GLOBAL INSIGHT - DLA Piper/media/Files/Insights/... · 2015-12-21 · The New Bankruptcy Law...

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GLOBAL INSIGHTNews, Views and Analysis from DLA Piper’s Global Restructuring Group

AFRICA

INSTITUTIONALIZING SECURED LENDING TO SMES – A KEY TO GROWTH OF THE ECONOMY IN THE AFRICAN REGION

Several countries in Africa have made significant progress in making their systems more efficient by revamping their system of recording security interests in movable assets and creating a meaningful non-judicial enforcement mechanism. In the largest of these countries, Ghana, the results have been significant: an additional 70,000 loans were provided to small- and medium-sized enterprises (SMEs) in the wake of statutory reform, with over US$14 billion of movable assets used as collateral.

It is too soon to see if these reforms will bring similar results in Liberia and elsewhere, but the experience in Ghana serves as an excellent example to other governments in Africa of the key role the reform of secured lending systems plays in unlocking the potential of SMEs and thus the national economies and the economy of Africa as a whole.

There is much opportunity for continued growth of the African economy. For example, the Sub-Saharan economies have grown at an average annual rate of approximately five percent for the past 15 years, although the growth rate is beginning to slow down. The commodity-driven boom and the accompanying “Dutch disease” are partly to blame for this slow down as the demand for commodities has declined with the slowdown of the Chinese economy. A lack of meaningful industrialization fueled by poor infrastructure development is also to blame. Unfortunately there is a large funding gap for Africa’s rapidly growing SMEs, which, amply supported, could become the drivers of the new African economy.

The ability to own and freely transfer ownership interests in both immovable and movable assets is a fundamental precept of modern and stable economies. Closely related to this economic reality is the ability to use these ownership rights as collateral to borrow money. Indeed, the ability to create, recognize and enforce security interests over movable assets is essential for access to secured lending, which is a critical ingredient for economic development and growth. In many African countries it is difficult to create recognizable security interests in movable assets at the moment, however, addressing this issue will allow for copious growth opportunities.

Richard ChesleyPartner, US Restructuring Co-Chair Chicago +1 312 368 3430 [email protected]

Currently, many jurisdictions in Africa have fragmented financial systems which makes it difficult to determine creditor priorities. In certain countries the registries are complex, while in others there is no publication of security interests. As a result, in many African nations, the lack of an efficient system for creating security interests in movable assets is blocking the receipt of essential and available capital. For 80 percent of the SMEs in Africa their only assets, and thus their only collateral, are movables. Indeed, in the countries we discuss herein, the only enforcement mechanism available to lenders willing to advance capital is judicial enforcement, which is often not feasible in the fast-developing commerce of Africa.

Only 20 percent of Africa’s SMEs have access to capital, it is estimated that this funding gap is approaching US$200 billion. Although investment capital is bountiful for the Africa region, a lack of recognizable systems for investors has largely contributed to this gap. As bank and non-bank lenders are going to advance capital in a meaningful way only if there are systems in place to protect their investments, it is advisable that other African countries follow the Ghanaian example to attain similar remarkable economic progress.

“ As bank and non-bank lenders are going to advance capital in a meaningful way only if there are systems in place to protect their investments, it is advisable that other African countries follow the Ghanaian example to attain similar remarkable economic progress.”



CONTINENTAL EUROPE

PRO-BUSINESS REFORM OF POLISH BANKRUPTCY LAW – JANUARY 2016

The new year will bring tremendous changes to the Polish insolvency regime as significant amendments to the Bankruptcy and Recovery Law (Journal of Laws 2015, No. 233, uniform text) come into force on 1 January 2016 (New Bankruptcy Law). The aim of the New Bankruptcy Law is to make existing legal instruments more effective and to help business entities survive financial stress or distress.

OVERVIEWThe New Bankruptcy Law significantly amends not only the content of the existing Bankruptcy and Recovery Law but also its name. From 1 January 2016, the act will simply be called the Bankruptcy Law - the provisions concerning recovery matters will be regulated separately under the Restructuring Law.

The rationale for the adoption of the new provisions were detailed during the legislative procedure in the written justification of the Restructuring Law. It states that after ten years of applying the Bankruptcy and Recovery Law, the suitability of existing provisions to current business conditions can be evaluated. Reference is made to the fact that Poland is in 37th place in the World Bank’s Doing Business – Measuring Business Regulations sub-ranking concerning insolvency proceedings. According to the World Bank, this ranking is due to the time-consuming nature of existing Polish insolvency proceedings, the high costs involved and creditor dissatisfaction. The new insolvency regime attempts to address these concerns.

WHAT IS CHANGING?The most important changes to the Polish insolvency regime include:

Conditions for declaring bankruptcy The New Bankruptcy Law provides a new definition of a person who is insolvent, a condition for declaring bankruptcy. The changes concern both statutory grounds for insolvency, i.e. financial liquidity and indebtedness:

■ Lack of financial liquidity - under the new regulations, “a debtor is insolvent if it has lost its ability to perform its due financial obligations”. Previously, “a debtor was deemed insolvent if it had failed to perform its financial obligations”. The justification of the New Bankruptcy Law states that when determining whether a debtor is insolvent or not, only the financial aspects of its business activity are taken into consideration. This means that the debtor is not insolvent if it has lost the ability to perform its due financial obligations and that loss was caused by some non-financial reason (e.g., forgetting the password to a company’s bank account). It is presumed that a debtor has lost the ability to perform its due financial obligations if it is in default for more than three months. However, the debtor may challenge this presumption of law.

■ Indebtedness - apart from the insolvency test mentioned above, the new provisions also stipulate that “a debtor that is a legal person or an unincorporated organizational unit granted legal capacity by a separate law is also insolvent when the sum of its obligations exceeds the value of its assets and this state lasts for more than 24 months”. This is only an additional test to the financial liquidity test, which means that a court may dismiss a petition to declare bankruptcy on this basis if there is no threat of the debtor



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losing the ability to perform its due financial obligations. This solution is supposed to help enterprises survive in case there is no real need of filing a petition to declare bankruptcy, because creditors are not economically threatened. The provisions concerning indebtedness do not apply to debtors that are commercial partnerships if at least one of their partners is liable without limitation (i.e. with his/her entire assets) for the obligations of the partnership.

Who can file a motion for bankruptcy?The New Bankruptcy Law offers clarification to this question as it expressly states that only the debtor or any of its personal creditors are entitled to file a petition to declare bankruptcy. Until now it was debatable whether a real creditor (e.g., a pledge/mortgage creditor) is entitled to solely file such a petition.

Deadlines for filing a petition to declare bankruptcyThe New Bankruptcy Law should be of particular interest to members of the management boards of limited liability companies, as they are liable for the debts of their insolvent company unless the petition to declare bankruptcy is filed on time (with a few exceptions). The most significant change for members of the management boards is the new deadline for filing the petition which is now one month instead of two weeks. Legal practitioners are welcoming this change as the 14-day period was considered to be unrealistic.

Assets do not cover the costs of the insolvency proceedingsThe new provisions retain the rule that the court shall dismiss a petition to declare bankruptcy if the assets of the insolvent debtor are not sufficient to cover the costs of the proceedings. However, under the New Bankruptcy Law, this condition is much more

favourable to creditors: it states that the court shall also dismiss the petition if the debtor’s assets cover the costs of the proceedings but do not cover any of the debts owed to its creditors.

New type of bankruptcy procedure: pre-packaged liquidationPerhaps the most interesting aspect of the New Bankruptcy Law is the introduction of a new kind of bankruptcy procedure in which the sale of a whole enterprise, an organized part thereof, or some of its high-value assets is agreed in advance of the debtor declaring its insolvency and the sale is completed shortly thereafter. In the petition, the petitioner has to specify the terms of the sale (price and purchaser) and attach a valuation report prepared by a court expert. The main aim of this procedure is to satisfy the creditors to the maximum extent and to speed up the bankruptcy proceedings. This solution is especially beneficial when selling the whole enterprise because it makes it possible

“ Perhaps the most interesting aspect of the New Bankruptcy Law is the introduction of a new kind of bankruptcy procedure in which the sale of a whole enterprise, an organized part thereof, or some of its high-value assets is agreed in advance of the debtor declaring its insolvency and the sale is completed shortly thereafter.”



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for the insolvent enterprise to continue its business activity and sell it for a much better price (without decreasing its value, which is often a direct effect of commencing insolvency proceedings). Similar legal procedures can be found in the American and British legal systems.

Change of the court’s jurisdictionIn order to comply with Council regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (Official Journal L 160, 30/06/2000 P. 0001 - 0018), the provisions on court jurisdiction have been changed. Under the New Bankruptcy Law, a bankruptcy case will be decided by the court with jurisdiction over the main centre of the basic debtor’s activity, whereas previously it was the court with jurisdiction over the main establishment of the debtor’s enterprise.

Division into classesCreditors are divided into classes that reflect the priority in satisfying their claims from the proceeds of the liquidation. Under the New Bankruptcy Law, tax claims will no longer have priority over private creditors’ claims and will belong to the same class. Currently, tax liabilities and other public dues are in the third class while contractors and other unsecured private creditors are in the fourth class. Under the new regulations, tax and private creditors will both belong to the second class. Interest will be satisfied in the third category instead of the fifth, and there will be a new class for shareholder loans. The aim of this new classification is to change the tax authorities’ approach to restructuring proceedings and various arrangements with debtors since they will no longer have a better position among the creditors during bankruptcy proceedings.

Krzysztof WiaterPartnerWarsaw+48 22 540 [email protected]

Magdalena DecAssociateWarsaw+48 22 540 74 [email protected]

CONCLUSIONIntroducing business-friendly amendments into Polish legislation is an important step for business entities conducting their activities in Poland. The New Bankruptcy Law implements new substantive solutions (e.g., pre-packed sale), while retaining some of the current bankruptcy instruments but in a more streamlined form (e.g., grounds for insolvency). Because the New Bankruptcy Law represents an overhaul of existing law, numerous new terms will need to be tested in court. It will inevitably take some time to understand how the New Bankruptcy Law will work in practice, so businesses in financial uncertainty within Poland should continue to proceed with caution and seek appropriate advice.



CONTINENTAL EUROPE

On 23 October amendments to the Resolution of the National Bank of Ukraine (NBU) No. 581 came into force, aimed at further relaxing restrictions on the currency markets and increasing the flow of foreign capital into Ukraine.

NATIONAL BANK OF UKRAINE RELAXES CERTAIN RESTRICTIONS ON CURRENCY MARKET

RELAXATION OF REQUIREMENTS FOR MANDATORY CONVERSION OF FOREIGN CURRENCY INTO UKRAINIAN HRYVNIA No longer subject to mandatory conversion into Ukrainian hryvnia (UAH) are funds:

■ Generated by projects which are carried out due to Ukraine’s participation in international EU programs;

■ Received by Ukraine-resident legal entities pursuant to grants provided by international financial organizations of which Ukraine is a member. This exception applies only if the Ukrainian Government participates in the management of the Ukraine-resident legal entity;

■ Submitted as security deposits to the auction organiser’s account by non-residents taking part in auctions for the privatisation of state-owned property.

“ On 23 October amendments to the Resolution of the National Bank of Ukraine (NBU) No. 581 came into force, aimed at further relaxing restrictions on the currency markets and increasing the flow of foreign capital into Ukraine. ”

CLARIFICATION ON PREPAYMENT OF LOANS MADE BY NON-RESIDENTSThe NBU has specified that early repayment of loans made by non-residents can be made from monies obtained by the borrower under another loan agreement made with a non-resident with a later maturity date, subject to the condition that these funds were advanced exclusively in order to repay the original loan. The borrower is entitled to buy foreign currency for early repayment of the original loan up to the amount of the new loan amount sold on the interbank market.

In addition, the NBU allowed early prepayment of loans to creditors enjoying special treatment in Ukraine.

REMOVAL OF CONTROL OVER CERTAIN EXPORT OPERATIONS The amended resolution has removed foreign exchange controls over telecommunications companies making payments by way of set off for services for international roaming and international traffic transmission.

CANCELLATION OF RESTRICTIONS ON WITHDRAWAL OF CASH IN UAHThe NBU has annulled the previously-established threshold (in the sum of 300 000 UAH) for certain cash withdrawals in UAH. Now banks are obliged to provide individuals with any amount of cash in UAH received as a result of foreign currency exchanges.



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Oleksandr KurdydykPartnerKiev+380 44 490 [email protected]

Rodion IgnatenkoSenior AssociateKiev+380 44 495 [email protected]

CHANGE OF RESTRICTIONS CONCERNING REGISTRATION OF LOAN AGREEMENTS WITH NON-RESIDENTS The amended resolution allows resident borrowers, who have borrowed from non-residents, to register with the NBU changes of either the initial debtor or borrrower. However, such amendments to a loan agreement can only be registered with the NBU when the borrower merges with a new borrower and / or in the event of the borrower’s liquidation.

The amendments also provide for a right to register changes in the parties to loan agreements executed with foreign export credit agencies.

Amendments introduced by NBU Resolution No. 718 dated 22 October 2015 “On Amending Resolution of the National Bank of Ukraine No. 581 dated 3 September 2015” which came into force on 23 October 2015.

Resolution of the National Bank of Ukraine No. 581 dated 3 September 2015 “On regulation of the situation on monetary and exchange market of Ukraine” which came into force on 4 September 2015. The Resolution will be effective until 4 December 2015.



UK

In the recent Hong Kong Court of First Instance case Charmway Hong Kong Investment v Fortunesea (Cayman) Ltd & Ors [2015] HKCU 171, the court considered whether an individual lender has the right under a syndicated credit agreement to take action directly against members of the obligor group (including petitioning for winding-up) independently of the other lenders. The case and the market response is of interest to majority and minority creditors in syndicated structures in understanding the extent of their basic rights to pursue the debt owed by the obligors.

FACTS − DISPUTE BETWEEN LENDERS OVER ENFORCEMENT STRATEGY The facts of the case are typical of a scenario that arises in the course of restructuring negotiations.

The credit agreement in Charmway was a term loan facility of US$612 million, with a syndicate of lenders, made available to a group of companies which operated in the development and construction sector in China. When the borrower defaulted under the credit agreement, the then majority lenders (representing two thirds of the then outstanding commitments) commenced enforcement action against the group’s assets (which involved appointing a receiver) on behalf of the syndicate as a whole, in accordance with the terms of the prevailing finance documents. The facts are not particularly clear, but it appears that shortly thereafter there was a flurry of secondary trades in the debt under the credit agreement, which ,resulted in a change to the composition of the majority lender group. That new majority lender group then purported to give an instruction to the facility agent to terminate the enforcement proceedings. It is this change of approach that drew the attention of a group of minority lenders, who sought the continuation of enforcement of their rights under the finance documents individually by bringing separate proceedings to wind up certain group companies.

ISSUE: CAN A LENDER ACT UNILATERALLY IN A SYNDICATED STRUCTURE? The issue before the court was whether any single lender was entitled to seek to enforce repayment of its proportionate share of the syndicated loan and/or to seek a winding up of any of the obligor companies independently of any concerted action by the lenders as a syndicate.

The credit agreement in this case was based on the Loan Market Association’s (LMA) form of recommended facility documentation. The relevant clauses were clause 2.2(b) and (c) (finance parties’ rights and obligations) of the LMA multicurrency term and revolving facilities agreement), which provided that:

■ The rights of a finance party under the finance documents are separate and independent rights;

■ A Finance Party may, except as otherwise stated in the finance documents, separately enforce those rights; and

■ A debt arising under the finance documents to a finance party is a separate and independent debt.

These provisions together we shall call the “Separate and Independent Rights Provisions”

It has long been considered that lenders under a syndicated credit facility retain a right to seek to recover their portion of a loan directly following a payment default, typically by seeking the winding up of Obligors based on these provisions. However, the court found that a syndicated credit facility based on LMA standard terms creates an aggregate loan, rather than individual loans due to the lenders. As a result, in the absence of an express provision giving individual lenders a right to take independent enforcement proceedings it was for the majority lenders, acting in good faith, to decide what enforcement proceedings to take. In practice this meant in this case is that the lenders would be required to proceed through the collective action mechanism of instruction by the lenders (whether majority or all lender) to the administrative (facility) agent.

SHARING OF UNILATERAL RECOVERIES There is clearly a balance to be sought to ensure orderly restructuring discussions, but the decision and rationale are at odds with the jurisprudence around these provisions. Crucially, the judge in the Charmway case did not consider the drafting and the purpose of the “Sharing” provision (of the LMA multicurrency term and revolving facilities agreement found at clause 34, “Sharing Among the Finance Parties”), whose purpose is to force the sharing of individual receipts by one bank but not the others, such as receipts by set-off, proceeds of litigation, individual guarantees or direct payment by the borrower.

LMA SYNDICATED LOANS − SEPARATE AND INDEPENDENT RIGHTS FOR LENDERS − CAN LENDERS GO AT IT ALONE?


UK


The practical effect of the sharing clause can be to discourage unilateral action by one creditor because the prosecuting creditor will have to bear litigation costs and only have to share litigation proceeds, unless these are exempted, which they often are. The sharing provision can therefore assist in binding creditors together or acting as a further indirect and informal protection (beyond any formal moratorium or standstill) for the borrower against multiple enforcements during the course of restructuring discussions.

The position adopted by the judge in Charmway can also be contrasted with creditor’s rights in respect of private placements, where there are usually multiple lenders in a facility but no facility agent, so the borrower and investors have a direct relationship, or bond indentures, which, depending on vintage, may preserve (on a payment default) the rights of individual investors to take action immediately and absolutely, often even without any failure by the bond trustee.

LMA UPDATE REINFORCES SEPARATE AND INDEPENDENT RIGHTS Thankfully, the LMA has issued guidance and concluded that, if such authority were brought before an English court, such court would be unlikely to follow the Hong Kong judgment’s approach and reasoning; in accordance with established loan market practice and understanding, the LMA documentation should operate to give an individual lender an independent debt claim in respect of outstanding loans. Further, the LMA has developed some clarificatory drafting to the separate and independent rights provisions (as of 5 November 2015) to further underscore the individual nature of a lender’s right to payment of all amounts due.

WHERE DOES THIS LEAVE MINORITY DISSENTING CREDITORS? The position then is largely unchanged under the LMA documentation; however, it is worth noting:

Intercreditor: The LMA update is helpful clarification that the separate and independent rights provisions are still available, as a practical matter, to minority creditors in syndicated structures particularly for strategic purposes. However, it is still important to examine the entirety of the terms of the finance documentation, particularly the intercreditor, which may impose further restrictions or contractual provisions (and setting aside particularly any economic or reputational impacts or considerations) − which may dissuade minorities from taking unilateral action by minority creditors.

Standstills: The material relevance of the separate and independent rights provisions is usually where there is a payment default and, (in the absence of a formal moratorium) often, in order to support the directors of the borrower and/or strengthen the underlying position during restructuring discussions. Any payment defaults will be waived or suspended for a period utilizing the required majorities set out in the amendments and waivers provisions of the LMA multicurrency term and revolving facilities agreement, so an opportunity to use the separate and independent rights provisions never arises.

Cram-down/in mechanisms: In the overall scheme of macro-restructuring trends (e.g. given the continuing march of “cram-in” mechanisms such as schemes of arrangement under section 895 of the Companies Act 2006) restructurings and rescues can proceed at a steady pace while holdout positions without objective substance (e.g., as to value) become increasingly difficult to sustain.

David Ampaw Legal Director London +44 20 7153 7199 [email protected]

“ There is clearly a balance to be sought to ensure orderly restructuring discussions, but the decision and rationale are at odds with the jurisprudence around these provisions.”



ASIA PACIFIC

THE RISE OF THE PHOENIX, THE REGULATORS’ RESPONSE AND PROPOSED REFORMS

Illegal phoenix activity broadly involves the transfer of assets between related companies to intentionally evade creditors. In October 2015 a comprehensive report in respect of the incidence, cost and enforcement of illegal phoenix activity was released by the Melbourne Law School and Monash Business School in Australia (Report) providing lawmakers and regulators with highly sought after data to assist them tackle illegal phoenix activity across Australia. The Report comes at a time when the Australian government has undertaken a number of actions to address illegal phoenix activity, including the commencement of a Senate Inquiry, which released its final report on 3 December 2015 (Senate Report), and the establishment of a ‘Serious Financial Crime Taskforce’ (Taskforce) in July 2015. This paper examines the key findings of the Report, the recommendations of the Senate Report and the possible impact of the recently announced Australian insolvency legislative reforms on the incidence of illegal phoenix activity.

WHAT IS ILLEGAL ‘PHOENIX ACTIVITY’?Illegal phoenix activity involves the transfer of the assets from an indebted company into a new company (often controlled by the same directors) with the intention of avoiding paying creditors. The indebted company is then placed into administration or liquidation leaving no assets to pay creditors. Meanwhile the new company continues to trade. Such activity continues to occur in a number of common law jurisdictions, including Australia, United Kingdom, United States, Canada and New Zealand.

HOW BIG IS THE PROBLEM?The Report noted that while the Australian government and regulatory bodies recognise that illegal phoenix activity is a significant and increasing problem, no one has been able to accurately quantify its extent. The difficulty is due, in part, to the fact that ‘phoenix activity’ lacks a specific legal definition or legal offence in Australia and other jurisdictions. While an accurate estimate of the extent of illegal phoenix activity in Australia is not presently available, the Report provides that:

1. The Australian Taxation Office (ATO) estimates that at any given time there are approximately 6,000 phoenix companies operating in Australia, run by between 7,500-9,000 directors. Many of these companies operate in the small to medium enterprise market (companies with a turnover of AUD$2

million to AUD$250 million) and the micro enterprise market (companies with below AUD$2 million turnover). The ATO believe that phoenix activity largely operates in these segments of the market because larger business cannot afford to risk their reputations; and

2. The Australian Securities Investment Commission (ASIC) have identified 6,223 companies in the top five risk industries that may have the potential to conduct illegal phoenix activity (rather than confirmed cases).

WHAT’S THE COST?Quantifying the extent of illegal phoenix activity is difficult and accordingly, regulators also face difficulties calculating a figure that represents the true cost of phoenix activity. Nonetheless, the Report notes that the problem is significantly costly to justify the commitment of substantial government resources to it and, in particular, illegal phoenix activity may cost:

1. The Australian economy between approximately AUD$1.78 billion to AUD$3.19 billion annually according to a report prepared by PwC in 2012 (PwC Report);

2. Australian employees between approximately AUD$191 million to AUD$655 million annually according to the PwC Report; and

3. The Australian government approximately AUD$600 million annually in relation to uncollected tax according to ATO estimates.



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HOW HAVE THE REGULATORS RESPONDED? As there is no specific offence in relation to phoenix activity, regulators are left to resort to a quagmire of legislative provisions that may have not been drafted with the purpose of targeting illegal phoenix activity. Accordingly, enforcement of phoenix activity and the quantification of enforcement measures have proven difficult. Despite the significant incidence and cost of phoenix activity in Australia, there is real difficulty faced by regulators when combatting phoenix activity. For instance, the Report estimates that during a 10 year period between 2004 and 2014 only 51 directors were disqualified by ASIC in circumstances that involved illegal phoenix activity.

‘Serious Financial Crime Taskforce’ (Taskforce)Going forward, the Australian government has enlisted the support of a number of agencies including the Australian Federal Police to tackle illegal phoenix activity. Earlier this year the government committed AUD$127.6 million over four years to fund the Taskforce to target (amongst other things) international tax evasion and criminality related to fraudulent phoenix activity. The Taskforce has recovered AUD$85 million since being operational on 1 July 2015.

“ Earlier this year, the government committed AU$127.6 million over four years to fund the Serious Financial Crimes Taskforce in order to target among other things international tax evasion and criminality related to fraudulent phoenix activity.”

Senate InquiryThe Australian government has also recently established a Senate inquiry into insolvency in the Australian construction industry and, in particular, the practice of phoenix companies within the industry. The Senate Report was released on 3 December 2015 and, in relation to phoenix activity, recommended that:

■ ASIC require external administrators to indicate whether they suspect phoenix activity in their statutory reports;

■ Consideration be given to amending the statutory confidentiality requirements of certain regulators to permit regulators providing information to the ATO;

■ More resources be directed to strategies aimed at preventing, detecting and prosecuting instances of illegal phoenix activity; and

■ Section 596AB of the Corporations Act 2001 (Cth), which prohibits a person from entering into an agreement with the intention of preventing the recovery of employee entitlements, be amended to (among other things) remove the requirement that a person have a subjective ‘intention’.

Recent Insolvency Legislation ReformsIn December 2015, the Australian Government announced that it would significantly reform Australia’s current insolvency laws by mid-2017. The reforms are intended to:

■ Reduce the current default bankruptcy period from three years to one year;

■ Protect directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company;

■ Make ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.



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If implemented, these reforms will significantly change the landscape in Australian insolvency law. While the proposed reforms do not directly tackle illegal phoenix activity, they may impact on the rates of illegal phoenix activity. The CEO of the Australian Restructuring Insolvency & Turnaround Association stated that “these reforms are more likely to preserve creditors’ money by finding better ways to turn troubled businesses around.” If the reforms have their desired affect and more businesses are able to be rescued, incidence of illegal phoenix activity and other drains on creditor and shareholder funds could conceivably decrease, enhancing Australian’s corporate environment for investment.

CONCLUSIONThe current regulatory landscape appears to be failing to hinder phoenix activity and protect creditors. Arguably, this is partly because of the limited resources of regulators, the difficulty in quantifying what actions represent phoenix activity and the evidentiary difficulties in proving phoenix activity. However, the recent government investment in research into illegal phoenix activity, the establishment of the Taskforce and the Senate Inquiry may indicate that the government may be prioritising tackling phoenix activity going forward. Furthermore, while the position remains unclear, the recent Federal government’s insolvency legislative reforms may have an impact on illegal phoenix activity in the future.

Amelia KellyPartnerSydney +61 292 868 [email protected]

Alexandra DoyleSolicitorSydney+61 292 868 [email protected]



CROSS-BORDER

ARE GIFT CARD HOLDERS RECEIVING BETTER TREATMENT IN SITUATIONS OF INSOLVENCY? A US VS. UK COMPARISON

According to the UK Gift Card & Voucher Association, in 2014 the gift card and voucher market was worth £5.4 billion in the UK and $124 billion in the US.

Gift cards can confer numerous benefits on the retailer, including promotion, working capital and additional profit from up-spend, and are popular with consumers as a method of paying for goods and services in advance of receiving them.

However, if a retailer who has accepted a pre-payment by way of gift card becomes insolvent in the US or the UK, consumers are at risk of losing their money, because insolvency legislation offers limited protection to this class of creditors.

While the purchaser or holder of a gift card does not always lose out entirely in a retailer insolvency situation, a number of high-profile retail insolvencies over the last few years have put the treatment of gift card holders under the spotlight.

UK: NO PREFERENTIAL STATUS FOR GIFT CARD HOLDERS Unsecured creditorIf a retailer becomes insolvent in the UK, consumers risk losing their right against the company to use their gift card or get their money back. Often, the formal insolvency will employ a process known as Administration, during which the business and assets of the company fall under the control of the Administrator. The consumer becomes an unsecured creditor in the administration of the company, ranking behind the retailer’s secured and preferential creditors in the statutory hierarchy. It is not uncommon for unsecured creditors to receive no distribution at all.

Consumers are not entirely unprotectedHowever, in insolvency situations, gift card holders are not entirely unprotected. They may benefit from one of the following:

Administrator decision to honour the gift cardWhen the administrators decide to trade the business of the retailer in administration, there is an opportunity for them to agree to honour gift cards issued by the retailer (in whole, or part, or subject to conditions) if they feel this would achieve one of the statutory objectives of administration and a better result for the company’s creditors as a whole.

There is, however, no obligation on the administrators to do so, and any such decision needs to consider a commercial review of the retailer’s position. The administrators need to balance competing factors, such as:

■ the effect of any negative PR on the retailer’s goodwill and brand value (and therefore ultimately the value of the business) in not honouring the gift card

■ the cost to the retailer (and therefore its creditors) in honouring the gift card (particularly where there are numerous cards and insufficient assets)

Purchaser decision to honour the gift cardA purchaser of the business and assets of the retailer is under no obligation to honour gift cards, but may choose to do so to maintain consumer goodwill and brand value.

Gift card monies held on trustThe retailer may have voluntarily set up a trust account prior to its insolvency in relation to the prepayment received from the consumer, ring-fencing the monies from the company’s assets and holding them on trust for the consumer. In an insolvency, so long as the trust complies with the necessary legal formalities, the monies which are the subject of the trust will belong to the gift card holders and will neither form part of the company’s assets nor be available for distribution to the company’s creditors. If there are sufficient funds in the trust, the gift card holder will receive its money back. If, however, the trust lacks the correct legal formalities and the administrators suspect the trust is invalid, they will be obligated to challenge the trust in order to maximise return for the creditors as a whole.



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Consumer credit protectionIn certain circumstances, consumers who have purchased a gift card using a credit or debit card (but not the recipient of the gift card) may be able to get a refund from the card issuer:

■ Credit card payment protection - Pursuant to section 75 of the Consumer Credit Act 1974, the credit card provider is jointly and severally liable with the retailer for any breach of contract or misrepresentation claim which could have been made against the retailer, provided that the value of the item is more than £100 and less than £30,000.

■ Chargeback protection - A card issuer’s chargeback scheme (set out in the relevant card scheme rules) may permit a purchaser to obtain a refund of the amount paid where a gift card has been purchased using a debit or credit card. There is no limit on the amount that can be claimed, but the claim must usually be raised within certain timeframes.

Dividend as an unsecured creditorThe consumer may receive a dividend as an unsecured creditor of the insolvent retailer, once the claims of secured and preferential creditors have been paid; however such a payment is not guaranteed and is likely to be negligible in any event.

PROPOSALS FOR REFORM IN THE UKIn September 2014, the Department for Business, Innovation and Skills asked the Law Commission to examine the protections available in respect of consumer prepayments and to consider whether or not such protections could be strengthened.

The areas of consultation include: ■ Increasing the information available to consumers about

chargeback in credit and debit card transactions.

■ Exploring ways to make it easier for traders to protect prepayments on a voluntary basis, in light of the difficulties involved in protecting consumer prepayments though trusts, bonding and insurance.

■ Sector-specific regulation of prepayments.

■ Giving preferential status to a small, limited category of consumer claims, namely those arising out of the situation

where businesses take significant sums of new money from consumers shortly before entering insolvency and no other protections are in place.

Of particular interest will be the Law Commission’s recommendations on its proposal to confer preferential status on (inter alia) gift card holders so that they are paid ahead of floating chargeholders (such as lenders) and unsecured creditors in circumstances where the gift card is not redeemed on insolvency.

If the category of preferential creditors expands, it is likely to have a considerable impact on the amount to be returned to lenders in a retail insolvency, particularly where numerous gift cards are in circulation. This could in turn lead to an increase in the cost of loans to retailers and a reluctance on the part of lenders to advance credit in an already uncertain lending market.

In addition, the likelihood of a distribution to unsecured creditors (who already invariably receive a negligible dividend (if any)) on insolvency will be further reduced if the category of preferential creditors expands.

Any such protection will also need to be considered from a public policy perspective as increasing the category of preferential creditors will reduce the money available to employees who are essentially, at present, the only category of creditor with preferential status under insolvency legislation.

The Law Commission intends to publish its recommendations in the Autumn of 2016.

US: PRIORITY STATUS FOR SOME GIFT CARD HOLDERSIn many retail bankruptcy cases in the US, the debtor will either liquidate or sell the business as a going concern. In both instances, gift card holders are at risk of not being able to redeem unused gift cards or be fully paid on their claim for the unused amount of the gift card. Generally in a liquidation scenario, a gift card holder only has a brief period of time to use the gift cards before the company closes its doors. In a going concern transaction, the purchaser may not want to continue to honor gift cards issues by the debtor prior to the bankruptcy.



CROSS-BORDER

RadioShackIn the highly publicized RadioShack bankruptcy case, RadioShack sold its assets as a going concern and the buyer, General Wireless, ultimately agreed to honour gift cards previously issued by RadioShack, but only for 50 percent of the purchase price of merchandise. For instance, if a customer purchased $20 of merchandise, only $10 of the gift card could be redeemed. Gift card holders could either redeem their gift cards at the buyer’s store or submit a claim in the RadioShack bankruptcy case. However, if a gift card holder elected to submit a claim instead of redeeming the gift card at a store, it was not guaranteed that the gift card holder would receive the full claim amount.

A significant issue raised in the RadioShack case was whether claims for unredeemed gift cards are entitled to what is referred to as “priority” status. Under the United States Bankruptcy Code, unsecured claims are subject to a priority scheme. For instance, administrative expenses, employee wages and taxes are entitled to priority and thus are paid prior to the claims of general unsecured creditors.

Furthermore, the Bankruptcy Code provides that an unsecured claim arising from the deposit, purchase, lease or rental of property, or the purchase of services, for the personal family, or household use that were not delivered or provided is entitled to priority status. It is based on this provision that certain parties in the RadioShack bankruptcy case asserted that all claims for unredeemed gift cards were entitled to priority status.

After extensive briefing and oral argument, the bankruptcy court approved a settlement whereby only certain types of gift cards would be entitled to priority status, such as gift cards purchased by customers. Other types of gift cards, such as those issued in connection with the return of merchandise and promotional giveaways, were not entitled to priority status.

The issues raised in the RadioShack bankruptcy case with respect to gift cards and the treatment of claims for unredeemed gift cards will certainly be revisited, given the rise of retail bankruptcy cases in the US and the significant liability that a retail debtor will face if holders of unredeemed gift cards are entitled to priority status.

CONCLUSIONIn both the US and the UK, the position of gift card holders on insolvency certainly warrants further review and consideration. As retail insolvencies appear to be on the rise, providing gift card holders with more rights will inevitably have knock-on effects for other parties affected by a retailer’s insolvency.

“ In both the US and the UK…retail insolvencies appear to be on the rise and providing gift card holders with more rights will inevitably have knock-on effects for other parties affected by a retailer’s insolvency.”

Gregg GalardiPartner, Global Co-Chair (US)New York+1 212 335 [email protected]

Robert RussellPartnerManchester+44 161 235 [email protected]

Kerry BarnardSenior AssociateManchester+44 161 235 [email protected]

Dienna CorradoAssociateNew York+1 212 335 [email protected]


GLOBAL INSIGHT

GUEST ARTICLE

MORE RESTRUCTURINGS IN 2016? ABSOLUTELY

Economists are renowned for their uncanny inclination to see dark clouds on a sunny day. Restructuring professionals tend to fall into the same camp; we’re no Pollyannas when it comes to forming views on business conditions. Perhaps working extensively with challenged companies tends to skew our outlook. But, biases notwithstanding, we’re quite confident that 2016 is shaping up to be a solid year for restructurings and workouts - measurably better than a respectable 2015 - as the challenges of slowing global growth, depressed commodity prices, disrupted business models and less accommodative credit markets show no signs of abating in the year ahead.

GREATER CORPORATE CREDIT MARKET DISCIPLINE 2015 marks a distinct turning point in this business cycle. Corporate earnings growth has begun to sputter, events of debt defaults, restructurings and workouts have moved decidedly higher from very low levels in the prior two years, and credit markets are more judicious in rationing credit among risky corporate borrowers. The distortions caused by QE programs and the easy credit environment they encouraged are starting to fade. Bank lenders are increasingly mindful of Leveraged Lending Guidelines and the potential consequences of aggressive loans or lending practices that would run afoul of regulators. In short, corporate credit markets are finally displaying some discipline that is sorely lacking in US equity markets. Credit markets are now divided and those on the wrong side of that divide are finding it harder to tap new financing. Several leveraged debt offerings in recent months that would have cleared the market in 2014 were either pulled or sweetened due to push-back from solicited investors. Many very low rated companies (“deep junk issuers”) have effectively lost access to primary credit markets. High-risk-tolerant behaviors by fixed-income investors are changing and this is a healthy development but one that will continue to have consequences for affected borrowers.

INDICATORS OF DEFAULT AND BANKRUPTCY RISEUS equity and credit markets couldn’t be giving more conflicting views about where this business cycle might be headed. Major equity indexes are within striking distance of all-time highs even as earnings growth has slowed appreciably - stretching valuation multiples to multi-year highs - while credit markets are telling a more cautionary tale. We’ll take our cues from corporate credit markets, which have a better track record of anticipating turns in the business cycle. (You may recall that credit markets were prescient in the months preceding the 2008 financial crisis.) At the moment, high-yield credit markets are sending clear signals that defaults and bankruptcies will be picking up smartly in the year ahead. S&P’s distressed debt ratio, which measures the proportion of speculative-grade bonds with excessively high yields (YTM) based on market prices, is at a six-year high with 20 percent of all high-yield bonds considered distressed. Absolute levels of distressed corporate debt now exceed such amounts outstanding in early-to-mid 2008 when investors began to flee credit risk. High-yield bond spreads for deep junk issues are also at their highest levels since early 2008. Credit quality, which we evaluate from the distribution of corporate credit ratings, is weaker today than it was in 2007 at the height of the LBO boom. We’re not suggesting that anything calamitous is at hand but this is the most vulnerable that leveraged credit markets have looked in years except during the Great Recession itself.

News, Views and Analysis from DLA Piper’s Global Restructuring Group

“ We’re not suggesting that anything calamitous is at hand but this is the most vulnerable that leveraged credit markets have looked in years except during the Great Recession itself. ”



GUEST ARTICLE

TROUBLED SECTORS2015 has been unusual in that the uptick in distress and defaults has been so dominated by the energy, metals and mining sectors, which collectively account for 40 percent of defaults and 50 percent of distressed debt this year—more than twice their proportionate share of all high-yield debt. But it would be a mistake to characterize the year in restructurings as a two industry phenomenon. Other major industry sectors, such as retail, media and high-tech, have also seen defaults and distressed debt levels climb, though not nearly to the same degree.

THE NEW YEARNone of the rating agencies expect a surge in defaults next year. That would likely require a recession, which has a low probability of happening in 2016 (somewhere between 15 and 20 percent). However, we anticipate that the trends seen over the past few months will continue and even accelerate in the new year. Back in the old days we called it a normal year.

Andrew J. HinkelmanSenior Managing Director, FTI ConsultingSan Francisco+1 415 283 [email protected]

The views expressed in this article are those of the author and not necessarily those of FTI Consulting, Inc., its management, its subsidiaries, affiliates or other professionals.

©2015 FTI Consulting, Inc. All rights reserved.

If you are interested in submitting a guest article to a future issue of Global Insight please email [email protected]



NEWS ROUNDUP

AWARDS ■ UK: DLA Piper has been named ‘Insolvency Law Firm of the

Year - 8 or more office locations’ at the 2015 Insolvency & Rescue Awards. This is the second consecutive year that DLA Piper has won this award.

■ Europe: DLA Piper has been named ‘Game Changing Law Firm of the Past Ten Years’ by the FT Innovative Lawyers Awards Europe 2015. DLA Piper was described as “Pioneer of the Swiss verein structure, under which affiliates remain separate entities, the firm led in showing the profession how to achieve ambitious internationalisation without the pain of a full merger. It also led in listening to clients and positioning itself as a business-led law firm.” Sir Nigel Knowles, DLA Piper Global Co-Chairman, was also listed as an Innovative Individual. He was praised for taking a Yorkshire-based firm to one of the largest firms in the world in just 19 years through the use of the verein structure.

■ US: DLA Piper won the M&A Advisor Turnaround Award in the ‘Distressed M&A Deal of the Year (between $10 million to $25 million)’ category for the Authentic Brands Group’s acquisition of Frederick’s of Hollywood, and ‘Restructuring Deal of the Year (over $250 million to $500 million)’ for the restructuring of RadioShack. The 10th Annual M&A Advisor Turnaround Awards Gala will be held on January 28th at the Colony Hotel in Palm Beach, Florida.

■ Global: DLA Piper has been ranked as the second most favourable and recognised legal brand in the Acritas Global Elite Law Firm Brand Index 2015. Out of the twenty firms ranked DLA Piper has the biggest points increase of 2015 rising 12 points and two ranks in total. The firm is also ranked as the biggest mover in terms of its progression in the Index since it began six years ago.

■ Global: The American Lawyer has released its 2015 Global 100, DLA Piper is ranked third.

■ Global: For the second consecutive year, Law360 has ranked DLA Piper’s Bankruptcy practice group as the world’s largest, with more than double the number of bankruptcy partners at several of the firms in the top 10.

■ UK: DLA Piper is ranked in The Times’ Top 100 Graduate Employers in 2015 - 2016.

■ US: The Deal ranked DLA Piper #4 by volume, up from #5 in Q3 2014, and #4 by number of cases, up from #12 in Q3 2014, in its 2015 bankruptcy league table for the third quarter.

NEW OFFICES ■ Morocco: On 5 October DLA Piper expanded its presence in

Africa with the launch of its own office in Casablanca, Morocco. In addition to the considerable business opportunities it offers, Morocco is developing Casablanca Finance City as an international hub and a leading gateway into Africa’s fast-emerging markets.

■ Johannesburg: DLA Piper will be opening an office in Johannesburg in the first quarter of next year. The city is already established as a major financial and corporate hub for those doing business in Sub-Saharan Africa.

NEWS ■ DLA Piper and Lawyers on Demand (LOD) have announced a

ground-breaking collaboration which will see DLA Piper and its clients benefit from a flexible resourcing capability using a bespoke, innovative approach powered by LOD. The venture will enable DLA Piper to further enhance its client solutions by leveraging a pool of resources, the core of which will consist of DLA Piper alumni. The venture will initially roll out in the UK, followed by other key international markets in early 2016.

■ Selinda Melnik (Wilmington) was appointed a member of the editorial board for Global Restructuring Review, a new legal magazine on the law and practice of international restructuring and insolvency.

■ Writing for the Wall Street Journal’s “Bankruptcy Beat,” Richard Chesley (Chicago) most recently explored the following issues: “The Examiners: Integrity Demands Insider Pay Disclosure,” November 19, 2015 “The Examiners: Marblegate Shouldn’t Cause Rush to Bankruptcy Court,” September 29, 2015

GLOBAL RESTRUCTURING GROUP NEWS ROUNDUP



GUEST ARTICLE

■ Thomas Califano (New York) and George B. South (New York) have authored a Guide to Restructuring Issues for Not-For-Profit Companies and Their Directors, in which they examine key issues that not-for-profit (NFP) entities may confront when they experience financial uncertainty, and address how NFP restructurings may differ from restructurings of for-profit entities.

■ DLA Piper has strengthened its Restructuring group in Italy by appointing a team of five dedicated restructuring lawyers - two partners and three fee earners.

EVENTSRecent

■ 9 - 20 November - Jonathan Leitch (Hong Kong) chaired a panel at the Turnaround and Management Association Asia Pacific Conference in Singapore. The panel had to debate the question, “Is there light at the end of the tunnel for Offshore Investors, or do Domestic Investors still hold all the cards?”

■ November - Craig Rasile (Miami) was a panelist on “Trends in Financial Crimes and High Tech Fraud: Investigations, Prosecution, and Sentencing: A Panel Discussion from Various Legal Perspectives” at Annotated Commercial Crime Insurance Policy: An Up to Date Look at Crime, Loss and Technology sponsored by the American Bar Association’s Tort Trial & Insurance Practice Section’s Fidelity & Surety Law Committee in Washington, DC.

■ October - Eric Goldberg (Los Angeles) spoke on the preclusive effects of bankruptcy court orders on post-sale and post-confirmation litigation at the Los Angeles Bankruptcy Forum in Beverly Hills, California.

Upcoming ■ 14 January - Tom Califano (New York) is presenting at the

Bay Area Bankruptcy Forum on healthcare and education not-for-profit issues.

■ 27 January - Ugo Calo (Milan) will be hosting a breakfast briefing at DLA Piper’s Milan office to discuss recent changes to Italian insolvency law.

■ 1 February - Tom Califano (New York) is presenting on continuing care retirement communities at a webinar hosted by the American Bankruptcy Institute.

■ 19 February - Vince Slusher (Dallas) is presenting on “Bankruptcy & Restructuring in the Oil & Gas Sector,” at a webcast hosted by the Knowledge Group.

WIN (What In-House Lawyers Need): Webinar and event recordings now available from your desk

Our new WIN: On Demand series provides you with webinar and event recordings at the click of a button, allowing you to access training and topical discussions from the convenience of your desk or mobile device. We are delighted to offer clients access to popular WIN webinars and keynote panel events which are available to watch at any time. All of our on demand sessions are CPD accredited.

Recent ■ Keynote Panel: “The Unknown Enemy: Can In-House

Lawyers Protect their Company and Customers from Cyber Attack?”

■ Future Legal Leaders: Empowering Personal Impact - Presentation Skills Webinar

■ Future Legal Leaders: Empowering Personal Impact - Communication Skills Webinar

■ WIN: On a Need to Know Basis - International Data Protection and Privacy Webinar

■ Future Legal Leaders: Empowering Personal Impact - Negotiation Skills Webinar

Email [email protected] to view any of the above webinars and to sign up for future WIN events.

https://www.dlapiper.com/en/us/insights/publications/2015/10/guide-to-not-for-profit-restructuring-issues/

https://www.dlapiper.com/en/us/insights/publications/2015/10/guide-to-not-for-profit-restructuring-issues/



GROUP OVERVIEW

GLOBAL RESTRUCTURING GROUP

DEDICATED RESTRUCTURING LAWYERS WORKING ACROSS BORDERS Our Global Restructuring group is one of the largest in the world, with over 200 dedicated restructuring lawyers across the Americas, Asia Pacific, Europe and the Middle East. We have the knowledge, experience and resources to address our clients’ restructuring and insolvency needs on a national and international basis.

We serve a diverse client base encompassing debtors, lenders, government entities, trustees, shareholders, directors, and distressed debt and asset buyers and investors. We advise clients across a wide range of industry sectors and have particular strength in energy, financial services, health care, hospitality and leisure, real estate, retail, sports, technology and transportation. ADEPT AT ALL LEVELS OF COMPLEXITY We advise on all matters relating to public and private companies in underperforming and distressed situations. We manage assignments from the mid-market to the largest national and international restructurings and insolvencies. Our experience also extends to any contentious issues arising from restructurings and insolvencies. We have significant experience of advising clients on, investigation, enforcement, litigation and asset recovery on a multijurisdictional basis. GLOBAL REACH, LOCAL RESTRUCTURING EXPERIENCE With our global team of dedicated restructuring lawyers we have detailed knowledge of local markets and the associated challenges our clients face. We are passionate about what we do and our clients see this in the quality of work our lawyers provide. Our Global Restructuring group is part of one of the world’s largest law firms with more than 4,000 lawyers located in more than 30 countries. As a full-service business law firm, we offer clients the benefit of the collective knowledge and experience of all our practice groups.

FOR FURTHER [email protected]

www.dlapiper.com

Gregg Galardi Global Co-Chair (US) New York +1 212 335 4640 [email protected]

Michael Fiddy Global Co-Chair (International) London +44 207 796 6325 [email protected]

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please speak to your DLA Piper contact on +44 (0) 8700 111 111. DLA Piper is an international legal practice, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com. Copyright © 2015 DLA Piper. All rights reserved.



GROUP OVERVIEW

GLOBAL RESTRUCTURING KEY CONTACTS

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