Category Archives: Insolvency/Bankruptcy/Re-structuring

Malta – foremost safe harbour in today’s stormy seas of maritime finance

International finance of ocean-going vessels and other maritime assets such as off-shore oil and gas equipment is currently experiencing what could be described as a perfect storm: Many owners looking to refinance newer assets in their fleet ordered their construction and locked into efficient funding before the global financial crisis of 2007/8. And according to the World Shipping Council, the global container fleet peaked in 2013 at around 34.5 million TEU. At the same time, along with transoceanic freight rates which are widely recognised as a bellwether of international trade flows, residual container ship values in US$ per dead weight tonnage slumped dramatically from the end of 2008 onwards, with ship brokers reporting declines of up to 40% from previous high water marks. What followed in the maritime finance sector, according to the world’s largest shipping lender HSH Nordbank AG, was a “monstrous wave” of loan loss provisions, peaking in 2013. So, when the need of ship owners for new funding was greatest, they found funding taps turned off – at least when investigating traditional sources.

The aircraft finance market had steered its way out of similar storms in the past by heading away from traditional bank lenders and towards increasingly global capital markets. Investors could consider the apotheosis of aviation capital markets financing to be the enhanced equipment trust certificate or “EETC”. EETCs are now a dominant force in aircraft financing, particularly in the United States, with fleet transactions of up to US$ 4.5 billion. In essence, an EETC transaction finances the acquisition and leasing of aircraft and other large equipment through the issuance of a type of asset-backed security by a special purpose vehicle held by a pass-through trust for institutional investors that buy and can potentially trade the relevant trust certificates. The trust certificate securities are said to be “enhanced”, because the special purpose vehicle as registered owner of the aircraft and issuer of the equipment notes backing the certificates is remote from the potential bankruptcy of the plane’s registered owner, typically, an aircraft leasing company. Equity injected for example by the owner / lessee of the aircraft, is thus regarded as credit enhancement for the EETCs, since the trustee for investors is empowered to enforce its security over the plane without getting mixed up in or delayed by corporate bankruptcy or reconstruction proceedings. Similarly, EETCs are so called because they will typically benefit from liquidity support in the form of a standby revolving credit facility from a highly rated financial institution to cover lease payment shortfalls against debt payments due for a period of months in order to avoid an immediate default on the securities.

Nevertheless, the EETC market has possibly been the victim of its own rapid success: Many investors are now facing concentration risk issues in their respective portfolios, with significant relative exposure to certain airlines, lessors, regions, aircraft types and manufacturers. EETC buyers also represent a relatively small part of the investor universe, being in the large part insurance companies and specialist investment funds buying in the U.S. private placement market.

This said, it should be easy to understand the excitement around 2015’s epoch in the development of Malta’s international capital markets sector as well as in ship finance worldwide, as EETC technology was applied for the first time to find a safe harbour for maritime finance deals. In September, the enhanced equipment trust certificate (“EMTC”) financing of MV Al Qibla, a 13,500 TEU ultra-large container vessel owned by United Arab Shipping Company (S.A.G.) (“UASC”) was completed in Malta. Closing in relation to Al Qibla’s sister ship, MV Malik Al Ashtar, was settled in August. The EETCs were privately placed with institutions in the United States of America qualifying as accredited investors under U.S. securities laws and similarly qualified investors in the European Economic Area.

The Equipment Notes cross-collateralizing the EMTCs in this deal were issued by two Malta incorporated special purpose vehicles, one for each vessel, established both as shipping organisations and securitisation vehicles under local legislation. Malta is also the flag of Malik Al Ashtar and Al Qibla. Malta’s Securitisation Act and related statutory instruments establish special regulatory, insolvency and tax regimes that make the jurisdiction uniquely equipped for the establishment of issuers in EMTC transactions. Special purpose vehicles with their centre of main interest in Malta enjoy the highest levels of protection under statute from being brought into the insolvency of a shipping company parent that is also charter party in an EMTC deal. In this deal, further comfort was given to capital markets investors by establishing a purpose foundation, the Tabuk EMTC Foundation, to own “golden shares” in the SPV Equipment Note issuers with rights to veto actions that could be prejudicial to investors, including placing the SPVs into bankruptcy proceedings. In the exercise of those golden share veto rights, the Maltese administrator of the Tabuk EMTC Foundation, Equity Wealth Solutions Limited, follows the instructions of the Subordination Agent in respect of the SPVs it has established. The Subordination Agent appointed for the Al Qibla and Malik Al Ashtar Equipment Notes was Wells Fargo Bank Northwest, N.A.

A particular feature of UASC’s debut EMTC transaction was that it wished as originator to maintain a substantial equity interest in the Equipment Note issuing SPVs and therefore ownership of the vessels. Originator ownership of the asset holding vehicle would ordinarily be anathema to a structured finance transaction – the norm is to “orphan” the vehicle through a charitable trust or purpose foundation. Here, UASC’s continuing ownership of the Vessels by holding ordinary voting shares in the SPVs was requisite. The ultimate concern of investors in relation to the legal structure of an EETC or EMTC transaction is that the assets and liabilities of an SPV will be consolidated with those of the originator on its subsequent insolvency, having been deemed by a court to be substantially those of the originator all along. This doctrine of substantive consolidation exists in policy or statute in many jurisdictions, but it is particularly prevalent as applied by the federal courts under the U.S. Bankruptcy Code. At the same time, a number of foreign ship owners have successfully placed themselves in U.S. bankruptcy proceedings, arguably to the detriment of their long term secured creditors. It was vital therefore to be able to demonstrate to the satisfaction of the investors and credit rating agencies that any bankruptcy or reorganization proceedings in which UASC might possibly be caught up would not affect the SPVs and in particular, the right of investors to enforce their security over the Vessels immediately following an event of default without stay or hindrance. An important element of this bankruptcy remoteness was the “true sale” of the Vessels to the SPVs, i.e., that the alienation from UASC’s estate could not be set aside by the court or an insolvency official recharacterising it as a secured financing, a transaction at undervalue or fraudulent preference. Likewise, the SPVs would be entitled to terminate the charter party agreements with UASC and repossess the Vessels on UASC’s default (including bankruptcy) under the arrangement as a “true lease” rather than a secured financing under the U.S. Federal Bankruptcy Code.

It was essential therefore to rely on the specific provisions of the Malta Securitisation Act that preclude an application by on behalf of an originator engaged in insolvency or restructuring proceedings affecting a securitisation vehicle established under the Act. Similarly, absent fraud on the part of the securitisation vehicle, statute prevents the Maltese courts from accepting an application from an insolvency official to reverse or amend the terms of a sale of securitisation assets by the originator effected prior to its insolvency. The statutory bankruptcy remoteness of the SPVs allows UASC to extract excess spread from charter party payments left after debt service by way of nothing more complicated than payment of a dividend. Bolstering this, the Merchant Shipping Act as it applies to shipping organizations such as the SPVs, allows for the enforcement of a Malta registered mortgage outside of any insolvency proceedings. The application of these and related provisions in the Malta Securitisation Act and Merchant Shipping Act were the subject of legal opinions addressed to investors and shown to rating agencies for the purpose of awarding the desired credit rating to the UASC EMTCs.

However, an originator holding an equity stake in a securitistion vehicle is not only problematic from a bankruptcy remoteness perspective:- profits building up in the issuing vehicle and profit extraction by way of dividend payments could obviously threaten the vehicle’s tax neutrality. By the same token, liability of the SPVs to account to the tax authorities in Malta for unpaid tax could threaten the exclusive right of securitisation creditors to manage the Equipment Note issuers’ indebtedness. Broadly speaking, an ordinary Maltese company issuer would be liable to 35% corporation income tax on taxable profits. And whilst interest payments on debt would be deductible, repayments of principal and dividends on shares would not. Hence it was particularly important that unlike in other onshore SPV issuer jurisdictions, the Securitisation Transactions (Deductions) Rules in Malta allow a securitisation vehicle issuer to make a deduction for residual income that would otherwise be taxable, provided that the originator gives its irrevocable consent to this treatment in the SPV’s tax return.

From an investor’s perspective, apart from bankruptcy remoteness and ease and speed of enforcement of security, it is important that shipping securitisation companies are not considered alternative investment funds, particularly if they are investing from Europe. Many European pension funds and insurance companies are limited by their investment policies and / or regulation in their holdings of units in non-UCITS collective investment schemes. Again, legislation in Malta makes it clear that securitisation vehicles are not collective investment schemes and therefore are unable to be considered AIFs as a matter of Maltese law. It is also helpful that all of the SPVs’ voting share capital is issued to UASC and the Tabuk Foundation, whereas the Equipment Notes are clearly debt securities. Similarly, private securitisation vehicles, namely those that do not, as the UASC SPVs do not, issue securities to the public on a continuous basis, are generally not required to be licensed by the competent authority in Malta. The issuers in the UASC transaction were however required to notify the Central Bank of Malta of their existence as financial vehicle corporations under Regulation ECB 2013/40 for collection by the European Central bank of data on FVCs’ activities in the Eurozone.

In short, Malta uniquely allows for originator owned unregulated onshore bankruptcy remote SPVs with profit extraction by way of distributions on equity. For this reason, GANADO Advocates is predicting that as maritime capital markets grow, EMTCs backed by equipment notes issued in Malta should emerge as the classic form of investment security. UASC has itself indicated interest in undertaking further EMTC transactions in the near future and it would be surprising if it remains alone in a large constituency of potential issuers. Moreover, the success of this EMTC transaction could be the harbinger of Maltese EETC issuing vehicles for aircraft deals where European investors or lessors dictate the deal structure. From constituting a fulcrum for Phoenician trade routes in the fourth century BC to becoming the Mediterranean’s first transhipment hub in 1988 with an annual trade volume in 2012 of over 2.5 million TEUs, Malta has been recognized as the region’s pre-eminent freeport. It has now developed the legal, tax and regulatory infrastructure to become the leading safe harbour for maritime capital markets issues.

Lawyers in the London and New York offices of White & Case LLP lead by the firm’s Global Head of Asset Finance, Chris Frampton, acted as Transaction Counsel to UASC and Morgan Lewis Bockius LLP as Investor Counsel. GANADO Advocates acted as Malta Counsel to UASC. The GANADO Advocates’ deal team was lead by capital markets Partner, Richard Ambery together with Max Ganado on Maltese corporate and finance law, Stephen Attard on taxation and Karl Grech Orr on shipping. The team also included Associates Nicholas Curmi, Matthew Attard and Amanda Attard, respectively on capital markets, shipping and tax matters.

The Hungarian Personal Bankruptcy Act

The Hungarian Parliament recently enacted Act CV of 2015 on Personal Bankruptcy (the “Act”). The Act will become effective on September 1, 2015[1] and fill the gap of the country’s bankruptcy law, Act XLIX of 1991[2], as amended, on Bankruptcy Proceedings and Liquidation Proceedings also known as the Bankruptcy Act that did not allow private individuals to file for bankruptcy, or using the terminology of the Act, debt settlement petitions.

The Act fills an important gap in the Hungarian legal system concerning the availability of debt settlement proceedings for private residents of Hungary. Proper implementation of the Act should create an efficient personal bankruptcy system that is able to provide the long-sought relief for qualifying debtors and at the same time honor the rightful interest of their creditors.

Main Provisions of the Act

Individual debtors will now have the legal opportunity to settle their debts through an agreement made with the creditor(s). Debtors successfully petitioning debt settlement proceedings enjoy various privileges during the quasi moratorium, including exemption from judicial enforcement procedures, avoidance of losing their pledged real and tangible properties and the possibility to avoid eviction.

Who May Be a Debtor

Persons residing in Hungary with combined assets and income less in value than their total outstanding liabilities may be debtors under the Act.

The Act sets forth the basic eligibility requirements for the petitioning of a debt settlement proceeding as follows[3]:

  1. total debts must be more than HUF 2,000,000[4] but less than HUF 60,000,000;
  2. total debts must exceed the value of the debtor’s combined assets and income, including income expected for the next five years but may not exceed twice (200%) that amount;
  • 80% of the outstanding debt has to be accepted or unchallenged by the debtor;
  1. one of the debts must be for HUF 500,000 or more and outstanding for at least 90 days;
  2. the debtor may not have more than 5 subordinated claims;
  3. one of the debts must be from a consumer loan agreement or an agreement financing the debtor’s private business; and
  • none of the debts are from secondary liability for the debts of a business.

Debtors who participated in any prior unsuccessful debt settlement proceedings as a debtor or additional debtor are not eligible to file another debt settlement petition within 10 years following final conclusion of the prior proceeding.[5]

Other Participants in Debt Settlement Proceedings

The debt settlement proceeding was construed to provide breathing room not only to the individual debtor but his/her immediate family members who got caught in the debt trap. Persons who have joint and several liability for the debtors’ debts and live in the same household with the debtor, or a marital community, will qualify as additional debtors and entitled to the same rights and subject to the same obligations as the debtor.

It is also assumed that under specific circumstances certain debts may be repaid by persons other than the debtor, for example the holder of a lien or surety. Under the Act judicial enforcement procedures may not be initiated and pending proceedings will be stayed against these persons if they join the debtor in the debt settlement proceeding as co-debtors, and undertake similar payment obligations in case the debtor, as the primary payor, would fail to pay the debt agreed and accepted under the payment settlement plan or any other binding document conceived within the proceeding.

Property of the Estate of the Debtor

The commencement of a case under the Act creates an estate. The estate is comprised of all the assets and income of the debtor and additional debtor, including any assets or income acquired during the debt settlement proceeding. There will be an exemption for assets and income required for basic personal needs, the amount to be set by implementing regulations.

Family Bankruptcy Service[6]

The Family Bankruptcy Service will be established to employ a family trustee and maintain the debt settlement register. The Family Bankruptcy Service will assist the court during the judicial debt settlement proceeding. The family trustee will act as the executive authority in the implementation of the court’s decisions.

Debt Settlement Register[7]

The debt settlement register will be the official register to contain the data of those who underwent any personal debt settlement proceeding including (i) information on the initiation of the debt settlement proceeding; (ii) the stages of the proceeding; and (iii) the resolution rendered on the merits at the conclusion of the proceeding. In addition, commencement of a debt settlement proceeding shall also be entered into the Central Credit Information System.

The Debt Settlement Proceeding

The Act stipulates the following three phases of the debt settlement proceeding:

  1. A) Out-of-court Negotiation[8]

At the outset and following the filing of the debt settlement petition, the debtor and the creditor(s) shall attempt to enter into a debt settlement agreement. The debtor must state in writing, addressed to the main creditor, that s/he requests a debt settlement proceeding. The statement must include the following:

  • personal data of the debtor and his/her creditor(s);
  • property of the estate of the debtor;
  • composition and amounts of debts and the obligations assumed for their repayment; and
  • list of close relatives and civil partners living in the same household of the debtor and their regular incomes and expenses.

The main creditor of the debtor may be from among banks, credit institutions and financial enterprises that hold a lien on the property of the estate, or lessors under a financial leasing agreement. In both cases the property of the estate used by the debtor for his/her own primary housing purposes, or the housing purposes of his/her close relative(s), must be subject to the aforementioned lien/leasing contract. The main creditor must participate in the out-of-court debt settlement procedure. If the debtor does not have a main creditor, the petition must be filed with the court through the Family Insolvency Service.

Following submission of the petition, the Family Bankruptcy Service should verify compliance with all legal and financial prerequisites, and then simultaneously issue a certificate on the petition and publish an individual public notice electronically on its website to unlisted and unknown creditor(s) inviting them to file their claim(s) within 15 days. The publication will remain on the website of the Family Bankruptcy Service until the out-of-court negotiation was successful or is registered in the Debt Settlement Register.

After the initiation of the proceeding, creditor(s) may only pursue their claims within the framework of the debt settlement proceeding. During the proceeding, the debtor must make his/her assets and income available – excluding the assets and income required for everyday living expenses – and may neither pledge nor willfully diminish the value of the estate to be used for the satisfaction of the creditor(s) claims.

It is the main creditor who is charged with the coordination, negotiations and preparation of the debt settlement agreement. The debt settlement agreement is concluded when the creditor(s), debtor, additional debtor(s) and codebtor(s) make a valid statement accepting the terms of the agreement, and return the statement to the main creditor and the debtor. A debt settlement agreement is valid only if 100% of the participants in the debt settlement proceeding has approved it. Out-of-court debt settlement agreements do not require court approval, but they must be entered into the debt settlement register.

  1. B) Judicial Proceeding[9]

Although more costly because of the filing and debt management fee, a judicial proceeding may be initiated if the parties

  • fail to enter into an out-of-court agreement within 90 days from the receipt of the Family Bankruptcy Service’s certification (120 days if there are multiple creditors);
  • there is no main creditor able to coordinate the negotiations; or
  • the debtor does not comply with the provisions of the executed debt settlement agreement within 30 days following receipt of the notice to comply.

Judicial debt settlement proceedings follow the rules of civil, non-litigious procedures and are intended to make the debtor and the creditor(s) reach an agreement on payment facilities. At the commencement of the proceeding, a notice is published on the website of the Family Bankruptcy Service inviting creditor(s) to the judicial proceeding within 30 days. The family trustee, with the cooperation of the debtor, compiles the list of creditors and additional debtors, and the details of the creditors’ claims within 30 days upon expiration of the deadline open for creditors to file their claims.

In this phase of the proceeding, claims must be classified in categories, such as:

  • claims accepted or unchallenged by the debtor;
  • claims challenged by the debtor;
  • secured claims;
  • unsecured claims;
  • priority claims;
  • claims of privileged creditors (holding claims for alimony, child support, unpaid public utility charges, public debts); and
  • subordinated debts (e.g. claims of close relatives, civil partners, partner companies).

Afterwards, the family trustee prepares the debt settlement plan proposal together with the debtor and sends it to the creditor(s), who have 30 days to accept the proposal or request its amendment. As part of the settlement, the debtor may agree with the creditor(s) on the conditions of the debt settlement regarding payment facilities, payment rescheduling, potential conversion of debt from foreign currencies to HUF, the relevant exchange rate, the joint risk pertaining to the foreign exchange rate and the allocation of amounts collected within the scope of a prior enforcement procedure.

In order to become effective, the settlement plan requires the approval of the debtor, the main creditor, and the simple majority of all other creditors. Although a successful plan does not require 100% consensus, this phase accords all creditors the right to present proposals on the merits of the plan and the subsequent agreement.

The Family Bankruptcy Service assists the court during the judicial debt settlement proceeding and supports the debtors in performing their obligations and exercising their rights.

If the content of the plan complies with all applicable legal provisions and has the required consents, the court approves it in a resolution. The court approved agreement will be binding on all creditors regardless of their participation or position in the plan approval vote.

Execution of the agreement should be supervised by the family trustee, who can inspect the debtor’s financial management at any time.

The court may amend the agreement twice at the debtor’s request if there is a substantial negative change in the debtor’s financial situation. In both cases, the amended agreement will be put to a vote among the creditors not yet satisfied.

Once the settlement is concluded, the family trustee will prepare a closing account statement with the assistance of the debtor.

  1. C) Debt Repayment Procedure[10]

The court shall initiate a debt repayment procedure if the

  • parties could not come to an agreement in the judicial proceeding;
  • the debtor did not pay all of his/her debts in accordance with the settlement agreement; or
  • the settlement agreement requires an amendment due to an unanticipated deterioration of the debtor’s financial position or any unanticipated and significant income, but the parties fail to reach an agreement on the amendment.

If any of these happen, the court adopts a debt repayment resolution, which includes the allocation and sale of the debtor’s estate within the scope of a repayment plan.

The family trustee will prepare the debt repayment plan for the court’s approval. Additionally, the family trustee should suggest solutions to ensure housing and necessary expenses for the everyday life of the debtor and his/her close relatives living in the same household.

If the financial position of the debtor substantially deteriorates, the debt repayment resolution may be amended twice upon the debtor’s request.

The debt repayment procedure period is five years, which may be extended by the court only once, for a maximum of two additional years. Upon the conclusion of the debt repayment procedure the family trustee, with the cooperation of the debtor, shall prepare a final closing account statement.

Termination of the Debt Settlement Proceeding

The court may terminate the debt settlement proceedings if the debtors do not comply with their obligations during the procedure. Termination of the debt settlement procedure will end all the benefits and protections that the debtors enjoyed while the case was pending, and creditors may continue to pursue and enforce their claims in accordance with the general rules of civil, civil procedure, and judicial enforcement laws.

Post Debt Settlement Agreement Rights of Creditors

The following rights are available to creditors if debtors fail to comply with their obligations undertaken in the debt settlement agreement or the court’s resolution:

  1. If the debtor removes or conceals any property of the estate, or gives preference to certain creditors by breaching relevant statutory provisions or provisions of the debt settlement agreement, creditors participating in the proceeding may, in case of out-of-court negotiations, request the termination of the debt settlement agreement[11], or in case of judicial proceeding, request the court to repeal its release resolution[12].
  2. If the term of a contract or the conditions of repayment was defined in a way that exceeds the term of the agreement in the release resolution and the debtor has not fulfilled his/her payment obligations during this period, creditors participating in the judicial proceeding may request the termination of the debt settlement agreement[13].

Miscellaneous Provisions of the Act

The general procedural rules of the judicial debt settlement proceedings will be provided by the Hungarian Code of Civil Procedure with certain derogations related to electronic communication and the broader powers of court officers.[14] A complaint may be submitted against the family trustee for any irregularities, negligence or if his/her acts infringe the rights and rightful interests of the debtor and/or the creditor(s)[15]. For the appeal of the orders of the court rendered during the proceedings, the Act includes specific rules that differ from the general provisions of the Hungarian Code of Civil Procedure[16].

In the debt settlement proceedings creditor(s) have to pay a registration fee and a claim management fee.[17] Debtors are obliged to pay a one-time fee of HUF 30,000 in case a main creditor can be engaged in the out of court proceeding.

Following its entry into force and until September 30, 2016,only those debtors may file a debt settlement petition whose residence or the residence of their close relative(s) are threatened by judicial enforcement or auction sale.



[3] Article 7 of the Act

[4] Approximately EUR 64,500 based on EUR 1.00/HUF310 exchange rate.

[5] Article 8 of the Act

[6] Articles 11-15 of the Act

[7] Article 16 of the Act

[8] Articles 17-31 of the Act

[9] Articles 32-68 of the Act

[10] Articles 69-82 of the Act

[11] Article 93 of the Act

[12] Articles 95-96 of the Act

[13] Article 94 of the Act

[14] Article 36-38 of the Act

[15] Articles 97-99 of the Act

[16] Articles 100-102 of the Act

[17] Article 88 of the Act

This article was first published in Insolvency Restructuring International, Vol 9 No 2, September 2015, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

Gibraltar Insolvency Act 2011 – Corporate Insolvency Reform


A complete legislative reform of Insolvency law in Gibraltar has been brought about by regime in the form of the Insolvency Act 2011 (IA) and comprehensive subsidiary and associated legislation took effect on 1 November 2014. The new legislation makes provision for liquidation, as well as for various rescue and recovery regimes for the first time under Gibraltar law, including creditor voluntary arrangements, receivership and administrative receivership.

The new Act also deals with individual bankruptcy which is outside the scope of this article. Specific rescue and recovery for creditors.

The new insolvency regimes of the IA now means that companies in difficulty are given opportunities to turn around their fortunes whilst ensuring that creditors are able to ensure a maximum return on debts owed to them. The IA provides a balanced approach between these two positions.

Company Voluntary Arrangements

The directors of a company (or a liquidator/administrator), if they believe that the company is or is likely to become insolvent, may propose a Company Voluntary Arrangement (CVA) to the creditors under Part 2 of the IA which may cancel all, or any part of, a liability of the company and/or may vary the rights of the creditors or the terms of a debt.

The process is supervised by an Interim Supervisor who must be an eligible insolvency practitioner, who must prepare a report on the proposal for the creditors and call a creditors’ meeting at which the creditors can either approve, amend or reject the proposal.

Approval by 75% (in value) of the creditors present and voting on the CVA, binds the company, each member and each creditor of the company as if he was a party to the arrangement whether that creditor attended the creditors’ meeting or not.

Following approval and subject to his agreement, the Interim Supervisor is appointed as Supervisor with such powers and functions as provided for in the proposal. Upon an application to Court, where he has failed to comply with his duties he may be replaced. The Court has the discretion, following an application, to give any direction to the Supervisor and can also confirm, reverse or modify any decision made by Supervisor.


The Administration provisions are in Part 3 of the IA. They can be described as company friendly in that they give the company a window of opportunity to try to rescue its ailing business during a period when the company structure is effectively preserved and creditors are prevented from taking any legal steps against the company.

Generally, an Administrator is appointed by an Administrative Order made by the Court. The Court must be satisfied that the company is, or is likely to become, insolvent and that the appointment will assist in the rescue of the company or will achieve a better result for the creditors as a whole than would be likely if the company were to enter into liquidation.

Upon appointment, the Administrator takes custody and control of all the company’s assets and he will manage the business affairs of the company in furtherance of the objectives. Unlike liquidation, the powers of the directors continue so long as they do not conflict with the Administrator’s powers. The Administrator has to formulate proposals for consideration by the creditors who may approve, amend or reject the proposal at a creditors’ meeting.

If approved the Administrator manages the company’s business, assets and affairs in accordance with the proposals. He shall perform his functions with the primary objective of rescuing the company, if possible. He is granted a wide range of powers to ensure the objectives are satisfied.

The period from the filing of the application for an Administration Order up to the dismissal of the application or the discharge of the Administrative Order is ‘the Moratorium Period’. During that period the company is protected from any further creditors’ action. Except with the Court’s leave or the Administrator’s consent, cannot take any step to, inter alia, enforce any security interest over the company’s assets or begin any legal process against the company.

An Administration Order cannot be granted by the Court where an Administrative Receiver has been appointed for the company by the holder of a debenture or other instrument secured by way of a floating charge. The concept of an Administrative Receiver is dealt with below but it is interesting to note that this might lead to an increase in the use of floating charges in financing transactions concerning Gibraltar companies.


The IA provides for the appointment of a Receiver either court order or by powers granted under a debenture or other instrument. A Receiver is usually appointed in relation to a particular asset of the company and will enjoy those powers expressly or impliedly conferred on him by the appointing instrument.

The Act also provides that a Receiver may demand and recover, and issue receipt for, any income of the asset in respect of which he was appointed.

The Receiver may also manage, insure, repair and maintain the asset. Primarily, he must exercise his powers in good faith and for proper purpose and must at all times act in the best interests of the person whose interests he was appointed. Subject to his primary responsibility the Receiver must also have reasonable regard to the interests of the creditors and the company.

Administrative Receiver

As referred to above, the IA also introduces the concept of an ‘Administrative Receiver’. He is a receiver of the whole or substantially the whole of the business undertaking and assets of a company, appointed by a floating charge holder, or in some circumstances by the court.

The Administrative Receiver’s powers go beyond those of a Receiver and include powers to execute all documents necessary or incidental to the exercise of his powers in the name of the company and may also use the company seal.


An application for appointment of a liquidator (replacing the previous “petition to wind up a company”), can be made by a creditor, the company, its directors, its shareholders, the Minister responsible for financial services or the Financial Services Commission. The Court will appoint a liquidator inter alia, where a company is insolvent, with provision also being made for appointment of liquidators on public interest or other grounds. A liquidator’s principal duties are to collect and realise the assets of a company and distribute the proceeds to creditors. Upon appointment, the liquidator takes custody and control of the company’s assets, and the directors cease to have any powers; this marks a complete end to the company’s business. Liquidation may be commenced by the court or by shareholders’ resolution.

The Court will also have jurisdiction, under Part 7, to appoint a liquidator over an unregistered company, which includes a foreign company, provided it has a connection with Gibraltar, namely if it has, or had, assets in Gibraltar, or if it carried on business in Gibraltar or if there is a reasonable prospect that the appointment would benefit creditors.

Commencement of liquidation

A company will be put into liquidation when a liquidator is appointed. The onset of insolvency, which is relevant for the purposes of voidable transactions (see below), is the date when the application for the appointment of the liquidator is filed, or, where the company is in liquidation following appointment of a liquidator by its members, the date of the appointment of the liquidator.

The definition of insolvency

A company will be presumed to be insolvent if it fails to comply with the requirements of a statutory demand that has not been set aside, or execution on a judgment in favour of a creditor of the company is returned unsatisfied.

A company is insolvent if it is unable to pay its debts as they fall due, or the value of its liabilities exceeds its assets.

Voidable transactions

The new legislation introduces several types of voidable transactions in Part 9 of the IA, with a new suspect or ‘vulnerability period’. Under the ………… Companies Act, the relevant time frame in determining whether a transaction by an insolvent debtor could be annulled was 3 months prior to commencement of winding up, and in the case of floating charges, six months before commencement (with the commencement being deemed to be the date on which a petition was filed to wind up the company).

Under the new legislation, the relevant periods are longer. It is important to note that they will be calculated from ‘the onset of insolvency’ which is the date on which an application for appointment of a liquidator is made.

The vulnerability period referred to in sections 259, 250 and 251, in relation to unfair preferences, undervalue transactions (s.250) and voidable floating (s.251) charges is 6 months prior to the onset of insolvency, or where the transaction is with a connected person, 2 years prior to the onset of insolvency. A “connected person” is defined in the Insolvency Rules 2014. A person is connected with an individual if the person is (a) the person’s individuals spouse or civil partner (b) a relative of the individual, or of the individual’s spouse or civil partner; or (c) the spouse or civil partner of a relative of the individual or of the individual’s spouse or civil partner. A person is connected with a company if the person if (a) is a director of the company; (b) is a parent or subsidiary of the company; or (c) has control of the company. The definition also covers people in partnership with one another and also employees.

In relation to extortionate credit transactions (section 252) the vulnerability period commences 5 years prior to the onset of insolvency and ends on the appointment of the administrator, or if the company is in liquidation, the liquidator.

Unfair preferences

This is a transaction, the effect of which places a creditor in a better position than they would have been in the event of the company going into liquidation. The preference must have occurred within the ‘vulnerability period’ and the company must have been insolvent at the time or become so as a result of the transaction.

Transactions in ordinary course of business are not unfair preferences. If the creditor is connected with the company, there is a rebuttable presumption that the company was insolvent at the time or became so as a result of the preference, and that it did not take place in ordinary course of business.

Undervalue transactions

This occurs where a company makes a gift to a person or otherwise enters into a transaction on terms that provide no consideration for the company, or significantly less than the value, in money or money’s worth, than the consideration provided by the company.

Such a transaction can be set aside if it was entered into within ‘the vulnerability period’ and if the company is insolvent or becomes insolvent as a result of the transaction. If the transaction is with a connected person, there is presumption (which is rebuttable) of insolvency.

Voidable floating charges

A floating charge created by a company within the vulnerability period is voidable if at the time of creation, the company was insolvent, or became so as a result.

The charge would not be voidable to the extent that it secures money or assets advanced at the same time as, or after, the creation of the charge. If a floating charge is created in favour of a connected person, there will be a presumption (which can be rebutted) that the company was insolvent at the time or that it became so as a result of the charge.

Extortionate credit transactions

A transaction entered into within the vulnerability period to provide credit to the company is voidable if, taking into account the risk accepted by the person providing the credit, the terms of the transaction require grossly exorbitant payments to be made, or the transaction grossly contravenes ordinary principles of fair trading.

Orders to be made by the Court

The Court has power to make an order setting aside voidable transactions and make such orders it considers appropriate, including restoring the position to what it would have been if the company had not entered into that transaction, or in the case of extortionate transactions, to vary the terms of the transactions or to take accounts.


Part 10 of the Insolvency Act deals with malpractice and directors liabilities.

Directors of an insolvent company may be personally liable and ordered to repay monies or compensation where they are found to be guilty of misfeasance or breach of fiduciary duty, or where they misapply monies.

Fraudulent trading

A liquidator powers to pursue directors for malpractice, including for fraudulent trading where the company’s business has been carried on with intent to defraud creditors or any other person, or for any fraudulent purpose. A director knowingly party to the fraudulent trading may be liable to contribute to the assets of the company.

Insolvent trading

A liquidator may also pursue a director, or former director for insolvent trading if that person continued to trade when he knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. The director or former director would have a defence if he or she took every step reasonably open to him to minimising the potential loss to the company’s creditors.

The Court has power to order that a director found guilty of insolvent trading contribute to the assets of the company.

Fraudulent conduct

Any officer of a company will be deemed to have committed an offence if at any time during their appointment, or in the 12 months preceding the liquidation they transfer or charge any of the company’s assets, or if they conceal or remove any of the company’s assets.


A director may also be disqualified from acting as a director of a company or from being directly or indirectly involved in the management of a company (including as a voluntary liquidator, receiver or insolvency practitioner).

A disqualification order may be made by the court if a director has been convicted of any offence in relation to an insolvent company, is guilty of fraudulent or insolvent trading under sections 259 and 260, is guilty of any fraud or misfeasance or where the Court considers that the person’s conduct as director, or shadow director, makes him unfit to be concerned in the promotion, formation or management of companies.

General provisions relating to Insolvency proceedings

Part 17 of the Act makes provision for the appointment of a creditors committee in liquidations, administrations or administrative receiverships. The functions of a creditors’ committee are;

(a) to consult with the liquidator (or administrator etc.) about matters relating to the insolvency proceeding;

(b) to receive and consider reports of the insolvency holder;

(c) to assist the officer holder in discharging his functions;


(d) to discharge any other functions assigned to it under this Act or the Rules.

A creditors’ committee may call a meeting of creditors and require the liquidator (or administrator etc.) to provide the committee with such reports and information as the committee reasonably requires, as well as to require him to attend before the committee. The committee will also have powers relating to the liquidator’s remuneration, and to controlling the same.

Part 18 of the Act deals with the appointment of the Official Receiver and sets out the functions of the same, with Part 19 setting out the rules governing insolvency practitioners, with licences required to act as a liquidator, administrator or other insolvency practitioner.

Such licences are available only from the Minister for Financial Services, with the Financial Services Commission monitoring the same.

Big Data Bankruptcy Sale Derailed – RadioShack’s Customer Information Draws Objections

On March 20, 2015, the State of Texas filed an objection to the sale of customer information in the In re RadioShack Corporation, et al., Case No. 15-10197, case pending in Delaware. According to the objection, the customer information up for sale includes consumer names, phone numbers, mailing addresses, e-mail addresses and activity data. Texas’s objection asserted that RadioShack’s proposed sale of personal information of 117 million RadioShack customers violates the Texas Deceptive Trade Practices Act and other federal and state consumer protection laws. The objection was joined by Oregon, Pennsylvania and Tennessee and twenty additional state consumer protection agencies wrote letters of support for the Objection.

Why is this such a big deal? An obvious reason is because the objection has the potential to delay the sale of RadioShack’s assets and, in bankruptcy, time is often more valuable than money. The less obvious reason is that RadioShack’s customer information may be one of the most valuable stand-alone assets in the bankruptcy estate. If the objection is granted, this value could disappear and result in a dramatic reduction of funds potentially distributed to creditors. On the other hand, is the customer information really RadioShack’s property to sell? Welcome to the world of bankruptcy.

Technology is not only a major disruptor of traditional business models; it has and will continue to unsettle established legal norms as well. One example is the rise of e-discovery, with most Fortune 1000 companies currently spending between $5 million to $10 million annually on e-discovery alone. Bankruptcy courts are no stranger to disruption. They are constantly faced with state and federal laws intersecting with the policies underlying the bankruptcy code. The tension stems from bankruptcy’s “fresh start” policy, which usually involves a debtor shedding obligations imposed by state and federal law through a bankruptcy sales process. If you throw technology into this mix, well, you might end up derailing RadioShack’s bankruptcy auction involving over $100 million in assets, or worse.

Almost 15 years ago, the online retailer entered bankruptcy and attempted to publicly auction its assets, including its customer information. The Federal Trade Commission (FTC) objected to the sale of customer information. In re, LLC, No. 00-13995-CJK (Bankr. D. Mass. filed June 9, 2000). Toysmart and the FTC settled the dispute, resulting in Toysmart being restricted to sell its customer information to a family-oriented buyer only and the buyer had to agree to follow Toysmart’s privacy policy. The problems didn’t end there. Multiple states also objected to the sale of Toysmart’s customer information (sound familiar?). In the end, Toysmart removed the customer information from the assets for sale and one of Toysmart’s largest investors actually paid $50,000 for the customer information to be destroyed.

The difference between the Toysmart case and what RadioShack now faces is the advent of “Big Data.” According to the International Data Corporation, a global technology research company, the Big Data market will be valued at $125 billion worldwide in 2015. This value comes from technological advances that allow companies to utilize Big Data in incredibly valuable ways, like predicting business trends, consumer preferences and targeted advertising, among others. Due to Big Data, things like customer information lists have gone from an after-thought, like in the Toysmart case, to highly coveted information assets by strategic and outside buyers alike. Facebook, for example, possessing more personal information than many companies in the world, has used Big Data to monetize that personal information by selling predictive consumer analytics and targeted advertising. Deserved or not, Facebook has a current market capitalization of approximately $231 billion. Big Data is big business. Consequently, RadioShack’s data for 117 million customers could be one of the most valuable stand-alone assets for sale.

The enterprise value of information has changed immensely since 2000 and the days of the Toysmart case. As the International Data Corporation has predicted, this value is likely only to increase for the foreseeable future. This may place pressure on bankruptcy courts, debtors and prospective buyers on preserving the value of information assets while also complying with state and federal consumer protection laws. Bankruptcy practitioners will need to adapt to these changes and find an approach that facilitates information asset transactions balanced with respecting the privacy rights of consumers.

Ordinary Course Of Business Preference Defense Clarified In A Recent SDNY Bankruptcy Court Decision

Almost every significant bankruptcy case eventually involves preference demands and litigation. Around this abundance of litigation developed a significant body of jurisprudence, to which Judge Sean Lane of the Southern District of New York Bankruptcy Court recently added in clarifying the ordinary course of business preference defense.

In Davis v. Clarklift-West, Inc,1 the Plaintiff — Litigation Trustee for the Quebecor World Litigation Trust (the Trustee) — sought summary judgment that certain transfers by the Debtors to the Defendant were preferences under § 547(b) of the Bankruptcy Code. The parties did not dispute that the transfers met the elements of § 547(b). The dispute concerned the Defendant’s assertion of the ordinary course of business defense under § 547(c)(2)(A).2

The Trustee analyzed 533 transfers made during a two-year historic baseline period ending before the preference period, to 82 transfers made during the preference period. The results were damning — in the historic period, 83 percent of payments were made between 45 and 65 days past the invoice date, as opposed to 6 percent during the preference period (in the preference period, 70 percent of the payments were between 76 and 85 days after the invoice, and 99.97 percent of the payments were more than 60 days after, leaving effectively no payments transferred on or around the historic 50-day mean). The weighted average from invoice to payment rose about 55 percent, from 50.29 days in the historic period to 77.79 days in the preference period. The Court accepted and the Defendant did not contest these figures or methodology.3 Rather, the Defendant relied primarily on two cases to support its defense.

First, the Defendant cited a California bankruptcy case from 20074 where a variance of 33 percent to 50 percent in timeliness of payments did not preclude an ordinary course of business defense. Judge Lane distinguished the case due to its unique facts, including the potential of invoice or payment delays due to the intervention of holiday periods.

Second, the Defendant cited the Southern District of New York’s Pameco5 bankruptcy decision, which outlined factors courts should consider to determine whether transfers were in the ordinary course: (1) the parties’ prior course of dealings; (2) the payment amounts; (3) the timing of payments; (4) the payment circumstances; (5) the presence of unusual debt collection practices; and (6) whether the means of payment had changed. The Defendant argued that five of these six factors supported the ordinary course defense, while only the timing of the payments did not.

The Court reinforced the standard in the Southern District of New York that late payments are presumed to be outside the ordinary course. Simply adding-up the Pameco factors was insufficient to rebut that presumption.6 Only a showing that late payments were the parties’ standard course of dealing would suffice. Judge Lane noted that, although courts consider other factors, a significant delay in payment during the preference period will not necessarily be overcome by the existence of other favorable factors. The Court granted summary judgment in favor of the Trustee because the Defendant did not establish that the extent of the late payments was in the parties’ standard course of dealing.7 The Court also allowed pre-judgment interest under §§ 547 and 550(a).

The message to creditors is clear — when constructing an ordinary course of business defense under § 547(c)(2)(A), determine your most favorable analysis to include the highest amount of payments within the ordinary course defense. Then, determine how much exposure you have and work with the trustee to arrive at a settlement south of the exposure amount. Based on the Court’s ruling, it appears that unless you can decrease the exposure period, the Pameco factors will not save you and contesting the preference could be a losing battle, resulting in possible loss of the full exposure amount, pre-judgment interest, and costs.8


1. Eugene I. Davis, as Litigation Trustee for the Quebecor World Litigation Trust v. Clarklift-West, Inc. dba Clarklift Team Power (In re Quebecor World (USA), Inc. et al.), Bankr. S.D.N.Y. Adv. Proc. No. 10-1568(SHL) (Order Dated October 14, 2014).

2. Section 547(c)(2)(A) provides the so-called “subjective” test, which looks to the history of the transactions between the parties.  The “objective” ordinary course of business test, provided in 547(c)(2)(B), looks at whether the transfers were made according to ordinary business terms, and is more costly to prove, rendering it prohibitively expensive in many instances.

3. It is unclear whether a different methodology would have yielded a more favorable result for the Defendant.

4. In re Central Valley Processing, Inc., 360 B.R. 676 (Bankr. E.D. Cal. 2007).

5. Buchwald Capital Advisors LLC v. Metl-Span I., Ltd. (In re Pameco), 356 B.R. 327, 340 (Bankr. S.D.N.Y. 2006).

6. Even the Pameco court acknowledged that substantially delayed payments are outside the ordinary course.

7. The Court also considered the Defendant’s inadequate application of the Pameco factors, and other evidence including a letter from the Debtors to their suppliers urging them to maintain a business relationship. These factors did not appear to weigh heavily in the decision.

8. The views expressed in this article do not necessarily represent the views of Arent Fox LLP, its attorneys, or its clients.

Quantum Foods: Committee Files Preference Actions


On October 28, 2014, The Official Committee of Unsecured Creditors of Q v. AB Foods LLC (the “Committee”), the committee in the Quantum Foods, LLC bankruptcy, began filing complaints to recover what it contends are avoidable preferences.  The Committee filed the preference actions in the Delaware Bankruptcy Court and argue that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code. This post will look at the Quantum Foods, LLC bankruptcy proceeding, why the company filed for bankruptcy as well as key developments during the course of the bankruptcy proceeding.


On February 18, 2014, Quantum Foods LLC (“Quantum” or “Debtor”), along with various related entities, filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware.  The main Quantum Bankruptcy case is Case Number 14-10318-KJC.  As stated in its Declarations in Support of Chapter 11 Petitions and First Day Relief (the “Declaration” or “Decl.”), Quantum described itself as a “leading further-processor of proteins, including beef, pork and poultry.”  Going into bankruptcy, the Debtors employed approximately 1,100 employees, all based in the Debtors’ facilities in Bolingbrook, Illinois.  The Debtors primary objective in commencing its chapter 11 cases was to pursue a prompt sale of their assets in order to maximize value for stakeholders, preserving jobs, minimizing supply disruptions for the Debtors’ customers and ensuring an uninterrupted supply chain for the Debtors’ vendors.  Decl. at * 2.

The Bankruptcy Proceeding

On multiple dates since the bankruptcy petition was filed, including May 16, 2014, June 13, 2014, July 11, 2014, and July 15, 2014 the Debtors file motions for the sale of assets.  The Delaware Bankruptcy Court confirmed the Plan on March 18, 2013.  On April 15, 2013, Southern Air satisfied the conditions precedent to the Plan becoming effective.

On July 14, 2014, the Court entered an order authorizing the Committee to prosecute causes of action on behalf of the Debtors and granting the Committee standing to pursue such claims. The causes of action include all litigation pursuant to Section 5 of the Bankruptcy Code.  This includes the recently filed preference actions.

The Preference Actions

The Quantum bankruptcy, as well as the preference actions, are before the Honorable Kevin J. Carey.  The Committee prosecuting the Quantum preference actions is represented by the Cross and Simon, LLC.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

Limitations On Credit Bidding Under Fisker And Its Progeny: A Trend Or An Aberration?

Section 363(k) of the Bankruptcy Code (the “Code”) provides that a secured creditor may “credit bid,” or bid at the sale of its collateral and then offset the purchase price at closing by the value of the outstanding claim secured by the collateral being purchased. The right of a secured creditor to credit bid, however, is not absolute, and may be modified or denied by the court “for cause.” Recent cases might appear to indicate that there is an emerging trend toward broadening the definition of “for cause” by limiting a secured creditor’s right to credit bid based upon policy considerations, such as a desire to foster a competitive bidding environment or to avoid chilled bidding. However, these cases may not be as significant a departure from existing case law as was first believed.

In the first of these cases, In re Fisker Auto. Holdings, Inc., No. 13-13087-KG, 2014 Bankr. LEXIS 230, (Bankr. D. Del. Jan. 17, 2014), the U.S. Bankruptcy Court for the District of Delaware capped a senior secured creditor’s right to credit bid for cause where no bidding would occur if the creditor were allowed to bid its full secured amount. In Fisker, Hybrid Tech Holdings, LLC (“Hybrid”) purchased an outstanding $168.5 million debt for $25 million to become the senior secured lender to Fisker Automotive Holdings, Inc. (the “Fisker Debtors”). Hybrid sought to purchase substantially all of the Fisker Debtors’ assets, and the Fisker Debtors proposed a private sale under section 363 of the Code just 24 business days after the bankruptcy filing. The Unsecured Creditors Committee (the “Committee”) opposed the sale motion and, in particular, opposed Hybrid’s right to credit bid. The Committee argued that if Hybrid’s credit bidding were capped at $25 million, there would be a strong likelihood that there would be an auction that could create material value for the estate. If Hybrid’s bid was not capped, there would be no realistic possibility of an auction. The court agreed, stating “bidding [would] not only be chilled without the cap; bidding [would] be frozen.” However, the court also pointed to the unfair, hurried process insisted upon by Hybrid and highlighted the fact that there was a portion of the assets being sold in which Hybrid did not have a perfected lien, and another portion in which there was a dispute as to whether Hybrid held a perfected lien. Based upon all of these considerations, the court ultimately determined that cause existed to cap Hybrid’s right to credit bid at $25 million. Given the additional reasons cited by the court, the opinion cannot be read to find “cause” would exist merely because the size of the secured creditor’s claim would chill other bidders.

In April, the U.S. Bankruptcy Court for the Eastern District of Virginia followed Fisker’s lead by capping a secured creditor’s right to credit bid. In In re Free Lance-Star Publishing Co., No. 14-30315-KRH, 2014 Bankr. LEXIS 1611, (Bankr. E.D. Va. Apr. 14, 2014), the Free Lance-Star Publishing Company and William Douglas Properties, LLC (collectively, the “Free Lance Debtors”) were a family-owned publishing, newspaper, radio and communications company, and a related entity that were parties to a $50 million loan secured by certain assets of the Free Lance Debtors, but not by “tower assets” that were associated with the Free Lance Debtors’ radio broadcasting company. The company that initially made the $50 million loan sold its secured debt to DSP Acquisition LLC (“DSP”), which bought the debt as part of a “loan-to-own” strategy, whereby it intended to push the Free Lance Debtors into bankruptcy and then acquire the company by credit bidding its secured claim. DSP asserted a right to credit bid up to approximately $39 million; however, this amount included liens on the Free Lance Debtors’ tower assets, despite DSP not having valid, properly perfected liens on, or security interests in, those assets. Other potential buyers were confused by what assets DSP had liens on and were reluctant to participate in the sale process because of DSP’s potential credit bid. Consequently, the court held that it was necessary to limit DSP’s ability to credit bid to the value of those assets on which DSP had properly perfected liens based upon DSP’s overzealous conduct, lack of valid liens in all the assets being sold, and the court’s goal of fostering “a fair and robust sale.”

Finally, the newest decision in which the court capped the amount of a secured creditor’s credit bid is In re RML Development, dba Pinetree Place Apartments dba Raintree Apartments, No. 13-29244 (Bankr. W.D. Tenn. July 10, 2014). In this case, SPCP Group III CNI 1, LLC (“Silverpoint”) asserted a valid first mortgage security interest in two apartment complexes owned by RML Development (“RML”), and intended to credit bid its claim. Silverpoint calculated its claim at $2,543,579.65, while RML admitted that the claim was worth $2,354,759.55. Section 363(k) specifies that a creditor may credit bid only “an allowed claim” as defined by section 502(a) of the Code. A filed proof of claim is deemed allowed until a timely objection is filed, after which there must be a hearing and determination by the court. Since RML objected to the amount of Silverpoint’s claim, the court limited Silverpoint’s credit bid to $2,354,759.55, or the amount that RML had admitted. This was important because there were numerous pending allegations connected to a Ponzi scheme in which RML may have been involved. Because of this, the court stated that it “[could not] turn a blind eye to these allegations and blindly ignore objections to claims.”

These decisions are noteworthy for secured creditors or distressed-debt traders who use the purchase of distressed debt as an acquisition strategy, as well as competing bidders and creditor constituents participating in section 363 sales. Credit bidding by secured creditors in section 363 sales is commonplace, but these three cases serve as a reminder that the right to credit bid is not absolute, and can be limited by the Bankruptcy Court “for cause.” Though much of the discussion surrounding Fisker, Free Lance-Star and RML Development focuses on the policy considerations that influenced the courts’ decisions, it is important to note that these recent decisions each involved a dispute as to the validity or extent of the creditors’ claims. Consequently, these decisions should not be read as allowing credit bidding to be capped solely to avoid bid chilling.

Orchestrated Involuntary Case Not Dismissed On Bad-Faith Grounds

In In re Houston Regional Sports Network LP,1 Hon. Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas held that an involuntary case commenced to circumvent a contractual clause requiring unanimous director consent to commence a voluntary case (the “unanimous-consent clause”) was not subject to dismissal on bad-faith grounds pursuant to § 1112 (b) of the Bankruptcy Code. This holding is significant because, despite the existence of thousands of agreements with unanimous-consent clauses, the two previously reported decisions directly addressing this issue reached opposite conclusions. While it remains to be seen how other courts will rule on this issue, Houston Regional may encourage efforts by a debtor’s principals to circumvent unanimous-consent clauses by convincing creditors to commence an involuntary case.

Standard for Dismissal

Section 1112 (b) (1) provides, subject to certain limitations, that “the court shall … dismiss a case under this chapter … if the movant establishes cause.” Section 1112 (b) (4), in turn, lists various events that would satisfy “cause.” The exact standard for determining whether cause for dismissal exists on the grounds that a case was commenced in bad faith varies somewhat by district. In general, however, cause for a bad-faith dismissal may be established by demonstrating that a reorganization would be “objectively futile” and that the case was commenced in “subjective bad faith” (i.e., as a litigation tactic and not with intent to effect a reorganization).2

Kingston Square Associates

In In re Kingston Square Associates,3 the court held that an involuntary case that was commenced to circumvent a unanimous-consent clause is not subject to dismissal on bad-faith grounds where the debtor has a reasonable possibility of reorganizing. In Kingston Square, 11 corporations and limited partnerships that owned various apartment complexes issued mortgage-backed securities (MBS), substantially all of which were beneficially owned by Donaldson, Lufkin & Jenrette Securities Corp. and its affiliates (DLJ).4 To render the borrowers “bankruptcy remote,” the corporations’ charters and general partners’ bylaws were amended to include a unanimous-consent clause, and an independent director selected by DLJ was added to the board of directors of each such corporation and partnership within the general partner to ensure that the unanimous consent that was required to commence a voluntary case would not be obtained without the independent director’s vote.5

Foreclosure proceedings were subsequently commenced that, if consummated, would have transferred ownership of the borrowers’ apartment complexes to DLJ, leaving nothing for unsecured creditors.6 Believing there to be equity in the apartment complexes and that the independent director was a DLJ pawn who would never approve the commencement of a voluntary case, the borrowers’ other directors launched a campaign to find other creditors that would file involuntary petitions against the borrowers.7

Following the commencement of the involuntary cases, DLJ and the MBS trustee moved to dismiss the cases on bad-faith grounds, arguing that the filings were orchestrated to circumvent the unanimous-consent clauses.8 The court noted that the cases were subject to dismissal only “if both objective futility of the reorganization process and subjective bad faith in filing the petition [s] are found.”9 With regard to the former prong, the court held that the borrowers “had a reasonable belief that they could reorganize,” and no record was established concerning “the objective futility of reorganization.”10 With regard to the latter prong, the court held that the orchestration of an involuntary filing by itself is “suggestive of bad faith,” but that the movants failed to establish that the cases were commenced in furtherance of “a fraudulent deceitful purpose, [such as] avoid [ing] a court order or statutory bar,” since the potential for reorganization existed.11 As a result, the court denied the motion to dismiss.

Global Ship Systems

In In re Global Ship Systems LLC, the court held that an involuntary case that was commenced to circumvent a unanimous-consent clause is subject to dismissal on bad-faith grounds, even if the debtor has a reasonable possibility of reorganizing.12 In this case, to finance its acquisition of a shipyard, Global Ship Systems LLC borrowed approximately $13 million from Drawbridge Special Opportunities Fund LP and granted Drawbridge a 20 percent “class B” equity interest.13 The borrower’s operating agreement provided, among other things, that the class B holder’s consent was required for the borrower to commence a voluntary case.14 The borrower subsequently defaulted on the loan, whereupon Drawbridge commenced foreclosure proceedings.15 Thereafter, at the class A holder’s urging, several creditors commenced an involuntary case against the borrower.16 As of the date that the involuntary case was commenced, the debt that was owed to Drawbridge had ballooned to approximately $38 million, and the shipyard was estimated to be worth approximately $16 million.17

Drawbridge subsequently moved to dismiss the case on bad-faith grounds.18 The court held that “[i] n circumventing the rights of Drawbridge as shareholder to consent to a bankruptcy filing through the ruse of soliciting an involuntary case and failing to contest the involuntary petition once it was filed, Global engaged in bad faith toward Drawbridge.”19

The court distinguished Kingston Square, by noting that Drawbridge’s debt “[f] ar exceed [ed] the value of its collateral and there is simply no basis to believe [that] the unsecured and equity interest holders will be any worse off after a foreclosure than they were before.”20 Notably, the court further held that it was bound by Eleventh Circuit precedent to reject Kingston Square‘s holding:

In this Circuit, the fact that there may be prospects for reorganization does not negate a finding of bad faith as a matter of law. Phoenix Piccadilly, 849 F.2d at 1395 (“[A] possible equity in the property or potential successful reorganization … cannot transform a bad-faith filing into one undertaken in good faith”)…. Thus … even if I conclude that a feasible reorganization is in prospect, it would not demand a different conclusion.21

Houston Regional Sports Network

In Houston Regional, Judge Isgur went one step further than Kingston Square court and held that an involuntary case commenced to circumvent a unanimous-consent clause is not subject to dismissal on bad-faith grounds where the debtor has a reasonable possibility of reorganizing, even in situations when the case was commenced by affiliates of the party bound by the unanimous-consent clause.22 In this case, the debtor was a television network with three limited partners: the Houston Astros, the Houston Rockets and Comcast.23 The operating agreement of the network’s general partner provided that it could not cause the network to commence a voluntary case absent the unanimous consent of the general partner’s directors — one of which was selected by the Astros, one of which was selected by the Rockets, and two of which were selected by Comcast.24 Following payment defaults under a media rights agreement between the network and the Astros, the Astros threatened to terminate the agreement unless the defaults were promptly cured.25 Thereafter, the four Comcast affiliates commenced an involuntary case against the network, and the two Rockets affiliates and the network’s landlord subsequently filed joinders to the involuntary petition.26

The Astros moved to dismiss the case on bad-faith grounds, arguing that (1) Comcast’s filing of an involuntary petition was done in subjective bad faith to circumvent the unanimous-consent clause in the general partner’s operating agreement, and (2) a reorganization of the network would be objectively futile, principally because (a) under the network’s partnership agreement, the consent of the Astros-appointed director was required for the network to propose a reorganization plan; (b) the agreement permited the director to vote in the Astros’ best interests without regard to his fiduciary duties; and (c) the Astros would instruct such a director to veto any contemplated reorganization plan.27

In rejecting the Astros’ subjective bad-faith argument, Judge Isgur held that Comcast’s “end run” around the unanimous-consent clause did not mean that it acted in bad faith; rather, such action may have subjected it to contract damages, but that was “a far cry from bad faith.”28 Judge Isgur further found that Comcast’s involuntary petition had been filed to preserve value and rehabilitate the network, and was therefore consistent with Kingston Square‘s holding.29 In addition, Judge Isgur held that Global Ship was inapposite, since in that case, “the petitioning creditors did not intend to promote a legitimate reorganization.”30 Judge Isgur rejected the Astros’ argument that reorganizing would be objectively futile, stating that once an order for relief is entered, the general partner is legally required to fulfill its fiduciary obligations, and that the rejection of a viable reorganization plan would result in the Astros’ director breaching his fiduciary obligations.31


Houston Regional‘s holding that Comcast’s involuntary petition was not filed in bad faith was technically dicta, given that the Rockets’ affiliates and the network’s landlord qualified as petitioning creditors. Nevertheless, the decision is notable for several reasons (aside from the fact that there are few reported decisions addressing whether an involuntary case commenced to circumvent a unanimous-consent clause should be dismissed on bad-faith grounds).

First, Houston Regional went further than Kingston Square in permitting affiliated petitioning creditors to commence an involuntary case to circumvent a unanimous-consent clause. Second, these decisions suggest that in the context of orchestrated involuntary cases, satisfaction of the “subjective bad-faith” prong largely hinges upon satisfaction of the “objective futility” prong: Kingston Square held that the orchestration of an involuntary case was “suggestive of bad faith,” but declined to dismiss based on the determination that a reorganization was possible; Houston Regional held that subjective bad faith does not exist where the potential for reorganization exists, even if orchestration of the involuntary case would result in contract damages.32 Third, Houston Regional confirms that efforts to render an entity “bankruptcy remote” will not necessarily ensure that it is “bankruptcy proof.”33

While it remains to be seen how other courts will address this issue, when the potential for reorganization exists, Houston Regional may embolden parties faced with the challenge of working around a unanimous-consent clause to encourage creditors to commence an involuntary case.


1 No. 13-35998, 2014 WL 554824 (Bankr. S.D. Tex. Feb. 12, 2014).

2 See, e.g., In re Premier Automotive Servs. Inc., 492 F.3d 274 (4th Cir. 2007) (citations omitted); In re Integrated Telecom Express Inc., 384 F.3d 108, 119-20 (3d Cir. 2004) (citing In re SGL Carbon Corp., 200 F.3d 154, 165 (1999)) (“Our cases have focused on two inquiries … (1) whether the petition serves a valid bankruptcy purpose … and (2) whether the petition is filed merely to obtain a tactical litigation advantage.”).

3 214 B.R. 713 (Bankr. S.D.N.Y. 1997).

4 Id. at 715-16.

5 Id. at 716-17.

6 Id. at 717.

7 Id. at 720.

8 Id. at 723.

9 Id. at 734 (citing In re RCM Global Long Term Capital Appreciation Fund Ltd., 200 B.R. 514, 520 (Bankr. S.D.N.Y. 1996)).

10 Id. at 734-35.

11 Id. at 734.

12 391 B.R. 193 (Bankr. S.D. Ga. 2007).

13 Id.

14 Id. at 199.

15 Id. at 197.

16 Id. at 199.

17 Id. at 200.

18 Id. at 201.

19 Id. at 204.

20 Id. (citing Kingston Square, 214 B.R. at 733-35).

21 Id. (quoting In re Phoenix Piccadilly Ltd., 849 F.2d 1393, 1395 (11th Cir. 1988)).

22 2014 WL 554824, at *8-10.

23 Id. at *1.

24 Id. at *1, 8. Specifically, the operating agreement required unanimous approval for “[a] ny liquidation, dissolution, winding up or voluntary filing of a petition for bankruptcy or receivership,” which was interpreted as only barring a voluntary petition. Id. at *8.

25 Id. at *2.

26 Id.

27 Id. at *7-9.

28 Id. at *9.

29 Id. (citing Kingston Square, 214 B.R. at 713) (“[W] hen the petitioning creditors act with the intention of preserving the Estate, the sole fact that a voluntary filing was precluded by state law organizational documents will not make the involuntary petition one filed in bad faith.”).

30 Id.

31 Id. at *11-13 (“With the entry of the order for relief, management became duty-bound to meet fiduciary responsibilities. As fiduciaries, the Court expects that the four directors [of the general partner] will act in the best interest of the network. Although the Astros threaten to have their appointed director veto any arrangement … implementation of such a wholesale threat would be a breach of the Astros-appointed-director’s fiduciary duty…. To be sure, the Astros need not … appoint [an] individual to serve on the board of the General Partner. The Astros may leave a seat vacant, may appoint a third party who will serve as a fiduciary, or may determine an alternative course of action. But, individuals who choose to serve … must honor fiduciary responsibilities.”).

32 See Kingston Square, 214 B.R. at 734; id. at 739 (“[T] he orchestration is not sufficient to warrant the dismissal of the cases without evidence that the Debtors have no chance at rehabilitation.”); Houston Regional, 2014 WL 55824, at *9.

33 See generally In re General Growth Properties Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009).

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Crumbs Court Deals Protection For Trademark Licensees In Bankruptcy

The Bankruptcy Code definition of “intellectual property” does not explicitly include “trademarks.”1 This has led to trademark licensees losing their rights to use the trademark upon rejection of the license in bankruptcy.

A recent decision in the Crumbs2 bankruptcy case in New Jersey addressed this and related issues, finding that trademark licenses can be afforded the protections of § 365(n) based on a court’s equitable powers, notwithstanding their absence from the definition of “intellectual property.” Without consent from licensees to have their rights affected in a § 363 sale, these rights are preserved.

Some licensees are therefore permitted to continue using any intellectual property under such license agreements for the duration of their terms. Any royalties generated under these license agreements are payable directly to the debtor until the sale closes, provided the purchaser purchases the debtor’s accounts receivable, or until rejected or assumed and assigned.


As with many Chapter 11 cases in recent years, the Crumbs bankruptcy was sold pursuant to § 363 almost two months after the petition date pursuant to a credit bid Asset Purchase Agreement (APA) entered into on the petition date with Lemonis Fischer Acquisition Company, LLC (LFAC).

Following Court approval of the sale to LFAC, the Debtors moved to reject certain executory contracts, including six license agreements (the License Agreements) for use of the Debtors’ “Crumbs” trademark and trade secrets (the IP).3 The License Agreements were originally procured for the Debtors by Brand Squared Licensing (BSL), which also provided certain ancillary licensing services to the Debtors. BSL replied to the rejection motion, asserting the Licensees could elect to retain their rights under the License Agreements pursuant to § 365(n), and that BSL would be entitled to royalties derived from the Licensees’ continued use of the IP. The Debtors withdrew the rejection motion as to the License Agreements. LFAC then moved for an order in aid of the Court’s sale order to clarify several open issues concerning the effect of the sale order on the parties’ respective rights with regard to the License Agreements.

In a written opinion filed on October 31, 2014 (the Crumbs Opinion),4 the Court denied LFAC’s motion and considered: (i) whether trademark licensees are within the scope of § 365(n) upon rejection of their respective trademark licenses, even though “trademarks” are not explicitly included in the Bankruptcy Code definition of “intellectual property”; (ii) whether a sale under § 363(b) and (f) trumps and extinguishes rights of third party licensees under § 365(n); and (iii) which party is entitled to collect royalties from the Licensees’ use of the IP, to the extent continuing obligations exist.

Trademark Licenses Are Within the Scope of § 365(n)

Section 365(n) addresses rejection of rights pertaining to intellectual property. The Bankruptcy Code’s definition of “intellectual property” does not specifically include “trademarks.” To determine whether § 365(n) should include trademark licenses within its scope, the Court held it is improper to draw a negative inference from the Bankruptcy Code’s omission of “trademarks” from the definition of “intellectual property.” Citing legislative history and In re Exide Technologies,5 the Court found that Congress intended bankruptcy courts to use their equitable powers and decide, on a case-by-case basis, whether trademark licensees may retain rights under § 365(n).6

The Court refused to invalidate the Licensees rights under § 365(n). It determined it would be inequitable to strip the Licensees’ rights if the License Agreements were rejected, since those rights were already bargained away by the Debtors. The Court also noted that this holding would not prejudice the purchaser, LFAC, who entered the transaction after performing due diligence and could have adjusted its purchase price to account for the License Agreements.

The Court further rejected LFAC’s argument that allowing the Licensees to retain their rights would provide LFAC with little control over the quality of products or services provided under its newly-acquired IP. The Court noted that protections exist outside bankruptcy which provide Licensees incentive to maintain a certain standard of quality, including the possibility of trademark infringement and unfair competition claims for deteriorating quality.

A Sale Under § 363 Does Not Extinguish or Trump Rights Under § 365(n), Absent Consent

The Court held that a sale free and clear of all liens, claims, and encumbrances under § 363(b) and (f) does not extinguish or trump the rights of parties under § 365(n), absent consent. Little case law exists addressing the interplay of §§ 363 and 365(n), so the Court referenced analogous case law interpreting §§ 363 and 365(h).7

In statutory construction, the specific governs the general. Section 365(h) specifically allows lessees to remain in possession after lease rejection. In comparison, § 365(n) allows the licensees to remain subject to the license agreements for their duration. The Court noted that the specific language of § 365(n) should not be overridden by the more general and broad § 363(f), absent consent of the Licensees.

The Bankruptcy Code allows an interest to be extinguished by a sale with consent of the interest holder. Here, the Court found that the Licensees could not consent, as they were not provided with adequate notice that the potential sale put their rights under the License Agreements at risk. Indeed, the APA and sale documents did not include any specific language placing the Licensees on notice that the sale jeopardized their rights.8 Ultimately, the Judge addressed the consent issue as follows:

The Court posits that the content of the Sale Motion was a calculated effort to camouflage the intent to treat the License Agreements as vitiated without raising the specter of § 365(n) rights. Thus it would be inequitable for this Court to find that the Licensees consented to the termination of their rights.9

Only the Debtors are Entitled to Royalties Derived from the License Agreements

The License Agreements were neither sold, nor assumed and assigned to LFAC, which received no portion of the rights under the License Agreements. Those rights therefore remained with the Debtors, and any post-closing royalties generated under the License Agreements would be owed to the Debtors. LFAC did, however, acquire all accounts receivable related to the business, which would include unpaid, post-closing royalties.

BSL, which offered to purchase an assignment of rights under the License Agreements, could not perform the owners’ obligations because it did not own the Crumbs trademark. Neither could the Debtors — only LFAC could perform under the License Agreements, yet LFAC was not a party to those Agreements. Therefore, the Court found that rejection of the License Agreements would be necessary. But until such time as the Agreements were rejected, all royalties generated were payable to the Debtors until assumption, assignment, or rejection.

Conclusion and Consequences

Bankruptcy courts have, in recent years, looked to protect trademark licensees’ rights from the potentially harsh effects of rejection. The Crumbs Court has continued that trend, affording trademark licensees protections under § 365(n), but only to the extent a court chooses to exercise its equitable powers in bankruptcy. However, the explicit exclusion of “trademarks” from the definition of “intellectual property” in § 101(35A) makes the Crumbs Opinion vulnerable as an authority, as future courts may interpret the definition of “intellectual property” to contain an exhaustive list. Even courts accepting the Crumbs Opinion’s analysis may decline to exercise their equitable power to protect licensees under § 365(n).10

1 11 U.S.C. § 101(35A).

2 In re Crumbs Bake Shop, Inc., et al., Bankr. D.N.J. Case No. 14-24287-MBK.

3 The licensees include: Coastal Foods Baking, LLC; Pelican Bay LTD; White Coffee Company; Uncle Harry’s, Inc.; Mystic Apparel, LLC; and Pop! Gourmet (collectively, the “Licensees”).

4 Bankr. D.N.J. Case No. 14-24287-MBK, Docket No. 288 [corrected version at Docket No. 296].

5 In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010).

6 The Court also noted that there exists pending legislation which will remedy Congress’s omission of “trademarks” from the “intellectual property” definition; though it noted the pending legislation was not dispositive to its decision.

7 Section 365(h) is concerned with lease rejection in bankruptcy and has some similarities in purpose with § 365(n).

8 Only the proposed sale order included any language that would suggest the Licensees rights were being affected, and this language was dismissed by the Court as “a mere ten words, buried within a single twenty-nine page document, which itself was affixed to a CM/ECF filing totaling one hundred twenty-nine pages.” Crumbs Opinion at p.16.

9 Id.

10 The views expressed in this article do not necessarily represent the views of Arent Fox LLP, its attorneys, or its clients.

Zalman Files for Bankruptcy for Major Financial Fraud by Parent Company

Popular PC cooling products maker Zalman filed for bankruptcy, in midst of a huge controversy by its parent company Moneual. Executives of Moneual cooked-up sales and export figures from Zalman to markets like the United States, in a bid to pick up large fraudulent loans for the company, which it could never pay off, pushing it to bankruptcy.

The controversy came to light, when a whistleblower former-employee of Moneual took these details to the press. It’s alleged that CEO Harold Park (Hong-seok), Vice President Scott Park (Min-seok) and Vice President Won Duck-yeok committed a fraud, in which subsidiary Zalman would inflate its sales and export data, to qualify for large bank loans. The trio then used it to lift US $2.92 billion in loans, which the company could never pay back. Zalman has since filed for bankruptcy protection, with the Seoul Central District Court; while the three top Moneual executives, and 13 other mid-level ones, were arrested over allegations of export fraud.