DOCSLIB.ORG

The Floating Lien and the Preference Challenge: Some Guidance from the English Floating Charge, 8 B.C.L

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Floating Lien and the Preference Challenge: Some Guidance from the English Floating Charge, 8 B.C.L Boston College Law Review Volume 8 Article 4 Issue 2 Number 2 1-1-1967 The loF ating Lien and the Preference Challenge: Some Guidance from the English Floating Charge David W. Carroll Follow this and additional works at: http://lawdigitalcommons.bc.edu/bclr Part of the Bankruptcy Law Commons Recommended Citation David W. Carroll, The Floating Lien and the Preference Challenge: Some Guidance from the English Floating Charge, 8 B.C.L. Rev. 243 (1967), http://lawdigitalcommons.bc.edu/bclr/vol8/iss2/4 This Article is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been accepted for inclusion in Boston College Law Review by an authorized editor of Digital Commons @ Boston College Law School. For more information, please contact [email protected]. E OAIG IE A E EEECE CAEGE: SOME GUIACE OM E EGIS OAIG CAGE AI W. CAO I. IOUCIO England has been wrestling with floating charge problems for ninety-seven years, and this experience may be helpful in dealing with the developing conflict between the U.S. Bankruptcy Act' and the floating lien provisions of the Uniform Commercial Code. The English floating charge and the American floating lien have nearly identical characteristics. Both security clauses may encompass all or any part of the debtor's assets, including assets acquired after the date the security is created. The collateral may be used as security for past, present, and future advances by the creditor. The debtor can pass good title to the encumbered assets to a bona fide purchaser for value in the ordinary course of business prior to the commence- ment of insolvency proceedings. An examination of both the English and American treatment of the problem makes it obvious that there can be no assurance that a floating charge or lien will provide satisfactory collateral. In England, the courts and Parliament have imposed so many restrictive prefer- ence and priority rules that the floating charge has been substantially emasculated. In the United States, there have not been enough author- itative decisions to reach any conclusions as to the interaction of the Bankruptcy Act and the Code. Articles on this subject vary greatly in their suggestions and offer no real solution to the confused lender.' The central issue in the Bankruptcy Act-Commercial Code con- flict is whether the floating lien is prejudicial to the interests of unse- cured creditors. At the time of bankruptcy, there is an irreconcilable conflict between the floating lien creditor and the general creditor, but it is submitted that this is not the proper time to recognize the existence of a conflict. The appropriate time is the date of the creation and per- fection of the floating lien. Most credit men are very pessimistic about the position of the general creditor in bankruptcy and this pessimism is supported by experience. Therefore, even assuming that a debtor .S., Oh Stt Unvrt, ., Oh Stt Unvrt, 4 prntl Snr trr n , Inttt f Adntrtn, r, r. 1 0 Stt. 44 (88, ndd, U.S.C. $ 0 (64. 2 S Cnt, h Cd n th nrpt Crt: S Snfnt Cnflt f l, 8 .C. Ind. & C. v. 0 n. (66, fr pltn f f th rtl. It hld b ntd tht lthh thr r tll n thrttv dn, thr h bn rfr dn hh h d rt dl f nrn. In r rtlnd ppr blhn C., 2 nr. p. (4th d. 622 (. Or. b. , 66. 24 BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW was insolvent or in serious business difficulty, it would be reasonable to believe that general creditors would not be opposed to allowing a float- ing lien at least to the extent of any new funds given and legitimately used by the debtor. It may even be argued that the general creditors would be willing to consent to a floating lien for an amount in excess of new value given, if the floating lien was part of a bona fide effort to keep the business going and avoid bankruptcy. No general creditor, however, would consent to a floating lien designed to give a fraudulent preference to a creditor. For example, let us assume a fairly common situation. The principal supplier of a company burdened with a large unsecured account discovers that the debtor company is hopelessly insolvent. In order to obtain security and continue profitable operations, the supplier agrees to extend fur- ther credit to the debtor upon receipt of adequate security, .., a blanket floating lien. The principal supplier should not have to furnish much additional capital to keep the debtor's business going beyond the four-month preference period.' After that time has passed, the debtor company is thrown into bankruptcy, and the principal supplier receives payment for the bulk of his account from the realization of the col- lateral. Similar situations can be manipulated by insiders of the in- solvent company. These practices constitute blatant fraud. Regardless of the four-month preference period, the lien should be held invalid, and the lien creditor held personally liable to other secured and un- secured creditors for damages resulting from his fraudulent continua- tion of the business. It is submitted that recognition of this cause of action as a part of the common law tort of fraud' would go a long way toward properly solving the floating lien problem. Moreover, the economic effect of floating liens must be carefully evaluated in any rational determination of their validity. When a debtor obtains a loan, this usually results in the creation of additional credit. For example, laborers will work, tax liability will accrue, utili- ties, services, and goods will be supplied, all as a result of the debtor's apparent solvency. A large portion of this credit may be classified as nonconsensual; that is, the extension of credit was not a conscious extension of credit. No system of recording or notice will protect this class of creditors, and it is at least arguable that this 'class of credi- tors, which is in effect created or enlarged by the floating lien creditor, is entitled to some protection. Obviously, additional credit is created h frnth prfrn prd rfr t th tttr prvn tht n f th prrt fr rdtr t hv "prfrrd" tt tht th trnfr b "d r ffrd ... thn fr nth bfr th fln b r nt [th dbtr] . f th pttn nttn prdn [n bnrpt] . ." nrpt At § 60((, ndd, 64 Stt. 2 (0, U.S.C. § 6( ( (64. 4 S pp. 24 nfr. 244 OAIG IE b rd ln, bt t ld ppr tht fltn ln ld rt th rtt pbl ddtnl rdt. It ld rt r rdt thn pld, b th fltn ln dbtr ld hv bth th lltrl nd th ln t n h bn, hr th pld db tr ld hv nl th ln. A fltn ln ld rt r rdt thn rt ntrt n th ntr f httl rt r lr dv b f th rht f th fltn ln dbtr t frl dp f th lltrl. rthrr, th fltn ln, hl rtn th rtt rdt, t t nll tht th nnnnl rdtr ll b pd n th vnt f nlvn, b th fltn ln rd tr ll t ll f th dbtr t lltrl. Crtnt n rl l tlf vrt, nd t ntl tht th prbl f th vldt f th fltn ln b rlvd. b l pl, hvr, ll dtt th nt f dfnt lttn n th p f th fltn ln. II. E AMEICA OAIG IE A. h nrpt At h t b prbl rn th rpt t th fltn ln nvlv th prfrn prvn f Stn 60( f th nrpt At. 5 h t prvd tht f th trt n bnrpt n rr h brdn f prf n th flln lnt, th prfrn vd bl: ( trnfr f th dbtr prprt (2 t r fr th bn ft f rdtr ( fr n ntdnt dbt (4 b n nlvnt dbtr, th rdtr hvn rnbl t blv th dbtr nlvnt ( thn fr nth f bnrpt (6 hvn th rlt f vn th rdtr rtr prnt f h l thn nthr rdtr f h l. h ntrvr vr th vldt f th fltn ln f n hthr ftrrd lltrl vn fr n ntdnt dbt. h nrpt At d nt dfn ntdnt dbt, bt t ld b rd tht n lltrl rd r thn tntn d ftr rtn f th ln n b ndrd t hv bn vn fr n nt dnt dbt" If In r rtlnd ppr blhn C. nt fl ld b th fdrl rt, r f tn 60 ndd t ll th fltn ln, thn tn 08 f th Cd n b vn fft nd th fltn ln ll rvv th vdbl prfrn prvn. In th 5 64 Stt. 2 (0, U.S.C. § 6(( (64. nrpt At § 60(((, ndd, 64 Stt. 26 (0, U.S.C. § 6( ( ( (64. 7 2 nr. p. (4th d. 622 (. Or. b. , 66. In th , th frt t fnd th Cd n nflt th th drl nrpt At, th rfr rfd t ppl § 08 f th Cd, nd th th fltn ln n tn dftd b th prfrn prvn f th nrpt At. 24 OSO COEGE IUSIA A COMMECIA AW EIEW pt, hvr, rt hv fvrd n ntrprttn f th nrpt At hh prvdd th t l dtrbtn n rdtr, vn f t nr t trn th prpr ltrl nn f th t. S fr, thr hv nt bn n thrttv ppllt rt t r lv th prbl, nd nl fr rnt dn ppr t br n rltn t th bjt." hr r nbr f prCd n hh ln ntnn ftrrd prprt l r phld n bnrpt" vr, th fltn ln prvn f th Cd hv btntll dltd th pplblt f th .
Load more

Recommended publications
  • Sovereign Defaults and Debt Restructurings: Historical Overview
    Sovereign Defaults and Debt Restructurings: 1 Historical Overview Debt crises and defaults by sovereigns—city-states, kingdoms, and empires—are as old as sovereign borrowing itself. The first recorded default goes back at least to the fourth century B.C., when ten out of thirteen Greek municipalities in the Attic Maritime Association de- faulted on loans from the Delos Temple (Winkler 1933). Most fiscal crises of European antiquity, however, seem to have been resolved through ‘‘currency debasement’’—namely, inflations or devaluations— rather than debt restructurings. Defaults cum debt restructurings picked up in the modern era, beginning with defaults in France, Spain, and Portugal in the mid-sixteenth centuries. Other European states fol- lowed in the seventeenth century, including Prussia in 1683, though France and Spain remained the leading defaulters, with a total of eight defaults and six defaults, respectively, between the sixteenth and the end of the eighteenth centuries (Reinhart, Rogoff, and Savastano 2003). Only in the nineteenth century, however, did debt crises, defaults, and debt restructurings—defined as changes in the originally envis- aged debt service payments, either after a default or under the threat of default—explode in terms of both numbers and geographical inci- dence. This was the by-product of increasing cross-border debt flows, newly independent governments, and the development of modern fi- nancial markets. In what follows, we begin with an overview of the main default and debt restructuring episodes of the last two hundred years.1 We next turn to the history of how debt crises were resolved. We end with a brief review of the creditor experience with sovereign debt since the 1850s.
    [Show full text]
  • FERC Vs. Bankruptcy Courts—The Battle Over Jurisdiction Continues
    FERC vs. Bankruptcy Courts—The Battle over Jurisdiction Continues By Hugh M. McDonald and Neil H. Butterklee* In energy industry bankruptcies, the issue of whether a U.S. bankruptcy court has sole and exclusive jurisdiction to determine a debtor’s motion to reject an executory contract has mostly involved a jurisdictional struggle involving the Federal Energy Regulatory Commission. The dearth of judicial (and legislative) guidance on this issue has led to shifting decisions and inconsistent outcomes leaving counterparties to contracts in still uncertain positions when a contract counterparty commences a bankruptcy case. The authors of this article discuss the jurisdiction conundrum. The COVID-19 pandemic has put pressure on all aspects of the United States economy, including the energy sector. Counterparties to energy-related contracts, such as power purchase agreements (“PPAs”) and transportation services agreements (“TSAs”), may need to commence bankruptcy cases to restructure their balance sheets and, as part of such restructuring, may seek to shed unprofitable or out-of-market contracts. However, this situation has created a new stage for the decades-old jurisdictional battle between bankruptcy courts and energy regulators. The U.S. Bankruptcy Code allows a debtor to assume or reject executory contracts with the approval of the bankruptcy judge presiding over the case.1 The standard employed by courts when assessing the debtor’s request to assume or reject is the business judgment standard. A debtor merely has to demonstrate that assumption or rejection is in the best interest of the estate and the debtor’s business. However, most energy-related contracts are subject to regulatory oversight by federal and/or state regulatory bodies, which, depending on the type of contract that is being terminated, apply different standards—most of which take into account public policy concerns.
    [Show full text]
  • UK (England and Wales)
    Restructuring and Insolvency 2006/07 Country Q&A UK (England and Wales) UK (England and Wales) Lyndon Norley, Partha Kar and Graham Lane, Kirkland and Ellis International LLP www.practicallaw.com/2-202-0910 SECURITY AND PRIORITIES ■ Floating charge. A floating charge can be taken over a variety of assets (both existing and future), which fluctuate from 1. What are the most common forms of security taken in rela- day to day. It is usually taken over a debtor's whole business tion to immovable and movable property? Are any specific and undertaking. formalities required for the creation of security by compa- nies? Unlike a fixed charge, a floating charge does not attach to a particular asset, but rather "floats" above one or more assets. During this time, the debtor is free to sell or dispose of the Immovable property assets without the creditor's consent. However, if a default specified in the charge document occurs, the floating charge The most common types of security for immovable property are: will "crystallise" into a fixed charge, which attaches to and encumbers specific assets. ■ Mortgage. A legal mortgage is the main form of security interest over real property. It historically involved legal title If a floating charge over all or substantially all of a com- to a debtor's property being transferred to the creditor as pany's assets has been created before 15 September 2003, security for a claim. The debtor retained possession of the it can be enforced by appointing an administrative receiver. property, but only recovered legal ownership when it repaid On default, the administrative receiver takes control of the the secured debt in full.
    [Show full text]
  • Individual Voluntary Arrangement Factsheet What Is an Individual Voluntary Arrangement (IVA)? an IVA Is a Legally Binding
    Individual Voluntary Arrangement Factsheet What is an An IVA is a legally binding arrangement supervised by a Licensed Unlike debt management products, an IVA is legally binding and Individual Insolvency Practitioner, the purpose of which is to enable an precludes all creditors from taking any enforcement action against Voluntary individual, sole trader or partner (the debtor) to reach a compromise the debtor post-agreement, assuming the debtor complies with the Arrangement with his creditors and avoid the consequences of bankruptcy. The his obligations in the IVA. (IVA)? compromise should offer a larger repayment towards the creditor’s debt than could otherwise be expected were the debtor to be made bankrupt. This is often facilitated by the debtor making contributions to the arrangement from his income over a designated period or from a third party contribution or other source that would not ordinarily be available to a trustee in bankruptcy. Who can An IVA is available to all individuals, sole traders and partners who It is also often used by sole traders and partners who have suffered benefit from are experiencing creditor pressure and it is used particularly by those problems with their business but wish to secure its survival as they it? who own their own property and wish to avoid the possibility of losing believe it will be profitable in the future. It enables them to make a it in the event they were made bankrupt. greater repayment to creditors than could otherwise be expected were they made bankrupt and the business consequently were to cease trading. The procedure In theory, it is envisaged that the debtor drafts proposals for In certain circumstances, when it is considered that the debtor in brief presentation to his creditors prior to instructing a nominee, (who requires protection from creditors taking enforcement action whilst must be a Licensed Insolvency Practitioner), to review them before the IVA proposal is being considered, the nominee can file the submission to creditors (or Court if seeking an Interim Order).
    [Show full text]
  • Overview of the Fdic As Conservator Or Receiver
    September 26, 2008 OVERVIEW OF THE FDIC AS CONSERVATOR OR RECEIVER This memorandum is an overview of the receivership and conservatorship authority of the Federal Deposit Insurance Corporation (the “FDIC”). In view of the many and complex specific issues that may arise in this context, this memorandum is necessarily an overview, but it does give particular reference to counterparty issues that might arise in the case of a relatively large complex bank such as a significant regional bank and outlines elements of the FDIC framework which differ from a corporate bankruptcy. This memorandum has three parts: (1) background on the legal framework governing FDIC resolutions, highlighting changes and developments since the 1990s; (2) an outline of six distinctive aspects of the FDIC approach with comparison to the bankruptcy law provisions; and (3) a final section illustrating issues and uncertainties in the FDIC resolutions process through a more detailed review of two examples – treatment of loan securitizations and participations, and standby letters of credit.1 Relevant additional materials include: the pertinent provisions of the Federal Deposit Insurance (the "FDI") Act2 and FDIC rules3, statements of policy4 and advisory opinions;5 the FDIC Resolution Handbook6 which reflects the FDIC's high level description of the receivership process, including a contrast with the bankruptcy framework; recent speeches of FDIC Chairman 1 While not exhaustive, these discussions are meant to be exemplary of the kind of analysis that is appropriate in analyzing any transaction with a bank counterparty. 2 Esp. Section 11 et seq., http://www.fdic.gov/regulations/laws/rules/1000- 1200.html#1000sec.11 3 Esp.
    [Show full text]
  • Liquidation Bankruptcy Under the '78 Code
    William & Mary Law Review Volume 21 (1979-1980) Issue 3 Combined Issues 3 & 4 Article 3 April 1980 Liquidation Bankruptcy Under the '78 Code Doug Rendleman Follow this and additional works at: https://scholarship.law.wm.edu/wmlr Part of the Bankruptcy Law Commons Repository Citation Doug Rendleman, Liquidation Bankruptcy Under the '78 Code, 21 Wm. & Mary L. Rev. 575 (1980), https://scholarship.law.wm.edu/wmlr/vol21/iss3/3 Copyright c 1980 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmlr LIQUIDATION BANKRUPTCY UNDER THE '78 CODE DOUG RENDLEMAN* TABLE OF CONTENTS I. BACKGROUND ................................. 577 II. BANKRUPTCY UNDER THE '78 CODE .............. 579 A. The Bankruptcy Court and Its Power ........ 579 B. Procedure ............................... 581 1. Voluntary Petitions ................... 582 2. Involuntary Bankruptcy ................ 583 C. The Bankruptcy Process ................... 584 1. Automatic Stay ....................... 586 2. Interim Trustee .................. .... 588 3. Creditors' Meeting .................... 589 4. Electing a Trustee ..................... 591 D. The Estate .............................. 594 1. Abandonment-Assumrptio Rejection ..... 601 (a) Abandonment .................... 602 (b) Rejection and Assumption ......... 603 III. THE TRUSTEE'S POWER TO AVOID ................ 609 A. Section 544 Avoidance Powers .............. 610 1. The Decline of Moore v. Bay ............ 615 B. Statutory Liens ..........................
    [Show full text]
  • Law Reform Commission of British Columbia Report on Floating Charges
    LAW REFORM COMMISSION OF BRITISH COLUMBIA REPORT ON FLOATING CHARGES ON LAND LRC 103 JANUARY 1989 The Law Reform Commission of British Columbia was established by the Law Reform Commission Act in 1969 and began functioning in 1970. The Commissioners are: ARTHUR L. CLOSE, Chairman HON. RONALD I. CHEFFINS, Q.C., Vice-Chairman MARY V. NEWBURY LYMAN R. ROBINSON, Q.C. PETER T. BURNS, Q.C. Thomas G. Anderson is Counsel to the Commission. J. Bruce McKinnon and Linda Reid are Legal Research Officers to the Commission. Sharon St. Michael is Secretary to the Commission. Text processing and technical copy preparation by Linda Grant. The Commission offices are located at Suite 601, Chancery Place, 865 Hornby St., Vancouver, B.C. V6Z 2H4. Canadian Cataloguing in Publication Data Law Reform Commission of British Columbia. Report on floating charges on land (LRC, ISSN 0843-6053; 103) ISBN 0-7718-8748-5 1. Floating charges. 2. Commercial loans - Law and legislation - British Columbia. 3. Security (Law) - British Columbia. 4. Real property - British Columbia. I. Title. II. Title: Floating charges on land. III. Series: LRC (Law Reform Commission of British Columbia); 103 KEB271.A72L38 1989 346.711'074 C89-092073-7 Table of Contents I. INTRODUCTION 1 A. General 1 B. Methodology 1 C. The Need for Flexible Security Over Land 2 D. The Future of the Floating Charge 3 E. The Scope of Reform 4 F. This Report 4 II. THE NEED FOR REFORM 5 A. Introduction 5 B. Overview of the Current Law 5 1. Common Law 5 2. Land Title Registration 5 3.
    [Show full text]
  • Liquidators, Receivers and Examiners Their Duties and Powers
    Liquidators, Receivers and Examiners Their duties and powers A quick guide Introduction We have produced this information booklet to explain the powers, duties and responsibilities of liquidators, receivers and examiners under the Companies Acts. What are liquidations, receiverships and examinerships? The liquidation of a company is also known as ‘winding up’ a company. The process takes the company out of existence in an orderly way by paying debts from any available assets. Receivership is used by banks or other lenders to sell a company asset that was promised to them if the company failed to repay its loan as agreed. Examinership is a process that protects a company from its creditors (the people to whom it owes money) while efforts are being made to keep it running as a going concern. What are liquidators, receivers and examiners? A liquidator is the person who winds up a company. A receiver is the person who sells particular company assets on behalf of a lender. Where a loan is secured on a company’s entire business, a ‘receiver manager’ can be appointed as manager of the business during the receivership. Once a receiver raises enough money to pay back the debt, their job is finished. Liquidators, Receivers and Examiners Their duties and powers Examiners consider if a company can be saved and, if it can, they prepare the rescue plan. Who can act as liquidators, receivers or examiners? Liquidators, receivers and examiners do not need to have any specific qualifications under the law. However, they are usually practising accountants. To make sure that liquidators, receivers and examiners work independently of the company, they cannot be: • a director or employee of the company; or • a family member, partner or employee of a director.
    [Show full text]
  • Reorganization Or Liquidation: Bankruptcy Choice and Firm Dynamics
    NBER WORKING PAPER SERIES REORGANIZATION OR LIQUIDATION: BANKRUPTCY CHOICE AND FIRM DYNAMICS Dean Corbae Pablo D'Erasmo Working Paper 23515 http://www.nber.org/papers/w23515 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2017 We thank Gian Luca Clementi, Hulya Eraslan, and Vincenzo Quadrini as well as seminar participants at Carnegie Mellon, Rice University, University College London, Ohio State University, BI Norwegian Business School, Bank of Canada, Konstanz University, Macro Finance Society, Society for Economic Dynamics Meetings, and the Econometric Society Summer Meetings for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2017 by Dean Corbae and Pablo D'Erasmo. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics Dean Corbae and Pablo D'Erasmo NBER Working Paper No. 23515 June 2017 JEL No. E22,G32,G33 ABSTRACT In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization.
    [Show full text]
  • April 2020 COVID-19 and EXAMINERSHIP – WHAT the EXAMINER WANTS YOU to KNOW
    April 2020 COVID-19 AND EXAMINERSHIP – WHAT THE EXAMINER WANTS YOU TO KNOW For further information Following our articles on: on any of the issues discussed in this article 1. Emergency liquidity for businesses adversely affected by the please contact: economic impact of the COVID-19 Pandemic: https://www.dilloneustace.com/legal-updates/the-abc-and- de-of-emergency-liquidity-solutions; 2. Standstill Agreements as the first item out of the financial first aid kit: https://www.dilloneustace.com/legal- updates/running-to-standstill; and 3. Ireland’s public sector lifeboat for SMEs and small mid-cap businesses: https://www.dilloneustace.com/legal- updates/liquid-spirit-government-guaranteed-working-capital- facilities-for-irish-smes-adversely-affected-by-the-covid-19- pandemic, Jamie Ensor Partner, Insolvency we turn to the main items for consideration by stakeholders in DD: + 353 (0)1 673 1722 circumstances where examinership is the chosen mechanism for [email protected] rehabilitation and long term recovery for a company in financial difficulty as a consequence of the Pandemic. Testing times In the current climate, it is unfortunately all too possible to imagine a business that has dealt with a severe business interruption by following the government’s advice and has: • lowered variable costs (while participating in the COVID-19 Wage Subsidy Scheme); • delayed discretionary spending on replacing or improving Richard Ambery assets, new projects and research and development; Consultant, Capital Markets DD: + 353 (0)1 673 1003 [email protected]
    [Show full text]
  • Debtor-In-Possession Financing
    BANKRUPTCY Debtor-in-Possession Financing by Marshall S. Huebner an you imagine the reaction the first time a lender said, “Hey, let’s lend large sums of money to a bankrupt Ccompany!”? As it turns out, lending to a debtor in posses- sion can be a smart move. This article explains, in general terms, the hows and whys of DIP lending. t may seem counterintuitive In Chapter 11, pre-bankruptcy Chapter 11 debtors on C.O.D. or that banks and other institu- creditors are, for the most part, C.B.D. until the company stabi- I tions would compete fiercely stayed from enforcement reme- lizes and working capital financ- to provide loans to companies that dies and do not receive payment ing for the company’s ongoing have recently filed for protection of principal or interest while the operations is available. under Chapter 11 of the U.S. company seeks to rationalize its DIP loans are typically asset- Bankruptcy Code. But they do— business and formulate a plan of based, revolving working-capital and often. Indeed, “DIP loans,” reorganization to restructure its facilities put into place at the out- as they often are called, are big balance sheet. set of Chapter 11 to provide both business and can range from tens The DIP typically finds itself immediate cash as well as ongoing of thousands to billions of dollars. in need of credit immediately working capital during the reorga- Moreover, lending institutions of after initiating a Chapter 11 case. nization process. Perhaps most all sizes may be called on to While most of its pre-bankruptcy important, DIP financing helps extend further credit to a bank- liabilities are frozen, the company the company restore vendor and ruptcy debtor to “protect” an is likely to need cash immediately customer confidence in the com- existing loan position.
    [Show full text]
  • Schemes of Arrangement As Restructuring Tools
    Schemes of Arrangement as Restructuring Tools Since the start of the current credit crunch there has been a huge increase in the use of schemes as a restructuring tool. In most cases a scheme will be the fall-back strategy for use in cases where consensual changes to creditors’ and/ or shareholders’ rights under finance documents cannot be negotiated. Often the need for a scheme will fall away, but the prospect of a scheme will have helped deliver the consensus. So as well as those schemes that see their way through to implementation, there are many draft schemes in the marketplace. The purpose of this client note is to provide an overview of the use of schemes as a creditor restructuring tool and to highlight some of the key practice points. 1 What is a scheme? constituencies. The dominant driver of the creditor negotiations will usually be the A scheme of arrangement is a very flexible and creditor(s) who hold security and/or enjoy a long-established Companies Act procedure priority in repayment on an enforcement at the which can be used to vary the rights of some or point at which the value of the business breaks all of a company’s creditors and/or shareholders. (known as the fulcrum). That said, the question As long as a scheme receives the support of the of the value of a business will invariably be a statutory majorities of each class of creditor contentious point between the various stake- and/or shareholder whose rights are affected by holders in a restructuring and the value of the it, and the court sanctions it, the scheme will be business is in any event likely to move during binding on all creditors and/or shareholders, the course of restructuring negotiations as the including those within each class voting against business continues its operations.
    [Show full text]