Unsecured "credit Bid" For Assets Of A Company In Special Administration

• Jurisdiction: United States,Federal
• Law Firm: Mayer Brown
• Subject Matter: Finance and Banking, Corporate/Commercial Law, International Law, Insolvency/Bankruptcy/Re-structuring, Financial Services, Corporate and Company Law, Insolvency/Bankruptcy, Export Controls & Trade & Investment Sanctions, Securities
• Author: Mr Trevor Borthwick and Alexandra Wood
• Published date: 23 March 2023

Summary

The English High Court¹ has permitted special administrators (JSAs) appointed in respect of an FCA authorised and regulated broker (the company) to transfer a portfolio of the company's Russian securities to one of its largest unsecured creditors (the creditor) in return for that creditor waiving its admitted claims against the company². As a result of UK/US/EU sanctions and Russian government imposed countermeasures (the Sanctions Regime), the JSAs were unable to realise the securities by normal means.

Implications

Credit bidding by secured creditors is commonplace but this was, in substance, a successful "credit bid" by an unsecured creditor. The legal mechanism by which it was achieved (the transfer of the securities in return for the waiver of the creditor's admitted claim) was novel and on which there was no existing English authority.

The key characteristic of the transfer of the securities (which was central to the Court's approval) was that it was properly characterised as a sale or disposal, rather than as a distribution to a creditor, although the explanation of how the Court arrived at this characterisation was relatively brief. This characterisation enabled the Court to conclude that the pari passu principle and the statutory restrictions on distributions in specie were not engaged and the statutory scheme for the distribution of assets was not infringed.

The Court concluded that the JSAs' power to sell or otherwise dispose of the company's property³ was broad enough to cover a transaction whereby a creditor waives its claim against the company (subject to proper value being obtained). The Court saw no reason to read the power down to exclude such a transaction. Whilst this case was concerned with the realisation of assets (Russian securities) which was affected by the Sanctions Regime, the Court's comments on this point suggest that this unsecured credit bid structure may be of wider application, in appropriate cases, subject to the administrators properly concluding that it represents the best price reasonably obtainable for the assets in question.

The High Court's decision

The JSAs sought directions that they be at liberty to enter into the transfer. Their application was opposed by another creditor which was part of a consortium which wished to acquire the same securities. The High Court gave the directions sought by the JSAs. It was satisfied (among other things) that:

• As noted above, the JSAs' power of sale was broad enough to...