Vol 5 (2008) - Issue 1

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More Litigation in the Next Downturn in Europe? – Part Two

As the credit crunch intensifies and, as a result, the European debt market continues to see less liquidity, litigation may play an increased role in the next downturn. This twopart article explores the potential for investors to resort to litigation to protect or improve their positions. Part One, which was published in Volume 4, Issue 6 of International Corporate Rescue, examined some of the insolvency/restructuring cases that have come before the English Courts in recent years. Based in part on those cases, Part Two in this issue addresses which other litigation angles may be considered by whom in the next downturn.

2. Possible angles of litigation in the next downturn.

As is clear from the case summaries set out in Part One of this article which appeared in Volume 4, Issue 6 of International Corporate Rescue, the early tentative steps of hedge funds and other investors to challenge the process of restructurings in the English courts have been met with mixed levels of success.

Some of their arguments have been dismissed (e.g. Highberry’s attempt to challenge the valuation of Colt Telecom and Sisu Capital c.s.’s argument that the CVA in the restructuring of the TXUEL group was unfairly prejudicial). However, these arguments were rejected on the facts rather than in principle. It is possible to envisage circumstances in which either may be successful in the future. Indeed, the Powerhouse case demonstrates that, given the right factual circumstances, it is possible to set aside a CVA on the basis that it is unfairly prejudicial.

The other cases were either not decided (British Energy) or are not binding authority for future cases (MyTravel). The argument considered by Mr Justice Mann in MyTravel as to whether a category of creditors had a sufficient economic interest to merit consultation about the CVA will almost inevitably be revisited.

The British Energy case contains a word of warning for hedge funds and other activist investors. Any attempts to undermine existing schemes of arrangement or similar arrangements are likely to be met by claims of tortious interference with contract by the company and/or any of the other parties to the arrangements.

In addition to the above arguments which may be seen again, there are some further issues which may arise in litigation relating to insolvency/restructuring cases. These are briefly set out below.

2.1 Companies Act 2006

Sections 170 to 181 of the new Companies Act 2006 contain a codified statement of directors’ duties. The main duties include obligations to ‘act in accordance with the company’s constitution’, to ‘only exercise powers for the purpose for which they are conferred’ and to ‘exercise independent judgment.’

In addition, directors must act with ‘reasonable care, skill and diligence’ taking account of ‘the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company’ and ‘the general knowledge, skill and experience that the director has.’