Tag: restructuring

A Primer for Creditors Navigating the Bankruptcy System

Bankruptcy filings affect businesses across America.

The Bankruptcy Code is complex and difficult to navigate. But used properly, it can help creditors to minimize losses when a customer files bankruptcy. This article will guide you on how to stay out of trouble and improve your chances of getting paid by a bankrupt customer.

What Does the Bankruptcy Filing Mean?

The Bankruptcy system serves three basic purposes: It (i) provides a single forum to deal with the assets and liabilities of an insolvent debtor, (ii) provides the honest, but unfortunate, debtor with a “fresh start,” and (iii) if a debtor chooses to reorganize its debts, it provides a process for saving and preserving the going-concern value of a business.

Bankruptcy has different chapters depending on the debtor’s objectives. Chapter 7 is liquidation. A trustee is appointed to take control of and sell the debtor’s property. Typically, the Customer’s assets will be surrendered to those creditors holding security interests sold by the trustee to generate proceeds for distribution to creditors. Individuals or businesses may file Chapter 7, but only individuals can obtain a discharge of their debts.

Chapter 13 is called the “wage-earner” filing, and it’s available to individuals only. In a Chapter 13, the debtor keeps his or her assets and proposes a three to five-year payment plan. Depending on several factors, including the debtor’s income and available assets and whether you are a secured or unsecured creditor, recovery can vary. Similar to Chapter 7, Chapter 13 has a trustee. But his or her role is to be a monitor and conduit for distributing plan payments to creditors.

Chapter 11 bankruptcy is a reorganization proceeding available to businesses and wealthier individuals whose debt levels exceed the less burdensome Chapter 13 requirements. Similar to Chapter 13 cases, the Customer will file a plan of reorganization outlining the Customer’s proposal to modify and repay debts. However, in Chapter 11 cases, creditors generally take a more active role in the proceeding and plan approval process to ensure that their rights are preserved and not adversely affected by the Customer’s proposed plan. Once a plan has been approved by the Bankruptcy Court, payments are made pursuant to its terms.

The Automatic Stay

Immediately upon the Customer’s bankruptcy filing, a substantial impact on a creditor’s ability to exercise its rights is imposed. The “automatic stay” provision of the Bankruptcy Code stops creditors in their tracks from virtually any collection activity against Customer, providing Customer with room to reorganize its debts without the threat of collection actions from their creditors.

Any action to collect the balance of the money the Customer owes or to recover the property now under the protection of the Bankruptcy Court is considered a violation of the stay. Similarly, actions to obtain, perfect, or enforce a lien on property of the bankruptcy estate are prohibited. Further, if the Customer files under Chapter 13 and the debt owed is a “consumer debt” (i.e., a debt incurred for personal, as opposed to business, needs), the “co-debtor stay” prevents actions to collect from individuals jointly liable with Customer on that debt, even if they have not filed their own bankruptcy case.

In light of the automatic stay, proceeding with great caution is of the utmost importance. In the event of willful violations of the automatic stay, the Customer may be awarded sanctions against the creditor, including payment of fines, the Customer’s attorneys’ fees, and/or the creditor losing rights in the bankruptcy case itself. If you receive notice that the Customer is seeking sanctions for your violation of the automatic stay, quickly seek the assistance of knowledgeable legal counsel to minimize your exposure.

Payment Rights and Other Remedies

In certain instances, you may be entitled to “relief” from the automatic stay. If relief is granted by the Bankruptcy Court, creditors may proceed with taking those actions initially prohibited at the outset of the bankruptcy case. For example, a creditor may be able to obtain relief and file suit against a non-filing individual that was once protected by the co-debtor stay, in order to preserve its rights and increase the likelihood of payment on the delinquent account.

If it is customary for you to sell goods on credit, and if goods were sold to Customer within 45 days immediately preceding the bankruptcy filing, you may be able to reclaim the goods from the Customer. You may also be entitled to assert an administrative priority claim for the value of any goods sold to Customer in the ordinary course of business during the 20 days immediately preceding the bankruptcy filing. To avail yourself of these options, formalities and procedures must be strictly followed, and quickly, to avoid expiration of your rights.

Some debts may be “non-dischargeable.” In other words, if the creditor can show some exception to the general rule (e.g., debts incurred through fraud, larceny, or embezzlement), the debt will not be discharged, and the Customer will remain responsible to you for repayment at the conclusion of the proceeding. Again, there are strict burdens and time requirements for creditors seeking to have their claims declared non-dischargeable, so creditors should closely monitor those deadlines and discuss with their legal counsel to preserve their rights.

Finally, you can also file a Proof of Claim with the Bankruptcy Court evidencing the debt owed to you by the Customer. Coming as no surprise, this option similarly imposes strict burdens and deadlines on filing requirements. Acting early is advisable, ensuring your claim is recognized, and you are kept abreast of the status of the bankruptcy proceeding. Filing a Proof of Claim does not guaranty repayment but does preserve your right to payment in the case.

Every bankruptcy filing is different, and the underlying facts will impact your rights and influence your overall collection strategy. Proactively seek guidance on proper pre-bankruptcy loss mitigation efforts and understand that all risks of loss cannot be avoided. If a customer does file bankruptcy, act carefully, but quickly to meet deadlines, preserve rights, mitigate losses, and receive payment during the life of the case. The most effective way to do so is by seeking competent legal counsel experienced in navigating the complex and intricate bankruptcy system.

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For more news on Navigating the Bankruptcy Code, visit the NLR Bankruptcy & Restructuring section.

The Road Ahead for 2017 – Restructuring & Insolvency in Australia

insolvency Australia Road to 2017It is anticipated that, by the middle of the year, Australia will see the most significant reform to the corporate and personal insolvency environment in two decades. The reforms, which appear likely to be supported by all sides of government, are designed to promote business preservation and allow greater flexibility in order to ‘turnaround’ distressed companies.

In 2014 the process of reform began with the Australian Productivity Commission’s release of an Issues Paper and subsequent Report on Business Set-Up, Transfer and Closure. In December 2015 the draft Insolvency Law Reform Bill (the Bill) was released.

The perception among the business community is that the existing insolvency landscape stifled entrepreneurship and forced distressed companies into insolvency at the expense of restructuring. While some commentators lament the missed opportunity to go further and adopt more comprehensive reforms, consensus is that the new legislation will resolve some of the market’s biggest concerns and will encourage a turnaround culture. It is also likely to generate increased interest in the domestic distressed debt market.

Key elements of the Insolvency Law Reform Act 2016 include:

  1. Reduction of the bankruptcy period from three to one year
  2. Introduction of a ‘safe harbour’ defence for directors. Directors will avoid personal liability for insolvent trading if they appoint an adviser to assist with business turnaround.
  3. Unenforceability of certain ipso facto clauses. The proposed new laws will prevent a party from terminating a contract based solely on an insolvency event. Certain contracts such as prescribed financial contracts may be excluded from this restriction.

One of the Productivity Commission’s more controversial recommendations (and which did not make it into the draft Bill) is the introduction of a duty of receivers “to not cause unnecessary harm to the interests of creditors as a whole.” This and other more substantive reforms will be subject to further consultation as the Government has committed to another review. The passage of the Bill will meanwhile continue to shine a spotlight on the more substantive reforms proposed.

In addition to the commencement of the Insolvency Law Reform Act 2016, certain class action proceedings in the Federal Court of Australia are likely to intensify in 2017 in the lead up to a hearing on common issues in 2018. Squire Patton Boggs advises the applicants and most group members in seven class action proceedings that have arisen out of the rating of several structured financial products by Standard & Poor’s (S&P) and Fitch Ratings (Fitch). These follow a successful settlement reached in similar proceedings against S&P, following a landmark win in the main proceedings and a further appeal to the Full Federal Court.

The majority of the claims in these proceedings arose following the global financial crisis and the collapse of underlying reference entities including Fanny Mae and/or the swap counterparty Lehman Brothers Australia (in liquidation) (LBA). As a large number of Australian organisations held these products, a number of insolvencies resulted from their collapse in value and/or wipe out and Squire Patton Boggs has acted for creditors of LBA in the insolvency proceedings that ensued to recover money for creditors with these claims.

The products that are the subject of these proceedings include a constant proportion portfolio insurance (CPPI) and synthetic collateralised debt obligations (SCDOs) which were assigned credit ratings by S&P or Fitch. The applicants allege that the ratings agencies were negligent and engaged in misleading and deceptive conduct in assigning high ratings to these products. They contend that had the products not received such high ratings, they would not have invested. S&P and Fitch deny these allegations.

These proceedings have had and will continue to have widespread domestic and international significance due to the number of structured financial products that were sold around the world and were rated by the large ratings agencies using similar methodology. Actions against S&P have been filed in other jurisdictions, including by European institutional investors in Amsterdam, setting a global trend that is likely to continue into 2017. This trend involves ensuring the accountability of credit rating agencies in their assignment of ratings to complex financial products, especially in areas where regulators have as yet failed to achieve similar outcomes. As a result, the continuing progress of these class actions in 2017 is likely to produce lasting implications, in particular further consideration as to the regulation of credit rating agencies.

Continue watching this blog throughout the year to come for updates about these and other topics from our offices across Australia, EU and Europe, UK and US.

ARTICLE BY Amanda Banton of Squire Patton Boggs (US) LLP

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