Law on the Temporary Adaption of Restructuring and Insolvency Law Provisions to Mitigate the Consequences of the Crisis (SanInsKG). This addressed the difficulty of companies assessing their solvency during the crisis at that time, in particular as a result of the war in Ukraine, very high and volatile energy and raw materials prices, high inflation, rising interest rates and supply chain disruptions.
The most relevant change brought by SanInsKG was the reduction of the forecast period for the over-indebtedness test from 12 months to 4 months. This reduction allowed managing directors of companies time to address distress because they were not required to file for insolvency if a 4 months forecast period (rather than a 12 month forecast period) resulted in a positive going concern prognosis.
The Court of Appeal has, today, overturned the High Court’s decision to sanction the Part 26A restructuring plan put forward by the Adler Group (the “Plan”).
Following the Plan’s sanction by Judge Leech in the High Court in April 2023, dissenting creditors lodged an appeal, which was heard before the Court of Appeal in late October last year.
The judgment in the Adler appeal has been much anticipated, as it is the first time that the Court of Appeal has been asked to rule on matters relating to a Part 26A restructuring plan, and it sets precedent that judges in the High Court will be bound to follow.
On 23 September 2023, the new Act on Preventive Restructuring (284/2003 Coll.) entered into effect in the Czech Republic (the “Czech Preventive Restructuring Act”), incorporating the EU Directive 2019/1023 on preventive restructuring frameworks in the Czech legal environment. This legislation has been designed to enable debtors in financial difficulties to continue business by changing the composition, conditions or structure of their assets and their liabilities, by carrying out operational changes or adopting other appropriate financial measures, prepared, and implemented to avoid debtors’ bankruptcy.
In other words, as opposed to the Czech Insolvency Act, the new legislation should address financially distressed situations, in which the debtor’s business could survive without the need to launch formal insolvency proceedings, usually very damaging or even fatal to most of debtors in the Czech Republic.
This article briefly summarises the fundamental principles and statutory rules of the Czech Preventive Restructuring Act.
The judgment handed down in the matter of CB&I UK Ltd suggests that the English Courts will not expedite or truncate sanction hearing timetables to accommodate requests from companies which have applied for a restructuring plan under Part 26A of the Companies Act 2006 (“Restructuring Plan”) unless there are good reasons for doing so. Distressed companies and practitioners will want to take heed of these recent developments in light of the fact that many Restructuring Plans are proposed in the context of a burning platform where time may be of the essence.
The CB&I hearing dealt with two applications. This blog only deals with the application made by an opposing creditor, Refineria de Cartagena SA (“Reficar”) for an extension of the timetable for the sanction hearing.
The CB&I Restructuring Plan proceedings were issued on 24 September 2023. A convening hearing took place on 28 September 2023 where Mr Justice Miles ordered, among other things, that a sanction hearing was to be listed on an expedited basis for four days plus one day of pre-reading in the week commencing 27 November 2023. Reficar subsequently made an application to extend the sanction hearing timetable to two days pre-reading plus six days of hearing time. Although Reficar’s application did not request a delay to the sanction hearing, owing to Court availability, the next 6-day slot was not until early February 2024. The Court granted the order sought by Reficar which meant that the sanction hearing was ultimately delayed by a period in excess of two months.
The main takeaways from the CB&I judgment are, in our view, as follows:
- Reficar argued that Courts need to strike a balance between “the urgency of the situation and fairness to members of the creditors who oppose the scheme or plan”. Mr Justice Miles agreed, but at the same time noted there is a clear need to avoid unnecessary or protracted and elaborate trials which could add to costs, potential timing issues, and heighten insolvency risk for the plan company. Further, such an approach could leave plan companies exposed to the risk of opposing creditors tactically holding the plan company hostage, which could potentially defeat the overall purpose of Restructuring Plans, and signal their death.
- It ought to be noted that CB&I’s Restructuring Plan was unusual in that it did not seek to compromise certain classes of creditors (i.e. the trade creditors, intercompany creditors and the equity in the group which comprised largely of senior creditors). Conversely, Reficar – a creditor which had secured an arbitration award in the amount of USD 1 billion – stood to recover virtually nothing, nor did it stand to gain any other upside (e.g. equity or other interest in the CB&I group). Mr Justice Miles was no doubt mindful that the plan company was seeking to effectively write-off the debt owed to Reficar, and it was fair and just to allow Reficar the opportunity to put forward its case, particularly where it had argued that it may not necessarily be out of the money (with the suggestion being made that the equity holders were unlikely to allow the plan company to go into insolvent liquidation and lose their entire equity stake in the process).
- It was also questioned whether there was, in fact, a genuine urgency to secure sanction.Some of the evidence that the company had previously put forward alluding to the same was, at least, partly rebutted by counsel for Reficar by the time Mr Justice Miles handed down his convening hearing judgment. Reficar argued that the company had been able to enter into new contracts since the convening hearing, certain risks (in terms of financial instruments being performance based rather than on demand) may have previously been overstated, and the cash collateralisation of certain letters of credit (which the company had relied on as a crunch point) was only required to take place on 27 March 2024 – in short, there was no imminent risk of demise of the CB&I group prior to that point in time.
It is clear from the CB&I judgment that in the appropriate circumstances, the Courts will take a more balanced approach when timetabling sanction hearings so that, on the one hand, they consider whether there is a genuine urgency in the case of the plan company, and on the other, whether creditors who may possibly be in the money have been granted a fair opportunity to consider the case put forward by the plan company and respond with their own case and evidence. With respect to the latter, the Court will take into consideration matters such as the amount and complexity of the plan company’s evidence and whether the creditors have had sufficient time to digest the same and respond with their own submissions and evidence.
The above is particularly important in the context of Restructuring Plans (as opposed to, say, schemes of arrangements under Part 26 of the Companies Act 2006) in view of the cross-class cramdown mechanism which is a unique feature of Restructuring Plans (and not available in schemes of arrangements). That being said, Mr Justice Miles was cognisant that for Restructuring Plans to be workable, unnecessary or over-elaborate procedures should be avoided where possible and the Courts should be astute to opposing creditors (particularly those who are out of the money in the relevant alternative) making requests that would delay or extend the process as a tactical measure.
CB&I is unique and complex in its facts and, in our view, is unlikely to impact more straightforward cases, however, it does highlight the importance of plan companies thinking ahead in time and properly engaging with creditors and providing them with sufficient time to consider the plan company’s evidence prior to the convening hearing. The Courts will likely be less sympathetic to creditor applications for amendments to the Restructuring Plan timetable where all (at least) potentially in-the-money creditors have been fully informed in good time ahead of the convening hearing and cram-down is envisaged.
There are a few things that we can be almost certain of in 2024, and others are things to add to the watchlist, but with a potential change in government on the cards, there are likely to be a few curveballs thrown into the mix that none of us can predict.
For one thing, trading conditions remain difficult – although inflation has fallen, interest rates rose steadily during 2023, making borrowing and repayments more expensive. Consumer confidence is low and economic growth during 2024 is projected to be weak. There are no longer any props from the government to support businesses, interest costs remain high and with HM Revenue and Customs (HMRC) now taking a robust approach to recovering tax debts and an increase in winding up petitions, we can expect 2024 to be a financially difficult year for many businesses.
During 2023, we saw company insolvencies exceeding pre-pandemic numbers, and with reports in the press often citing the pandemic as one of the reasons for a business failing, are we only now starting to see the real fallout from 2020 and 2021?
With insolvencies expected to increase in 2024 to around 7,000 per quarter, restructuring professionals can expect to be busier – although as the insolvency figures for 2023 show, the bulk of insolvencies (over 80%) tend to be liquidations, and this is unlikely to change.