Cannabis and Bankruptcy: 2019 in Review

Courts struggled this year to find a balance between state-licensed cannabis activity and the federal right to seek bankruptcy protection under the Bankruptcy Code.  During 2019, we had the first circuit-level opinion in the bankruptcy/cannabis space that appeared to open the door to bankruptcy courts, albeit slightly.  We also had lower court opinions slamming that door shut.  Below, we look at a few of the most important decisions issued throughout 2019 and analyze the current state of the law.

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What impact does the General Election have on the proposed return of Crown preference?

HM Revenue & CustomsThe government announced its intention to reinstate HMRC as a secondary preferential creditor in the 2018 Autumn Budget. Following consultation on this policy, the draft Finance Bill 2019/2020 was published. It was then subject to further technical consultation.

Usually a policy is confirmed (or delayed or abandoned) in the Autumn Budget and if confirmed, will be included in the Finance Bill that is published shortly after the Budget. The legislation then proceeds through Parliament and the Bill is enacted as the Finance Act in the following spring before the end of the fiscal year.

We expected the Autumn Budget to reconfirm the proposal to reintroduce Crown preference and had it done so, the final form legislation would have been included in a Finance Bill 2019-20. That Finance Bill would currently have been making its way through Parliament and could have expected to obtain Royal Assent, becoming the Finance Act 2020, before the end of March 2020.

However, Parliament was dissolved on 6 November 2019 for an early general election. The Budget (scheduled for 6 November) was cancelled and the timetable halted. Does this mean that there won’t be a Finance Act 2020 or that it will be delayed? In short, no.

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What are the consequences of taking money from a rent deposit if the tenant company is in administration?

If administrators use leased property for the benefit of the administration, rent is payable to the landlord for the period of occupation, as an expense of the administration.

In London Bridge Entertainment, the court considered whether the administrators were obliged to top up a rent deposit where the landlord had taken monies from the rent deposit and applied the money against rent that fell due post administration and which would otherwise have been paid as an expense.

In part 3 of a series of blogs considering the position of landlords on insolvency we consider what are the consequences of taking money from a rent deposit if the tenant company is in administration?

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Can a landlord be forced to accept a surrender of a lease?

In part 2 of a series of blogs we consider whether a landlord can be forced to accept a surrender of a lease and the consequences of that.

This point was recently considered in the context of a scheme of arrangements where the Court concluded that a landlord cannot be forced to accept a surrender of a lease because this affects the landlord’s proprietary rights and therefore was outside of the scope of the arrangement.

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Does a company voluntary arrangement permanently vary the terms of a lease?

In this three part blog we highlight three recent court decisions concerning landlord rights and insolvency, which provide cautionary warnings and surprising twists.  The questions we consider are:

  1. Does a company voluntary arrangement (“CVA”) permanently vary the terms of a lease?
  2. Can a landlord be forced to accept a surrender of a lease?
  3. What are the consequences of taking money from a rent deposit if the tenant company is in administration?

In part 1 we consider the first question.

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When should an NOA be filed to avoid a defective appointment or subsequent court application?

E-filing a notice of appointment of administrators outside of court counter opening hours can impact the validity of an administrator’s appointment.

The recent high court rulings in SJ Henderson & Company Limited and Re Triumph Furniture Limited [2019] EWHC 2742, and Re Skeggs Beef Limited [2019] EWHC 2607 (Ch) should serve as a caution that a company, the directors or a qualifying charge holder (QFCH) intending to e-file a Notice of Appointment (NOA) should always file this within court counter opening hours in order to be certain that the administrators are validly appointed.

A QFCH can file an NOA out of court hours but the prescribed steps under rule 3.20 of the Insolvency (England and Wales) rules (IR 2016) must be followed.

In terms of a Notice of Intention to Appoint Administrators (NOI) Judge Burton in SJ Henderson concluded (although her comments were obiter) that an NOI can be e-filed by either the directors, the company or a QFCH at any time.

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How does the EU Restructuring Directive compare to Chapter 11?

On June 26, 2019, the European Parliament and the Council of the European Union published a new EU Restructuring Directive on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (“Directive”).

This is an extraordinary achievement given the existing differences in restructuring regimes across EU Member States.

The Directive applies to all Member States and is intended to create a uniform system throughout the continent to address financial distress, avoid the build-up of non-performing loans, and address distress prior to default, ultimately aimed at reducing the likelihood of formal insolvency proceedings.

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CVA challenges by landlords – the latest news

The hair salon Regis announced recently that the company has entered administration. The news might not come as a surprise because the chain, prior to the company’s administration, was subject to a company voluntary arrangement (“CVA”) whose validity was challenged by landlords.

The joint administrator of Regis commented: “trading challenges, coupled with the uncertainty caused by the legal challenge, have necessitated the need for an administration appointment”.

The appointment of administrators means that the legal challenge to the CVA is at an end. Landlords had challenged the terms of the CVA as unfair, with some landlords’ rent payments purportedly being cut by up to 100%.

Following the decision earlier this year in connection with the Debenhams CVA, when the Court confirmed that a CVA cannot compromise a landlord’s right to forfeit (see our previous blog post discussing the practical impact of that) we had hoped that the Regis case would provide further guidance on the ability of a CVA to compromise landlord claims.

Whilst the landlords claims against Regis are now at an end, this may not be the last time a landlord brings such a case given that retail trading conditions remain difficult.

Those challenging conditions have also meant that landlords are taking a different approach to managing property costs and our blog post last week takes a look at the position from both the landlords’ and tenants’ perspective.

Up in Smoke: More Cannabis Companies Get Shut Out of Bankruptcy

Marijuana Cannabis Leafs

In another loss for the cannabis industry, a district court recently affirmed the dismissal of chapter 11 petitions filed by companies that sold product used by both state-licensed marijuana growers and non-marijuana growers.  The district court’s decision in Way to Grow, Inc. demonstrates that the door that was opened by the Ninth Circuit in Garvin v. Cook Invs. NW, 922 F.3d 1031 (2019) to cannabis companies was at best only partially opened.

We have written about the facts underlying the Way to Grow case in prior posts.  To summarize, Way to Grow, Inc. and two affiliated companies sold indoor hydroponic and gardening-related supplies. The debtors’ expansion plans were tied to the cannabis industry, although the debtors also had customers using the hydroponic products to grow other crops.  A secured creditor moved to dismiss the cases, arguing that the debtors should be barred from bankruptcy relief because their business violated the Controlled Substances Act, 21 U.S.C. § 801, et seq. (the “CSA”).

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What does the HMRC loan review mean for directors of insolvent businesses?

The Government announced an independent review of HMRCs loan charge in September 2019.  In this blog we consider the effect of the review on directors who have or are settling claims with HMRC and highlight that the review does not impact on potential claims against directors of insolvent businesses.

Regardless of the outcome of the review, employee benefit trusts (“EBT”) which are not legitimate, are still tax avoidance schemes.

If former directors of insolvent companies have acted in breach of duty, causing loss to the company as a consequence of the EBT, they may still be personally liable to the insolvent estate.

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