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Editor's Note The highlight article of this issue is a thought-provoking analysis of some recent theories about the cause of the economic crisis, with a warning from author Christopher Nicholls about the dangers of global demands for government action and increased regulation and oversight. The article underlines the difficulties facing governments feeling the pressure of calls for a panacea for the pain of daily reports of large scale insolvencies, mounting unemployment and the rise in personal bankruptcies. Professor Nicholls reminds us that history has shown that legislation enacted quickly in the wake of a financial crises can have unexpected results, and illustrates the complexity of the roots of the current crisis. His call for caution and carefully - measured action from law makers and regulators is timely. Also timely is a briefing by Freshfields Brackhaus Deringer on new French legislation relating to the use of safeguard proceedings which came into force on February 15, 2009. The article comments on amendments to the French Commercial Code that have the primary object of promoting the use of such proceedings, which were inspired by US Chapter 11 proceedings and used in the restructuring of the Eurotunnel Group. A memorandum from Cleary Gottlieb describes the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009. The issue also focuses on Australia. David Cowling of Clayton Utz reports further developments in that country on the controversial Sons of Gwalia decision, which sets the law on a different course from many other jurisdictions by ranking shareholders with ordinary creditors in a corporate insolvency. Finally, we include a commentary on a decision of the US Bankruptcy Court, In Re Betcorp Limited, a case in which for the first time an Australia voluntary winding up was recognized in US Chapter 15 proceedings as a “foreign main proceeding.” Hon. Madam Justice Barbara Romaine |
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| Highlight of this Issue | |||||
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The economic crisis: An ideological rorschach test In times of crisis, many people turn to the help of a higher power. In times of financial crisis, that “higher power” is often the government. Unfortunately, government is not omnipotent. Certainly it is not omniscient. Well meaning measures, no matter how generously financed with taxpayer dollars, can frequently have unexpected results or, to use a well-worn phrase, “unintended consequences.” At the same time, as a political matter, in times of crisis governments rarely enjoy the luxury of doing nothing. They must be seen to act. Decisively. Even dramatically. The demands for government action in times of stress may be particularly strong if government inaction has been widely blamed for creating the problem government is now called upon to solve. The current international financial crisis, which began in the U.S. sub prime mortgage market, and soon spread more generally through the financial system, has led to urgings from many quarters for increased government funds and increased government regulation. The calls for greater regulatory intensity have frequently been conjoined, particularly in the United States, with attacks on the “deregulatory impulses” or “deregulatory ideology” that were said by some to have characterized governmental attitudes in the early twenty-first century, and to have created the conditions that led to the financial crisis in the first place. The message is a simple one: Deregulation caused this mess. Only a return to regulation (and other forms of healing government intervention - including bailout money) can get us out of it. There are two important flaws in this simple logic. First, it was not deregulation that got us into this mess, and, second it won’t be re-regulation that will get us out of it. The story is much more complicated than that. The triggers for the current problems include at least as many elements of increased, rather than decreased, government intervention in the economy. Equally important, vague calls for “more regulation” - or for question-begging “smarter regulation” (as if anyone were seriously advocating for “stupider regulation”) - suffer from what economist Harold Demsetz referred to as the Nirvana fallacy: the imagined (though largely unspecified) regulation, it is presumed, would work perfectly. Somehow, although the crisis we are experiencing was neither predicted nor averted with perfect foresight, nevertheless the consequences of this new cleansing regulatory regime would not suffer from any similar lack of unpredictability. It will be all (or mostly) benefits and no (or few) costs. Even if one is not prepared to accept that government had any role in sowing the seeds, or fertilizing the ground, of this current crisis, it is still difficult to argue with confidence that government is best positioned (and best incentivized) to craft the responses most likely to solve the current problems without inadvertently laying the groundwork for the next - potentially worse - crisis. Make no mistake. Government must play an important role in addressing the crisis. That can scarcely be doubted. But it should be a carefully measured role. And from both ends of the political continuum, people of good will must commit themselves to ensuring that the clarity of intellectual honesty trumps the distortion of ideological bias. In the end, one can only hope that lawmakers and regulators will proceed with caution and humility as they respond to ever louder demands that they some how legislate an end to the economic crisis, regardless of the cost or the consequences. We borrow with decisions; we repay with consequences. And as Yogi Berra so aptly put it, “It is hard to make predictions, especially about the future.” For the full article please click here. By |
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| Case Decisions | |||||
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Cross-border insolvency and the Betcorp decision In re Betcorp Limited (In Liquidation) - Unreported In this case, on 9 February 2009, the US Bankruptcy Court handed down judgment in favour of an Australian liquidator in a cross-border insolvency proceeding under Chapter 15 of the US Bankruptcy Code. This is the first time an Australian voluntary winding up has been recognised in the US, or any where else, as a 'foreign main proceeding'. Judge Markell of the US Bankruptcy Court was asked to address two main questions in his judgment: first, whether the voluntary winding up process could be recognised as a 'foreign proceeding'; and second, whether it was capable of being recognised as a 'foreign main proceeding'. The central issues the court discussed when deciding both these questions in favour of the Australian liquidator were:
For the full judgment ( unreported ) please click here. For a case note please see Allens Arthur Robinson, Focus, 27th February. | |||||
| Legislation | |||||
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French insolvency law : Reform of safeguard proceedings comes into effect On 15 February 2009, a reformed French insolvency law came into force. Its main aim is to promote the use of the safeguard procedure (la procédure de sauvegarde), which was introduced on 1 January 2006. Although safeguard proceedings have been used successfully as a negotiation tool in a number of high-profile cases (such as the Eurotunnel case), they have represented just 1 per cent of all insolvency proceedings in France since the Business Safeguard Act 2005 introduced the safeguard procedure in January 2006. The main reason for this lack of success is the continuing stigma that is attached to insolvency proceedings in France. This stigma usually leads the debtor’s management to delay filing a petition for the commencement of safeguard proceedings for so long that they reach a point at which the company is already insolvent, by which time it is too late to enter into the safeguard procedure. This briefing provides an overview of the key changes to be introduced by the reform and considers how it will affect the various players in French restructurings. For more details please see Freshfileds Bruckhaus Derringer Briefing, 13 February 2009. Americas Provisions of the American Recovery and Reinvestment Act of 2009 relating to deferral of cancellation of debt income The American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, amends the Internal Revenue Code to permit companies that have outstanding debt to elect to defer "cancellation of debt" (COD) income that may result from restructuring or retiring their debt in 2009 or 2010. The new COD deferral election is relevant to issuers that may engage in a number of different types of liability management transactions, including: cash tender offers, exchange offers, consent solicitations, repurchases of debt by a shareholder, sponsor or other related party, debt forgiveness, debt-for-equity swaps, and foreclosure. COD income of an issuer that makes the election generally will be deferred through 2013 and then recognized ratably over the following five years. We expect that the ability to defer or in some cases avoid paying cash taxes attributable to COD may greatly facilitate liability management transactions for the next two years. However, the new COD deferral election reduces or eliminates certain favourable provisions of current law for issuers who make the election. Accordingly, issuers will need to consider carefully whether making the election is on balance advantageous to them. For more details please see Cleary Gottlieb Steen Hamilton LLP, Alert Memo of 19 February 2009. |
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| Articles | |||||
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Australia boosts shareholder returns in insolvency - at a cost Australia's shareholders may hang on to their new-found right to rank with ordinary creditors in a corporate insolvency. A Federal Government committee has recommended no action to overturn the 2007 High Court decision in Sons of Gwalia. In a decision which sent shockwaves around the world, the High Court ruled that shareholders of an insolvent company who were misled into buying their shares are entitled to rank equally with unsecured creditors in the distribution of the company's liquidated assets. The High Court's conclusions were at odds with the prevailing belief that the Corporations Act 2001 (like all the companies legislation before it) postponed shareholders' claims to those of unsecured creditors. In that atmosphere, it was highly unlikely that the Australian Government would give an instant and unconditional undertaking to, in effect, dilute the High Court's "pro-investor" interpretation of the law. Accordingly, the Government referred the issue to its specialist advisory committee, the Corporations And Markets Advisory Committee (CAMAC). CAMAC released its report in early February this year. It recommended that there be no legislation to overturn the High Court decision. For the full article by David Cowling, Clayton Utz please click here. Enforcing security: The challenges The 2004-2007 leveraged buyout boom saw the rapid proliferation of complex leveraged finance structures across Europe. These structures often had security packages which purported to grant security interests over assets located in multiple European jurisdictions. A key concern is whether enforcement action will, in fact, yield the results or offer the protection expected by lenders. As global economic conditions worsen, many lenders now have cause to analyse the effectiveness of security packages, if only to assess what their options are in respect of struggling borrowers. This article considers the challenges of enforcing security in England and Wales, France and Germany and in particular:
For the full article, please see Jones Day Bulletin, February 2009. | |||||
| News | |||||
INSOL International Rio de Janeiro One Day Seminar - Thursday 2nd April 2009 INSOL international, the International Association of Insolvency, Restructuring and Bankruptcy Professionals in association with Instituto Brasileiro de Direito Empresarial (IBRADEMP) will be hosting a one day educational regional seminar in Rio de Janeiro on 2nd April 2009. The educational program will cover a number of international cross-border issues of relevance to Brazil, Argentina and other Latin American countries. The seminar will benefit from simultaneous translations in Portuguese, Spanish and English. For further information on this seminar or for sponsorship information please contact: Penny Robertson, Communications Manager, INSOL International, 2-3 Philpot Lane, London EC3M 8AQ Tel: +442079296679, Fax: +442079296678 or pennyr@insol.ision.co.uk INSOL World - First Quarter 2009 We are pleased to announce that the First Quarter 2009 issue of INSOL World is now available on our website http://www.insol.org/page/40/insol-internationals-quarterly-journal. Your hard copy is being mailed to you. If you do not receive your copy within the next 3 weeks please contact Jelena Sisko and let her know. You may email Jelena at jelena@insol.ision.co.uk |
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This issue was kindly sponsored by:
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INSOL Contacts If you would like to send an article for inclusion in one of our forthcoming issues please contact our Technical Manager, Sonali Abeyratne at sonali@insol.ision.co.uk If you would like to introduce a new member to INSOL International please contact, Jelena Sisko at jelena@insol.ision.co.uk |
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