Abstract
Chapter 4 examined the approaches to incentivizing new financing, which as noted is vital for a successful restructuring and consequently, ought to be an integral part of the restructuring procedural pre-requisites. While on the one hand, the prescriptive approach represented by the US provides for this regulated incentive structure, English and German laws appear to be favorably disposed to a regime that is market-based, leaving the parties to determine the incentives and basis for new financing. This chapter closely examines what appears to be a capture of the restructuring process by the providers of new financing with pre-distress relationship with the borrower, using the new financing agreements to gain both financial and control advantages over other stakeholder constituencies, as well as over the distressed business as a whole. With this in mind, the chapter focuses on new financing by creditors, financial and control advantages that border on overreach, and the lessons that may be learnt from the dominance of the process of formal restructuring by pre-distress creditors.
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Notes
- 1.
Weijs et al. (2012), p. 2 (“In practice, banks that are willing to provide credit at a time of need, are often banks that have provided credit before. The new credit is therefore often additional credit.”) See also Skeel (2004), p. 1926 (author commenting on the US lending market at the time of writing points out that “[n]early sixty percent of the time, the debtor’s post-petition financer is a bank or banks that has already lent money to the debtor prior to bankruptcy.”).
- 2.
See Chap. 4.
- 3.
White (2004), p. 175.
- 4.
- 5.
The above roughly recounts the facts of In re Tenney Village Co, Inc, 104 B R 562 (Bankr. D N H 1989).
- 6.
Carruthers and Parrot (1998), p. 158 (suggesting that financers exert themselves most vigorously during formal restructuring as they can dominate the creditor’s committee and shape the restructuring of distressed firms). See Also Mintz and Schwartz (1985) The Power Structure of the American Business Community. University of Chicago Press, Chicago (IL), 83 (authors argue that Chapter 11 of the US Bankruptcy Code is “a legally mandated form of bank control involving the subordination of corporate policy to bank dictation.”).
- 7.
For example, following the financial crisis of 2008. See generally, Rice (2010), p. 314 (attributing the difficulty in accessing financing during the crisis to its impact on the hedge funds and investment banks which were major distress financers; the desire of lenders to pursue safer investments, instead of risky investments; the ease of accessing credit pre-crisis meant debtors had fewer assets to use as collateral for distress loans; finally, the increased number of distressed businesses owing to the crisis).
- 8.
White (2004), pp. 175–176 (“points out that the prospect of bankruptcy makes the debtor amenable to terms in the loan agreement that would limit its rights. And such debtor would cheerfully accept terms that strengthen the DIP lender’s hand ….”).
- 9.
Lee (2009), p. 546 (commenting on distressed debtors in the US, it is argued that “[D]ebtor firms find themselves truly desperate for cash as they enter Chapter 11 because the only real alternative to adequate DIP financing is an organized liquidation…”); see also Adler (2012), p. 211 (“If a debtor has no alternative source of funds to continue operation, even temporarily, a debtor, …, may accede to the secured creditor’s demands because the alternative would be immediate liquidation.”).
- 10.
These include (1) increased interest margins chargeable on the loan to the distressed business; (2) affirmative covenants on periodic disclosure; (3) negative covenants which identifies and restricts the use to which the loan is to be put; (4) elaborate covenants. See Squire (2016) (noting that the typical interest rate chargeable by distressed lenders is about 2 percentage points above the rate offered to non-distressed businesses.); Kuney (2005), p. 56 (“[t]he one feature that almost all forms of DIP financing share is an interest rate significantly higher than that of similar loans provided to non-debtors.”); Kuney (2005), p. 52 (noting the use of affirmative covenants that require distressed borrower to “periodically disclose financial records and information so that the [new financer] can easily monitor the debtor’s performance”). See also, Bussel and Klee (2009), p. 707 (the authors highlight some other conditions to which the new financing may be tied to include “releases, sale and reorganization timelines, use of collateral or priming, additional collateral grants, stipulated claims allowance, current payment of interest, … standard budgetary controls, and statutory adequate protection and priorities available to post-petition lenders”); see Chatterjee et al. (2004), p. 3111 (“…a majority of the loans have clauses clearly stating that the DIP loan cannot be used for investments in projects and is to be used primarily for working capital needs. Over 63% of the sample restricts the use of proceeds to working capital needs…”). Note that the use of such covenants is not only restricted to new lending in the US. For similar covenants and more, see Wood (2007), pp. 675–676.
- 11.
The court in In re Capmark Fin. Grp. Inc., 438 B.R. 471, 511 (Bankr. D. Del. 2010) provides an explanation of roll-up clauses as follow roll-up clauses as:
…the payment of a pre-petition debt with the proceeds of a post-petition loan. Roll-ups most commonly arise where a pre-petition secured creditor is also providing a post-petition financing facility under section 364(c) or (d) of the Bankruptcy Code. The proceeds of the post-petition financing facility are used to pay off or replace the pre-petition debt, resulting in a post-petition debt equal to the pre-petition debt plus any new money being lent to the debtor. As a result, the entirety of the pre-petition and post-petition debt enjoys the post-petition protection of section 364(c) or (d) as well as the terms of the DIP order.
It is worthy of note that roll-ups (also known as roll-overs) may come in two ways. The first one which is often preferred by lender is as described in the case above (also known as first-day roll-up). The other form of roll-up is that in which a pre-petition lender, pursuant to an agreement to provide new financing, provide for the application of pre-petition receivables to the liquidation of pre-petition debt owed to the lender (also known as creeping roll-up). For this, see 3 Collier on Bankruptcy ¶ 364.04[1][e]. See also Bussel and Klee (2009), p. 707 n.209.
- 12.
This is deducible from the definition of cross-collateralization provided by the second Circuit in Otte v Manufacturers Hanover Commercial Corp. (In re Texlon Corp.), 596 F.2d 1092, 1094, as:
[I]n return for making new loans to a debtor in possession under Chapter XI, a financing institution obtains a security interest on all assets of the debtor, both those existing at the date of the order and those created in the course of the Chapter XI proceeding, not only for the new loans, the propriety of which is not contested, but [also] for existing indebtedness to it.
In a related sense, cross-collateralization may arise where debtor security interest is created over post-petition assets in favor a pre-petition lender offering new money, so that pre-petition unsecured debt is covered by the post-petition asset. Chatterjee et al. (2004), p. 3100.
There is a less contentious sense in which cross-collateralization may be used. Here, because of new financing provided in Chapter 11 by a pre-petition lender, security interest is created over a pre-petition asset of the debtor. The court in In re Antico Manufacturing Co., 31 B.R. 103 (Bankr.E.D.N.Y.1983) noted that this type of cross-collateralization is not as objectionable as the one In re Texlon, given that the existing claim of the lender is not necessarily improved, rather is “merely exacting as security for future advances a lien or interest in what may well be the only tangible assets the debtor can offer” (at 105).
- 13.
This may arise from the depreciation in the value of the assets which serves as collateral.
- 14.
See Carlson (1993), p. 498 (“[Prepetition] creditors often try to condition new credit on securing payment of the old”). The pertinent facts in In re Saybrook Mfg. Co. 963 F.2d 1490, 1491 (11th Cir. 1992) demonstrates this. A pre-distress lender who was undersecured by about $24 million offered to provide distress financing of $3 million provided that the debtor gives the lender security in respect of the unsecured $24 million.
- 15.
In re FCX, Inc., 54 B.R. 833, 840 (Bankr. E.D.N.C. 1985) (“If an undersecured creditor can obtain unencumbered assets as security for all of its prepetition claims, that creditor is being preferred to the detriment of other unsecured claimants.”). Preference as used here need not be confused with voidable preference especially where the financing is provided in the context of a formal restructuring. A hallmark of voidable preferences (transaction avoidance laws) which is somewhat of general application is that the preference liable to be avoided is that given to a particular lender or creditor, prior to the commencement of insolvency proceedings (or formal restructuring). See Tabb (2014), pp. 508–509.
- 16.
See Chap. 4.
- 17.
McCormack (2008), p. 190. See also Tabb (1986), p. 113 (“The cross-collateralization clause […] effectively transform[s] Lender’s [unsecured pre-filing] claim from an unsecured claim that shares pro rata with all other unsecured claims and comes behind priority claims into a secured claim which is preferred over all other claims.”).
- 18.
Roe and Tung (2013), p. 1238 (“…bank lenders have convinced judges to “roll up” their possibly unsecured pre-bankruptcy debts—debts that were quite likely not entitled to priority payment—into new, secured, and highly-prioritized loans to the debtor in bankruptcy.”).
- 19.
Bussel and Klee (2009), p. 707 n.209 (“… [the roll-up] is advantageous to the secured creditor primarily because prepetition claims may be subject to avoidance and restructuring, whereas post-petition claims, invariably, are not ….”).
- 20.
Roe and Tung (2013), p. 1252 (“… in roll-ups, the bankruptcy process often does not examine the old collateral’s adequacy and the old loan’s bona fides carefully. Sometimes the process doesn’t examine them at all.”).
- 21.
Official Committee of Equity Sec. Holders v. Mabey 832 F.2d 299 (4th Cir. 1987) (the court reasoned that a plan which allowed for the piecemeal, pre-confirmation payments to some unsecured creditors violated the clear policy of the law on formal restructuring of Chapter 11 of the Bankruptcy Code). See also In re Structurlite Plastic Corp. 86 B.R. 922 (Bankr. S.D. Ohio 1988) (where the court frowned upon selective repayment of pre-petition debt even where the creditors threatened and sought to coerce the debtor to pay).
- 22.
- 23.
Zumbro (2016), p. 12.
- 24.
See Chap. 4 above. See also the argument of the controlling shareholder In re Colt Holding Co., No. 15-11296 (Bankr. D. Del July 2, 2015), Limited Objections of Sciens Capital management LLC (shareholders) to Debtors’ Proposed Alternative DIP Financing at 5. The controlling shareholder argued that rolling up the pre-filing debt into the new financing agreement covers “100% of the pre-petition secured claims”, making it immune to a Chapter 11 cramdown.
- 25.
Id (Concerned about the preference that may result when an unsecured creditor receives a preference, the 4th Circuit pointed that “[t]he clear language of these statutes, as well as the Bankruptcy Rules applicable thereto, does not authorize the payment in part or in full, or the advance of monies to or for the benefit of unsecured claimants prior to the approval of the plan of reorganization.”).
- 26.
In re Saybrook Manufacturing Co., Inc. 127 BR 494, at 496 (11th Cir. 1991).
- 27.
See Gebbia and Oscar (1993), p. 202 (authors argue that the cross-collateralization makes the assets of the debtor unavailable “for pro rata distribution on all unsecured claims.”).
- 28.
In re Sun Runner, 945 F.2d 1089, 1094 (9th Cir. 1991) (“[t]here is no … applicable provision in the Bankruptcy Code authorizing the debtor to pay certain pre-petition unsecured claims in full while others remain unpaid. To do so would impermissibly violate the priority scheme of the Bankruptcy Code.”).
- 29.
Dahiya and Ray (2014) (“For borrowers that have an attractive investment opportunity set, DIP financing can be cross-collateralized with the pre-petition debt. Conversely, for borrowers with a poor opportunity, […] DIP financing should not be cross-collateralized.”).
- 30.
In re TexIon Corp., 1092.
- 31.
The court rather hinged its disapproval of the cross-collateralization clause on procedural the lack of notice and a hearing. The court stated:
In order to decide this case, we are not obliged, however, to say that under no conceivable circumstances could “cross-collateralization” be authorized. Here it suffices to hold that … a financing scheme so contrary to the spirit of the Bankruptcy Act should not have been granted by an ex parte order....
- 32.
Ibid, at 1098 (“we see nothing in s 364(c) or in other provisions of that section that advances the case in favor of “cross-collateralization.”).
- 33.
In re TexIon Corp.
- 34.
see Tabb (2014), p. 1068 (“Amazingly, post-Texlon cases read that decision to as implicitly authorizing cross-collateralization as long as the procedural requisites of notice and a hearing are satisfied.”).
- 35.
In distinguishing its case from re Texlon, the bankruptcy court in Borne Chemical Co. v. Lincoln First Commercial Corp. (In re Borne Chemical Co.) 9 Bankr. 263 (Bankr. D.N.J. 1981) held that the cross-collateralization order in the case “was not granted ex parte, but rather only after notice and hearing” (at 269); In re Flagstaff Food Services Corp. 16 B. R. 132, 133 (Bankr. SDNY 1981) (in view of the cross-collateralization clause provided for in the distress financing agreement, the bankruptcy court referenced re Texlon as mandating notice and hearing to the creditors (see n.1)); In re General Oil Distributors, Inc., 20 B. R. 873 (Bankr. E.D.N.Y. 1982) (“the law in this circuit is that cross-collateralization provisions may not be approved ex parte, but only after notice and a hearing.” (At 876)).
- 36.
See In re Vanguard Diversified, Inc., 31 B. R. 364, 366 (Bankr. E.D.N.Y. 1983) (the court relying on the opinion of scholars proceeded to state that the device “may be utilized as a last resort only when the debtor is otherwise unable to obtain needed financing on acceptable terms.” (at 366)).
- 37.
963 F2d 1490 (11th Cir. 1992).
- 38.
Ibid, 1494–1495.
- 39.
31 B.R. 364 (Bankr. E.D.N.Y. 1983).
- 40.
Ibid, at 366.
- 41.
See for instance In re Roblin Indus., Inc., 52 B.R. 241, 244 (Bankr. W.D.N.Y. 1985); In re Antico Mfg. Co., 31 B.R. 103, 105 (Bankr. E.D.N.Y. 1983).
- 42.
McCormack (2008), p. 192 (author describes this as a “needs test”, emphasizing the point that the debtor is usually in need of working capital to survive and only a handful of such debtors may have available cash reserves to finance its restructuring).
- 43.
Tabb (1986), p. 164 (generally analyzes the difficulty a debtor may face when it seeks financing from a new lender, as against a pre-petition lender).
- 44.
Perechocky (2012), p. 562 (“Alternatively, if no one would lend absent these special provisions, then perhaps the debtor is not a viable company and would be more valuable if liquidated under Chapter 7.”) Note however that it may be argued that the absence of an alternative financing may also have nothing to do with the viability of the firm when we bear in mind that the that the financing in issue here is a temporary one, and is designed by the Bankruptcy Code to be settled as soon as the debtor exits formal restructuring or upon the commencement of liquidation. So, in any case, the lender gets paid.
- 45.
Id (“The only benefit of allowing these special provisions would be to enable the pre-petition lender to cut its losses and recover more than it would otherwise, and to enable the debtor to gamble to stay alive, at the expense of the other creditors.”).
- 46.
Tabb (1986), p. 166.
- 47.
Ibid, at n 328 (Explaining that this testimony is conclusive, and also citing In re Roblin, 52 B. R. 245, where according to the court, an officer of the lender “made the unadorned statement that the Banks were not willing to lend on any terms other than those proposed.”).
- 48.
The officer of the lender testifying may for instance require authorization from the appropriate authority of the lender. Also, even if the modification is to be approved, it may take time, which may not be available to the debtor.
- 49.
Tabb (1986), p. 171 (“Given the lack of time, the lack of Chapter 11 ‘experience’, and the complexity of financing orders, creditors often do not the information necessary to make informed judgments.”).
- 50.
Ibid, at 172 (‘The creditors are put to the Hobson’s choice of liquidation versus cross-collateralization only because cross-collateralization is allowed in the first place. Neither cross-collateralization nor liquidation is in the creditors’ “best interests”.’).
- 51.
See for instance: In re FCX, Inc. (Giving its proclivity to prioritize unsecured claim of one creditor over that others, the court pointed out that “[c]ross-collateralization should be discouraged.”); In re
The International Insolvency Institute has also provided guidelines to aid the determination of the approval of cross-collateralization clauses. These guidelines refer to such indicators as:
the extent of the notice provided; the terms of the DIP financing and a comparison to the terms that would be available absent the cross-collateralization; The degree of consensus supportive of cross-collateralization; The extent and value of the prepetition liens held by the pre-petition lender (and in particular the amount of any “equity cushion” that the pre-petition lender may have); and whether cross-collateralization will give an undue advantage to some pre-petition debt without a countervailing benefit to the estate. See generally, Kuney (2005), p. 61.
- 52.
181 B.R. 237(Bankr. W.D. Pa. 1995).
- 53.
Cash collateral is defined in 11 USC § 363(a) as “cash, […] or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest…”.
- 54.
In re Appliance, 243.
- 55.
Id.
- 56.
See for instance, in In re Radioshack Corp, Case No. 15-10197, Docket No. 947 (Bankr. D. Del. March 12, 2015); In re Constar Int’l Holdings LLC, Case No. 13-13281, Docket No. 212 (Bankr. D. Del. Jan. 16, 2014);
In re Uno Restaurant Holdings Corporation, et al., Ch. 11 Case No. 10-10209 (MG) (Bankr. S.D.N.Y. Jan. 20, 2010) (In re Uno Restaurant); In re Foamex International Inc., et al., Ch. 11 Case No. 09-10560 (KJC) (Bankr. D. Del. Feb. 18, 2009); In re Aleris International, Inc., et al., Ch. 11 Case No. 09-10478 (BLS) (Bankr. D. Del. Feb. 12, 2009); In re Tronox Incorporated, et al., Ch. 11 Case No. 09-10156 (ALG) (Bankr. S.D.N.Y. Jan. 12, 2009); and In re Lyondell Chemical Company, et al., Ch. 11 Case No. 09-10023 (REG) (Bankr. S.D.N.Y. Jan. 6, 2009).
- 57.
Case No. 09-10478 (BLS) (Bankr. D. Del. Feb. 12, 2009).
- 58.
In re Farmland Industries, Inc. 294 B.R. 855 at p. 888 (Bankr. W.D. Mo., 2003).
- 59.
In the Re Aleris case, that case, the court bankruptcy court laid down what it considered as the factors to be considered by a bankruptcy judge when amendments to new financing agreement is sought but is resisted by other creditors. The court factors are: (i) That the proposed financing is an exercise of sound and reasonable business judgment; (ii) That the financing is in the best interests of the estate and its creditors; (iii) That the credit transaction is necessary to preserve the assets of the estate, and is necessary, essential, and appropriate for the continued operation of the Debtors’ businesses; (iv) That the terms of the transaction are fair, reasonable, and adequate, given the circumstances of the debtor-borrower and the proposed lender; and (v) That the financing agreement was negotiated in good faith and at arm’s length between the Debtors, on the one hand, and the Agents and the Lenders, on the other hand.
- 60.
Case No. 09-10023 (REG).
- 61.
See generally, Rapisardi and Davis (2009) (commenting on the economic downturn and how it negatively affected the chances of Lyondell obtaining better priced financing).
- 62.
See for instance, Hinkes-Jones (2016) https://www.bna.com/dip-loans-costly-n57982065779/ (suggesting that interest rates for distressed lending are still as high as pre-crises period).
- 63.
See Inre Atrium High Point Ltd. Partnership, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995) where the court suggested this distinction between situations where the waiver of the automatic stay is inserted in the original loan agreement and where it is bargained for. See also the case of In re Deb-Lyn. Inc. 2004 Bankr. LEXIS 200 (N.D. Fla. Feb. 20, 2004), at 8–11 (as part of the reasoning of the court in refusing to enforce a waiver, it pointed out that the pre-petition waiver was not part of a confirmed reorganization plan, but was a pre-petition waiver); The latter form of waivers will be further addressed in the analysis of the consideration principle as a justification for financing agreements skewed in favor of distress lenders.
- 64.
A pre-petition collateral attack is in the nature of a challenge to security interest acquired by the lender prior to the filing of the Chapter 11 petition.
- 65.
Kuney (2005), p. 64.
- 66.
Tabb (1990), p. 89 (“…before supporting the reorganization effort with new financing, the lender wants to be certain that, in a sense, the estate will not turn and bite the hand that fed it.”).
- 67.
Such provisions are very likely to be held to be contrary to public policy. In the US, such provisions in loan contracts have been considered unenforceable by the courts on the grounds of public policy. In In re Fallick, 369 F.2d 899, 904 (2d Cir. 1966) (“[A]n advance agreement to waive the benefits of the [Bankruptcy] Act would be void.”); In re Tru Block Concrete Prod., Inc., 27 B.R. 486, 492 (Bankr. S.D. Cal. 1983) (“It is a well settled princip[le] that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.”); In re Archambault, 174 B.R. 923, 933 n.8 (Bankr. W.D. Mich. 1994) (“Ample case law exists suggesting that an agreement not to file bankruptcy is unenforceable because it violates public policy”); In re Heward Brothers, 210 B.R. 475, 479 (Bankr. D. Idaho 1997) (“… prepetition agreement to waive a benefit of bankruptcy is void as against public policy”). But see also White (2004), p. 186 (arguing that although the courts couch prohibition of such waivers in terms of public policy considerations, the courts are also concerned about redundancy. Author rhetorically asks: “If bankruptcy filings could be promised out of existence, then what is a bankruptcy judge to do for a living?”).
- 68.
Such was the case in In re Bryan Road LLC, 382 B.R. 844 (Bankr. S.D. Fla. 2008). Where debtor and creditor had entered into a pre-petition forbearance agreement which entitled the creditor to the right to immediately seek relief from automatic stay if Chapter 11 petition was filed by the debtor.
- 69.
See generally, 11 USC § 362 (a) & (d). See Sect. 5.2.2.5 below on the judicial treatment of waivers.
- 70.
Schwarcz (1999), p. 554 (analyses waivers of automatic stay and how they affect the other creditors of the debtor).
- 71.
Berman and Lee (2011) Art. 1 (on inter-creditor agreements and their implications).
- 72.
Id (“including lien and payment priority, modifications of the credit agreement, the pursuit of remedies against the borrower in the event a default shall occur, the right to vote on a borrower’s Chapter 11 plan and otherwise be heard in a borrower’s bankruptcy case, etc.”).
- 73.
See for instance, Guidelines for Financing Requests: United States Bankruptcy Court for the Southern District of New York, Int’l Insolvency Inst. at 8 (20 Mar 2002) (“Waivers: Extraordinary Provisions are those that divest the Court of its power or discretion in a material way, or interfere with the exercise of the fiduciary duties of the debtor or Creditors’ Committee in connection with the operation of the business, administration of the estate, or the formation of a reorganization plan . . . .”).
- 74.
- 75.
Schwartz (1998), p. 1839 (“to let a secured creditor … foreclose before the value issue is resolved would vitiate the reorganization process.”).
- 76.
Bogart (1996), p. 1182 (“The Waiver of a stay provision might be a signal that borrower is confident that it controls a good project that is worth the effort of a loan workout, presuming that only a borrower convinced that it will not need to file for bankruptcy will waive its most substantial protection.”).
- 77.
Ibid, 1176 (author argues that “[B]ad borrowers will grant concessions to lenders, making the process of distinguishing between good and bad borrowers difficult. The only option open to the good borrower then, is to adopt even more costly strategies of signaling the lender.”).
- 78.
Tabb (1990), p. 87 (analyzes the potential for abuse arising from the use of pre-petition claim waivers in financing agreements).
- 79.
This essentially sums up the situation in In re Ellingsen MacLean Oil Co. 834 F.2d 599 (6th Cir. 1987) where in the course of the reorganization proceedings, the consolidated pre-petition collaterals of the lenders running into millions of dollars was already subject to a fraudulent conveyance attack. The lenders thereafter obtained an emergency order from the court, allowing them to provide a financing package totaling about $235,000 in exchange for the waiver of all attacks to its pre-petition claims.
- 80.
In the US for instance, s. 558 of the US Bankruptcy Code makes unenforceable against the estate of the debtor, any waiver of defenses procured after the filing of the reorganization petition.
- 81.
In re Citadel Properties, Inc., 86 B.R. 275 (Bankr.M.D.Fla.1988); In re Club Tower 138 BR 307, 310–312 (Bankr. N.D. Ga. 1991); In re Hudson Manor Partners, No. 91-81065HR 1991 WL 472592 (Bankr. N.D. Ga. Dec. 31, 1991); In re Powers, 170 B.R. 480 (Bankr.D.Mass.1994); In re Atrium High Point Ltd. Partnership 189 B.R. 599 (Bankr. M.D.N.C. 1995). This will be broadly addressed in the subsequent section on theories justifying the approval of such clauses.
- 82.
138 BR 307, 310–312 (Bankr. N.D. Ga. 1991).
- 83.
Ibid at 312.
- 84.
Ibid at 311.
- 85.
In a similar case where the court enforced the automatic stay waiver, the debtor had filed for Chapter 11 an hour before a scheduled foreclosure in a one-asset debtor case, the court in addition to approving the automatic stay waiver considered the filing to have been done in bad faith. See In re Citadel Properties, Inc., 86 B.R. 275, 276 (Bankr.M.D.Fla.1988).
- 86.
195 BR 431 (Bankr. D. N1996).
- 87.
Id at 434.
- 88.
Westbrook (2004), p. 253 (“Control of the debtor’s assets is a universal characteristic of bankruptcy regimes around the world. Virtually all of them use a property concept to give ownership or management of those assets to a publicly designated official or entity at the time of the opening of a bankruptcy proceeding.”).
- 89.
Westbrook (2004), p. 824 (author highlights the importance of control in the bankruptcy process (including the process of formal restructuring of the debtor) to avoid the rush for the assets of the debtor).
- 90.
11 U.S.C. § 1107 (highlighting duties of company as a debtor in possession).
- 91.
See White (2004), p. 145–146 (The author enumerates the elements of DIP control in the Code to include the automatic stay, which effectively stopped foreclosure in its tracks, debtors expansive right to use and possibly sell collateral; the cutting off interests on the debt liability of the debtor during the process of formal restructuring, to the extent that the value of the collateral exceeded the value of the debt and; the exclusivity of plan proposal by the debtor, and the early practice of the bankruptcy courts in routinely extending the period of exclusivity).
- 92.
See Skeel (2004), p. 1916 (“For the first decade after the enactment of the 1978 Bankruptcy Code, the debtor and its managers seemed to control the course of many large-scale Chapter 11 cases.”).
- 93.
See Weiss and Capkun (2007), p. 3 (Pointing out that secured creditors often provided DIP financing “and would thereby increase their influence over the bankruptcy process.”) Miller & Waisman itemise some of the provisions of control in the financing agreement as follows:
(i) requiring debtor to operate within a budget approved by the lenders; (ii) limiting disbursements other than those approved by the lenders in a budget; (iii) limiting the payment of prepetition claims even if approved by the court; (iv) requiring the debtor to meet a variety of performance hurdles related to, among other things, revenue, (v) limiting inter-company disbursements to non-debtors; (vi) requiring the rejection of executory contracts that the lenders believe unfavorable; (vii) requiring the payment of certain lease obligations; (viii) requiring the appointment of a chief restructuring officer approved by the lenders; (ix) requiring that certain assets be sold by certain fixed dates; (x) requiring the filing of a plan of reorganization by a fixed date; and (xi) requiring the debtor to obtain the court’s approval of a disclosure statement by a fixed date.
See Miller and Waisman (2004), p. 185.
- 94.
See Skeel (2004), p. 1917 (describing the commencement of the incident of control in the case of distressed businesses).
- 95.
Miller and Waisman (2004), p. 186 (“Major executive functions were vested in the [third party] and it was granted direct reporting and access to the debtor’s governing body.”); see also Baird and Rasmussen (2002), p. 1807 (“In large formal restructuring cases, the authors found that “at the moment Chapter 11 is filed, a revolving credit facility is already in place that entrusts decision making to a single entity. This entity will often step in to replace the management.”).
- 96.
White (2004), p. 183 (“In the words of several bankruptcy lawyers familiar with the practice, the DIP may appoint anyone in the world--as long as that person is on the secured creditor’s list of three approved candidates.”).
- 97.
Id.
- 98.
See Rasmussen (2007), p. 82 (“The new CEO or the new CRO is often a turnaround specialist. These executives do not plan on staying with a company long; rather, they are attempting to right the ship. They stabilize operations and offer advice to the creditors as to the best course of action for the business.”).
- 99.
Skeel (2004), p. 1918 (suggesting that a management turnover shortly before the company files for bankruptcy is often because the lenders have been pulling the strings).
- 100.
Id (citing the example of a covenants contained in the financing agreement of FAO Schwartz (the high-end US toy company) which authorized the financer to insist on the liquidation of the debtor if it is either unable to sell off its assets or to confirm a reorganization plan by a fixed date).
- 101.
Westbrook (2004), p. 251 (The author rightly expresses doubt that the lender may act with sufficient neutrality, hence “all other parties would be required to discount heavily their chances of recovery in that process given secured party control.”).
- 102.
Rasmussen (2007), p. 83 (“The need to get rehired on a constant basis provides a strong incentive to appease the creditors”); Lipson (2016), p. 278 (“[…] relational theory predicts that [the restructuring managers] may have greater loyalty to those whose relationships matter to them, such as those with who control the debtor’s purse.”).
- 103.
See Sect. 5.6 below.
- 104.
Skeel (2004), p. 1930 (author cites the examples of US Air and United Airlines restructuring, where in the exercise of control over the debtor, the DIP lender threatened a liquidation absent a significant wage concession by the employees, without which the debtor companies might not have been viable).
- 105.
See Adler (2004), p. 222 (author argues that in its new form, formal restructuring under Chapter 11 may tend more towards the liquidation of the debtor).
- 106.
LoPucki et al. (2013), p. 1855 (Noting that even when such secured creditors allow a portion of the collateral to fund the restructuring, then it has to be “scripted to the secured creditors requirements.”).
- 107.
In In re Tenney Village Co. Inc. 104 BR 562, at 568 (Bank. D.N.H. 1989), the New Hampshire bankruptcy court succinctly highlights the problem arising from the control of formal restructuring by the financer. It stated that:
[u]nder the guise of financing a reorganization, the bank will disarm the debtor of all weapons used against it for the bankruptcy estate’s benefit, place the debtor in bondage working for the bank, seize control of the reins of reorganization, and steal a match on the other creditors in numerous ways. The financing agreement would pervert the reorganization process from one designed to accommodate all classes of creditors and equity interests, to one specially crafted for the benefit of the bank …. It runs rough shod over numerous sections of the Bankruptcy Code.
- 108.
For an analysis of the growing use of contracting practices in formal restructuring by which lenders bypass statutory provisions, see Lipson (2016).
- 109.
For a contrary opinion on the most important goal of bankruptcy laws, see Westbrook (2004), p. 245 (arguing that the maximization of value for distribution to creditors through control is the overriding policy of formal restructuring or liquidation in the Bankruptcy Code).
- 110.
Leepson (1996), p. 799 (“…rehabilitation is the predominant goal of chapter 11 reorganization, and that the goal of rehabilitation should be accorded greater weight in reorganizations….”).
- 111.
See for instance the H. REP. No. 595, 95th Cong., 2d Sess. 220 (1978), reprinted in 1978 U.S.C.CA.N. 5787, 6179 (“The purpose of a business reorganization case, unlike a liquidation case, is to restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders.”) The courts have also re-echoed this position. See for instance NLRB v. Bildisco & Bildisco 465 U.S. 513, 528 (1984) (“[t]he fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with the attendant loss of jobs and possible misuse of economic resources.”); In Caplin v. Marine Midland Grace Trust Co. a 406 U.S. 416, 422–423 (1972) (“In contradistinction to a reorganization proceeding where liquidation of a corporation and distribution of assets is the goal, a Chapter X [a precursor to Chapter 11] proceeding is for the purposes of rehabilitating the corporation and reorganizing it.”).
- 112.
See Leepson (1996), p. 803 (urging that courts invoke their equitable jurisdiction in approving special clauses in order to achieve the goal of debtor rehabilitation).
- 113.
- 114.
See the incentivizing theory below.
- 115.
Barnett (2003), p. 3 (“Bankruptcy courts understand the role of the DIP lender and, within limits, are willing to approve DIP financing agreements that disproportionately favor the DIP lender over the debt …”).
- 116.
98 B.R. 174 (Bankr. S.D.N.Y. 1989).
- 117.
Ibid 176. Although the court pointed out that the goal of the equality of distribution could trump other considerations in a liquidation. Id.
- 118.
See Warren and Westbrook (2009), p. 604.
- 119.
Leepson (1996), p. 799 (arguing that the broad equity powers of the US bankruptcy courts allow them to approve financing agreement with clauses favorable to providers of new financing since it serves the goal of rehabilitation).
- 120.
402 B. R. 571, (Bankr. S.D.N.Y. 2009).
- 121.
The court approved one of the largest DIP Financing provision of $ 8 Billion, about the largest single DIP loans in history. The sum consisted of a new term loan facility of $6.5 Billion, of which $3.25 Billion was in new term loan facility, and the other $ 3.25 Billion was a dollar-for-dollar rollup of pre-petition claims. The other $ 1.5 Billion was made up of ABL new loans which also rolled up the pre-petition ABL. (DIP Financing Order on file with author).
- 122.
In re Lyondell Chemical Co., at 583.
- 123.
Tabb (1986), p. 119 (“… [t]he lender preference clauses are designed to enhance in different ways of, and the likelihood of repayment of funds already advanced prior to the filing of the Chapter 11 petition.”).
- 124.
Id.
- 125.
See for instance Rickert (1993), p. 250 (on cross-collateralization, author argues that “[t]he Code does not explicitly authorize the practice of cross collateralization; however, it also does not strictly forbid it.”).
- 126.
For instance, see: Telesca (1987), p. 110 (pointing out that the creditor is often uncertain whether outstanding debts will be collectible and is therefore very hesitant to extend further credit); Baiser and Epstein (1992), pp. 103–104 (“To counter the understandable reluctance of financial institutions to lend to Chapter 11 debtors, section 364 of the [Bankruptcy] Code provides incentives to lenders to provide financing to borrowers who are the subject of bankruptcy cases.”).
- 127.
McCormack (2008), p. 177 (“New lenders however have no great incentive to lend since the company is in difficulties, and by definition, any loan will run the risk of not being repaid in full.”).
- 128.
Bohm (1985), p. 290 (commenting on the inclusion of cross-collateralization clauses in the financing agreement, the author argues that it is meant to convince lender to provide additional financing to debtor who has just filed Chapter 11 petition for reorganization).
- 129.
829F.2d 1484 (9th Cir. 1987).
- 130.
Ibid at 1488.
- 131.
Id.
- 132.
Matter of EDC Holding Company 676 F.2d 945, 947 (7th Cir.1982).
- 133.
829F.2d 1490.
- 134.
834 F2d.
- 135.
Ibid at 600-1.
- 136.
The court rhetorically asked, “[i]f an order exceeded the scope of s. 364(c), is it not entitled to s.364(e) protection, if purportedly granted under s.364(c) and relied un by the debtor and lending party in good faith?” Ibid at 602.
- 137.
Ibid at 604.
- 138.
Tabb (1989), p. 120 (pointing out that this argument tends to suggest that “any clause in a financing order, no matter how egregious or how violative of the bankruptcy laws …” is irreproachable).
- 139.
Id (suggesting that the courts in both Adams Apple and Ellingson took into cognizance the fact that the disputed clauses were not in fact very offensive).
- 140.
Perechocky (2012), p. 562 (arguing that competition has the capacity to reduce the cost of distress financing for the debtor, or even raise the price of the assets of the debtor in the event that a sale is to be effectuated under s.363 of the Bankruptcy Code, and provide overall benefits for the estate of the debtor and its creditors as a whole).
- 141.
Although in this case, the lender may not enjoy priority over the providers of financing for the liquidation.
- 142.
Perechocky (2012), p. 562 (“The only benefit of allowing these special provisions would be to enable the pre-petition lender to cut its losses and recover more than it would otherwise, and to enable the debtor to gamble to stay alive, at the expense of the other creditors.”).
- 143.
See generally, Tabb (1989), p. 119 (Commenting on the s. 364 of the US Bankruptcy Code which incentivizes new financing, author points out that what the law seeks to protect is the providers of financing post-petition “… permitting the lenders to rely on the finality of the authorizing financing order.”).
- 144.
See for instance, the opinion of the court In re Saybrook, where the court reasoned that notwithstanding the objective of restoring the debtor to profitability through the new financing, such an end cannot be justification for the circumvention of the provisions of the Bankruptcy Code.
- 145.
As provided for in the 2nd Restatement on Contracts § 72, with certain exceptions, performance which is bargained for is considered a consideration. § 71 highlights the constituents of consideration as follows:
-
(1)
To constitute consideration, a performance or a return promise must be bargained for:
-
(2)
A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.
-
(3)
The performance may consist of
-
(a)
an act other than a promise, or
-
(b)
a forbearance, or
-
(c)
the creation, modification, or destruction of a legal relation.
-
(a)
-
(4)
The performance or return promise may be given to the promisor or to some other person.
It may be given by the promise or by some other person.
See also Arvind (2017), p. 59 (explicates the principle of consideration in English common law as “something of value, which one party gives in exchange for the promise made, or performance rendered by the other party.”).
-
(1)
- 146.
See E.J.Baehr v. Penn-O-Tex Oil Corp., 104 N.W.2d 661, 662. (“Consideration requires voluntary assumption of obligation by one party upon condition of act or forbearance by other.”).
- 147.
See for instance, Miller and Murray (2006), p. 361 (“such agreements are supported by new and valuable consideration in the form of the lender’s forbearance from exercising its legal rights and remedies as well as other lender concessions and accommodations.”).
- 148.
Of course, in reality, the clauses are not necessarily negotiated by the parties but is imposed by the lender. See Tabb (1986), p. 170 (“In the reported cases involving cross-collateralization, the financing terms do not appear to be negotiated they seem to be presented more on a take-it-or-leave-it basis.”).
- 149.
In cases (especially involving waivers) where the other creditors object, it is very much likely that the court will take their objection into consideration. The objection must not however come from the debtor who has enjoyed the forbearance on the part of the lender. See In re Cheeks, 167 B.R. 819–820 (Bankr. D.S.C. 1984).
- 150.
The consideration principle could be regarded as relevant in respect of other clauses, such as those that pertain to interest rate. The court In re Defender Drug Stores, Inc. 145 BR 312, 316 (B. A. P. 9th Cir. 1992) framed the consideration principle as compensation for the distressed lender for the use of the money of the lenders as well as for forbearance in exercising its rights and remedies following a borrower default.
- 151.
189 B.R. 599 (Bankr. M.D.N.C. 1995).
- 152.
Ibid 609. The bankruptcy court re-echoed a similar sentiment in In re Powers 170 B.R. 480, 483 (Bkrtcy.D.Mass.,1994) (“In the instant case the Debtor received relief under the forbearance agreement approximating that which would have been available in a bankruptcy proceeding. The Pending foreclosure sale was canceled, the foreclosure action was dismissed, and the Debtor gained an opportunity to start a new payment schedule….”).
- 153.
227 B.R. 422 (Bankr. D. Md. 1998).
- 154.
Id at 425.
- 155.
Chatterjee et al. (2004), p. 3105 (“DIP loans are usually made in the form of revolving line of credit (RLC) either for less than one year (25% of the loans) or over a year (60% of the loans) and in many cases (25% of the RLC facilities), the RLC is accompanied by a term loan and/or a letter of credit.…”).
- 156.
Schwarcz (1999), p. 564 (arguing that in such situations, the debtor has received something of value which benefits the debtor by easing its illiquidity).
- 157.
In re Colt Holding Co., No. 15-11296 (Bankr. D. Del. June 15, 2015).
- 158.
Limited Objections of Sciens Capital management LLC (shareholders) to Debtors’ Proposed Alternative DIP Financing at 4, In re Colt Holding Co., No. 15-11296 (Bankr. D. Del July 2, 2015).
- 159.
See Debtors’ Statement in Further Support of Debtor’s Motion, In re Colt Holding Co., No. 15-11296 (Bankr. D. Del. July 8, 2015), 4.
- 160.
Final Order: In re Colt Holding Co., No. 15-11296 (Bankr. D. Del. July 10, 2015).
- 161.
Skeel (2004), p. 1928 (the author whilst proposing a solution to the overreach by pre-distress lenders through financing agreements proposed that the transactions (pre-petition loan and distress financing) be treated differently. He further opines that “[t]he ideal way to separate old and new would be to treat them as entirely separate loans, each with its own collateral and bankruptcy treatment. Payments on the new loan will be treated as an administrative expense, and the loan would be secured by whatever lien the court approved. The old loan by contrast, would be entitled to priority to the extent of any collateral, while the remainder would be treated as an unsecured claim”).
- 162.
See White (2004), p. 182 (explaining the way the rollup clause works in practice states that “[e]ach payment on the loan reduces the pre-petition debt and each advance on the revolving loan increases the principal balance of the post-petition [s. 364) loan. When the loan has gone through one complete cycle after the filing, it has all become post-petition secured debt entitled current interest and heightened priority.”).
- 163.
See American Bankruptcy Institute, Final Report of Commission to Study the Reform of Chapter 11, Commission to Study the Reform of Chapter 11, 68 (ABI, 2014). It is worth noting that while the Commission recommended the disallowance of some of such clauses such as the granting of lien or waiver of avoidance action as well as rollups that “provide little or no value to the estate.”
- 164.
Ibid, at 68.
- 165.
For an analysis of the corporation as a web of contracts, see generally, Allen (1993), p. 1400.
- 166.
See In re Shady Grove Tech Center Associates Ltd. Partnership227 B.R. 422 (Bankr. D. Md. 1998). (the court considered as a condition for the approval of a waiver clause, the fact that there was no material impairment of the rights of third parties as there was no equity in the asset of the debtor, and the dispute in the case was between the debtor’s equity holders and the lender).
- 167.
See In re Texlon Corp., 596 F.2d 1092, 1098 (2nd Cir. 1979) (suggesting that the debtor in possession is itself hardly ever neutral and is more concerned about its own survival, even at the cost of treating the creditors equally).
- 168.
Goss (1991) Chapter 11 of the Bankruptcy Code: An Overview for the General Practitioner. Utah B.J. 4(9): 6, at 7 (arguing that special lender clauses often are “approved even though the debtor must make significant concessions that affect the interests of other creditors.”).
- 169.
White (2004), p. 190 (argues that “…to some degree, the DIP is truly spending the form the unsecured [creditors’] purse when it strikes a deal with the DIP lender.”).
- 170.
11 U.S.C.§ 1102(a)(1).
- 171.
Wolfson and Kochis (2013) (Pointing out that for reasons which include difficulty in finding unsecured creditors willing to seat on the unsecured creditor’s committee, or a rough start to the restructuring, the interim financing order may have been obtained before the Committee of unsecured creditors is formed, or their counsel appointed).
- 172.
Id (“Hence, [unsecured creditors’] committee counsel may find itself scrambling to understand a large amount of information in a compressed timeframe to prepare to challenge the financing order.”).
- 173.
Schwarcz (1999), p. 564 (author argues for instance, that a stay waiver may result in offsetting benefits for creditors where something of value has been demanded and given by the debtor.); Schwarcz (1997), p. 443–449 (arguing that secured lending through pre-bankruptcy contracting not only reduces the chances of default on the part of the debtor, but also facilitates a potential increase in the value of the claim of unsecured creditors).
- 174.
The court in In re Ellignsen whilst dealing with a claims waiver clause referred to the financing agreement as a package containing this clause. See at 602.
- 175.
- 176.
See Evans v Jeff D, 106 S. Ct. 1531, 1537(Regarding a settlement case, the US Supreme Court reasoned that courts may be allowed to approve or reject a settlement proposal but may not modify the terms of the agreement and compel the parties to accept the modified agreement).
- 177.
Tabb (1989), p. 122 (suggesting that the theory may be termed salvation by agreement because special clauses which may otherwise be struck down are protected by the part of the agreement that comply with the law).
- 178.
See the criticism of the consideration theory in Sect. 5.4.3 above.
- 179.
Armour et al. (2008), p. 152 (“once companies become financially distressed “concentrated creditor” governance may serve to correct any tendency for the directors to “bet the firm” by committing to high risk strategies in which remote future benefits (the pay offs to all stakeholders in the unlikely event that such strategies succeed) are pursued with assets that in economic, if not strictly legal, terms are “owned” by the creditors.”).
- 180.
Baird and Rasmussen (2001), p. 922 (n4) (authors cite the example of the teen fashion retailer Merry-Go-Round, which found itself in Chapter 11 with more than $100 million in cash but had lost the money and nearly all of its assets within 1 year).
- 181.
Fleet (2012). (‘Over the past several years, a growing number of companies have vigorously sought to avoid the bankruptcy court process and have embarked on such trends as out-of-court negotiations, assignment for the benefit of creditors (ABC) or state receivership and Article 9 foreclosures under the Uniform Commercial Code (UCC) (“friendly foreclosures”)’).
- 182.
A clear manifestation of this is the growing popularity in the use of blanket liens by secured creditors over all of the assets of the borrower, whose perfection is now largely simplified by Article 9 of the UCC. See Vance and Barr (2003), pp. 379–380 (on the now increased power afforded secured creditors over the assets of borrowers under the reformed UCC Article 9); Ayotte and Morrison (2009), p. 523 (noting that over 90% of new financing facilities are by either all or almost all of the assets of the distressed business); Warner (2011), p. 525 (on how the revision to UCC Article 9 is unduly skewed in favor of secured creditors); Harner (2015), pp. 515–517 (discussing how blanket liens, combined with term lending can now effectively place secured creditors in control over the distressed business).
- 183.
See Walters (2015), p. 560 (“Before the Enterprise Act, bankruptcy and secured transactions law were structured so as to confer significant formal control rights on secured creditors.”).
- 184.
Indeed, the floating charge has been described as a tool for control, as against fixed charge which is for priority. See generally, Westbrook (2004), p. 820.
- 185.
Armour et al. (2008), p. 153 (authors point out that prior to reform, “a secured creditor holding an all-encompassing general floating charge was free to contract for the right to appoint an administrative receiver to take control of the company’s affairs, realize the charged assets and repay that creditor’s debt from the proceeds of realization.”).
- 186.
See Kirshner (2015), p. 527.
- 187.
- 188.
- 189.
Armour et al. (2008), p. 154 (noting that secured creditors (floating charge holders under the original IA, 1986 could veto an administration, appointing administrative receiver instead).
- 190.
Webb (1991), pp. 152–153.
- 191.
Enterprise Act, 2002 (Commencement No.4 and Transitional Provisions and Savings) Order 2003 (SI 2003/2093). The Act came into force in 2003.
- 192.
Armour et al. (2008), p. 155 (“the Enterprise Act reconfigured corporate rescue law in United Kingdom by simultaneously curtailing the power of a secured creditor to appoint a receiver and elevating the administration regime to a position of structural priority within the overall legal scheme.”).
- 193.
IA 1986 Sch.B1 para.3(2) for instance requires an administrator to act in the interest of the creditors as a whole.
- 194.
See McCormack (2008), p. 183 (describing the provisions supporting the US blanket lien as the functional equivalent of the English floating charge). See also Lupica (2005), p. 888 (analyzing the changes in US Article 9 that make easier, the creation of blanket liens over the undertakings of a borrower).
- 195.
See generally Westbrook (2004), p. 795 (quoting a British bankers’ saying, “fixed charge for priority, floating charge for control.”).
- 196.
Westbrook (2004), p. 862 (noting how the expanded security interest under the regime of (revised) Article 9 “… not only changes the basis on which the lender extends credit, but also the control that the creditor can exercise over the business.”).
- 197.
Harner (2015), p. 510.
- 198.
IA 1986, Sch. B1, para 65 (1) and (2) is to the effect that “[t]he administrator . . . may make a distribution to a creditor of the company” and that “Section 175 shall apply in relation to a distribution under this paragraph as it applies in relation to a winding up.” On its part, IA 1986, s. 175(2)(b) is to the effect that designated preferential debt shall “so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge”. See generally, Wood (2013), p. 227.
- 199.
See generally, LoPucki et al. (2013), pp. 1853–1857.
- 200.
- 201.
For a criticism of the rejection of the notion of carve-outs for non-secured creditors, see Warner (2001), p. 24.
- 202.
See for instance, In re Renaissance Park Hotel, LLC, Case No. 06–04893 (Bankr.D.S.C. Nov. 19, 2007); In re Pulliam Motor Company d/b/a Pulliam Ford, Case No. 07–01555–dd (Bankr.D.S.C. Apr. 17, 2007.
- 203.
LoPucki et al. (2013), p. 1858.
- 204.
McCormack (2011), p. 610 (such carveouts constitutes “a fair concession to unsecured creditors without destroying the notion of security in its entirety.”).
- 205.
See generally, IA 1986, ss. 388–390.
- 206.
Baird & Rasmussen state that the appointment of the CRO or CEO (as the case may be) depends on what the lender intends to achieve with the debtor. They point out that:
At times, creditors put a new head in place after they have already decided the fate of the company. If the creditors have already decided to place the company on the block, they will push for a manager whose talents lie in readying companies for such sales. If they have decided to reorganize the company, they will veer toward a professional whose skills lie in fixing the company’s problems. If they have yet to decide what the best course of action will be, they will endorse someone whose judgment they trust.
Rasmussen (2007), p. 83.
- 207.
IA 1986, Sch B1, para 3(1).
- 208.
See generally, Walters (2015), p. 565.
- 209.
Especially in the context of banks as lenders who exert control through their superior knowledge to protect their secured position, see Spindler (2006), p. 345.
- 210.
On the nature of lender involvement that may result in control that may warrant liability of lender, see Hadjinestoros (2013), p. 176.
- 211.
On the criminal liability imposed, see 2. 15(a)(4) InsO. Regarding the civil liability imposed, see s. 823 Abs 2 BGB. The practice of imposing liability on directors for failing to petition for insolvency also applies in the UK, see s. 214 IA, 1986; See also See also Finch (2009), p. 300. The US presents a sharp contrast. The nearest to liability directors may come is based is based on their fiduciary duty. Attempts to rely on the theory of “deepening insolvency” have been consistently refused by the court as grounding a cause of action against the directors of a distressed and now insolvent debtor. See In re Hydrogen LLC 431 BR 337, 357. A powerful statement of the law rebutting deepening insolvency as a cause of action was proffered by Delaware Court of Chancery in Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del.Ch.2006) as follows:
[T]he fact of insolvency does not render the concept of “deepening insolvency” a more logical one than the concept of “shallowing profitability.” That is, the mere fact that a business in the red gets redder when a business decision goes wrong and a business in the black gets paler does not explain why the law should recognize an independent cause of action based on the decline in enterprise value in the crimson setting and not in the darker one. If in either setting the directors remain responsible to exercise their business judgment considering the company’s business context, then the appropriate tool to examine the conduct of the directors is the traditional fiduciary duty ruler….
- 212.
- 213.
See s. 129 InsO.
- 214.
See s.133(1) InsO.
- 215.
See Weijs et al. (2012), p. 11.
- 216.
Id.
- 217.
Id.
- 218.
See s. 142 InsO.
- 219.
Dawson (1937), p. 45 (“The protection received by the borrower did not depend on proof of economic pressure in the particular case but was explained on broad grounds of morality and social policy.”).
- 220.
- 221.
Ibid, 48.
- 222.
S. 138 BGB:
-
(1)
A legal transaction which is contrary to public policy is void;
-
(2)
In particular, a legal transaction is void by which a person, by exploiting the predicament, inexperience, lack of sound judgement or considerable weakness of will of another, causes himself or a third party, in exchange for an act of performance, to be promised or granted pecuniary advantages which are clearly disproportionate to the performance.
-
(1)
- 223.
S. 15a para 1 InsO.
- 224.
S. 15a para 1 InsO.
- 225.
Such opinions are typically provided by auditors based on the standards set by the Institute of Public Auditors in Germany (IDW). The standard for many years has been the IDW S6. Proposed reform (IDW ES 6 n. F.) is designed to make such opinions more concise especially for SMEs.
- 226.
S. 826 BGB: A person who, in a manner contrary to public policy, intentionally inflicts damage on another person is liable to the other person to make compensation for the damage.
- 227.
See generally, McCormack (2008), p. 205 ff.
- 228.
Goode (2011), pp. 522–523.
- 229.
See generally, s. 239 IA, 1986.
- 230.
S. 245 IA, 1986.
- 231.
McCormack (2007), p. 729.
- 232.
Ibid, at 205. This position is based on the expansive reading of para. 99 of the IA, 1986.
- 233.
Id.
- 234.
- 235.
- 236.
- 237.
See for instance, McCormack (2008), p. 206 (explaining why secured creditors in the UK will be unwilling to seek control through financing agreements).
- 238.
Walters (2015), p. 568.
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Mba, S.U. (2019). New Financing and Lender Capture. In: New Financing for Distressed Businesses in the Context of Business Restructuring Law. Springer, Cham. https://doi.org/10.1007/978-3-030-19749-0_5
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