Practice Statement: Restructuring Plans and Schemes – What Does this Mean for the Future? (UK)
We have seen an increasing number of contested restructuring plans (RPs) over the last quarter. With a notable shift of RPs into the litigation arena, and some gentle push back from the judiciary about timetabling and use of court time the judiciary has published a draft practice statement for consultation outlining new case management requirements for those proposing a plan.
Replies to the consultation must be submitted by 13 June, and although there is no official date for publication of the finalised statement, this is expected to be sometime in July.
The practice statement requires the parties to identify areas of contention and opposition early, seemingly seeking to streamline and reduce the number of issues that the court is required to deal with at sanction. In doing that there is a significant shift in process – requiring the plan company to issue a claim form before the court hearing is arranged and requiring the explanatory statement and all appendices to be prepared before the convening hearing.
The statement follows the direction of travel we have seen in recent cases, where the court has introduced case management processes – Madagascar Oil is a recent example where the court ordered a case management conference.
The statement is relevant not only to those proposing a plan, but also those who wish to object – requiring issues to be resolved in an efficient and orderly manner. Last minute opposition is unlikely to find much favour with the court moving forward.
Ultimately what the statement hopes to achieve is a more orderly approach to proceedings, but front loading much of the work comes with its own challenges – timing and costs being two.
Although this statement if not the final version, it is unlikely to change significantly between now and final publication, and in line with the approach we have seen the courts take recently it would be remiss not to apply the principles outlined in the statement now.
Application of the Insolvency Claw-Back Barrier under Article 16 of the EU Insolvency Regulation to Cross-Border Shareholder Loans
Article 7(m) of the EU Insolvency Regulation (2015/848) provides that the law of the EU Member State in which insolvency proceedings have been commenced in respect of a company determines whether certain acts carried out prior to the commencement of insolvency proceedings, (such as payments made by the company), are void, voidable or unenforceable and may therefore be clawed back by the insolvency administrator.
However, Article 16 of the same Regulation provides an exception to this. This applies where the relevant relationship under which the payment was made is subject to the law of another EU Member State and under the law of that other Member State the payment cannot be challenged – the claw back barrier provisions.
Application of the “claw back” barrier provisions in practice
The impact of the “claw back” barrier provisions under the EU Insolvency Regulation is currently being considered by the European Court of Justice (ECJ). In this case, an Austrian holding company had provided an Austrian law governed shareholder loan to its German subsidiary. Before insolvency proceedings were opened in Germany against the subsidiary, the Austrian parent received payments of interest and principal under that loan. The German insolvency administrator wishes to claw back these payments and wishes to treat the claims of the Austrian holding company as subordinated to all other creditors of the German subsidiary.
The German Federal Supreme Court (Bundesgerichtshof – “BGH”) in an interim decision dated 16 January 2025 put forward a number of questions for the ECJ to consider, the answers to which will be relevant to how Article 16 of the EU Insolvency Regulation is applied throughout the EU. Although the decision of the BGH relates to Article 13 of EU Insolvency Regulation (1346/2000), that provision is materially identical to Article 16 of the Regulation and thus any judgment of the ECJ is likely also to apply to Article 16.
The reason for the challenge is based on arguments that local laws and rules in the jurisdiction where the insolvent company has its centre of main interest and which are based on corporate law should take priority over Article 16.
Under German insolvency law, shareholder loans granted to a German company would in principle be subordinated in a German insolvency of the German company. Therefore, any payments (like payments of principal and interest) can more easily be challenged and clawed back in the insolvency than other third-party payments. The litigation in this case has arisen, because Austrian law rules differ from such German corporate law rules and therefore the holding company invoked Austrian law and Article 16 in the German proceedings.
Impact of the ECJs findings
The ruling of the ECJ will be significant in determining whether, and to what extent, the risk of claw-back (in the context of shareholder loans) can be mitigated by choosing the law of another EU Member State as the law governing the shareholder loan.
How Many Businesses Can Survive a 145% Tariff Shock?
Small business bankruptcies are about to surge, and tariffs are the match being lit. [i]
FTI Consulting’s CFO, Ajay Sabherwal, recently said that the recent uptick in FTI’s restructuring business is partly fueled by “tariff-induced” stress. Many consulting firms have already set up ‘tariff war rooms’ to help clients brace for what’s ahead. If this sounds eerily familiar to how firms scrambled to support clients during COVID-19, that’s because it is. I would not be surprised if law and accounting firms launch tariff-focused resource centers, just as they did with pandemic-related issues. Regardless, many US businesses will soon need more help than during COVID-19, but nothing like ERC or EIDL money will likely be in the offering.
Gary D. Cohn, IBM vice chairman and former director of the US National Economic Council, summed it up on Face the Nation a few weeks ago. Cohn explained that the full impact of the new tariffs is only a few weeks away, due to the typical eight-week shipping and distribution cycle:
“So what people need to understand is the cycle from a good being sold in China, loaded on a vessel, sailed across the ocean, unloaded in the United States, put in a factory, distributed to a shelf, is about eight weeks… [I]f you go back to the April 2nd date when the tariffs kicked in… we’re a few weeks away from… see[ing] the early effects of what will happen in the transportation of goods… [Toy stores typically order] their toys for Christmas today [but] those toys are now coming with a massive 145% tariff. The vast majority… cannot order toys today because they cannot afford the 145% tariff. So… they’re either going out of business or they’re just going to wait and see what happens.”
Yes, Cohn was talking about toys. But swap out ‘toys’ for just about anything else, and the story is the same. Retailers. Manufacturers. Distributors. Logistics companies. The effects will ripple quickly.
The bottom line: If tariffs remain at their current levels, and if no meaningful adjustments are made soon, we are about to see a wave of business distress and bankruptcies that makes the recent pickup in restructuring work look like a warm-up act. [ii]
Editors’ Note: This article is based in substantial part on an article that was published on LinkedIn on 4/29/25. This article is subject to the disclaimers found here.
Footnotes
[i] While no business is thrilled about a 145% tariff, not all businesses are equally equipped to weather the storm. Big companies can hedge currency exposure, renegotiate supplier contracts at scale, shift production to other countries, or pass costs along to customers with clever pricing strategies. Small businesses? Not so much.
Small business owners don’t have trade compliance departments or international logistics teams. They often lack the cash reserves, the borrowing capacity, or the leverage to get sweetheart deals from suppliers. And unlike their larger competitors, they don’t have the luxury of absorbing costs or ‘waiting it out.’ For many, the choice is stark: pay the tariff and lose money or stop ordering and lose customers. Either path leads to distress. One path just takes longer to get there.
A potent tool for struggling companies is Subchapter V of Chapter 11 of the Bankruptcy Code. Read “Subchapter V of Chapter 11: A User’s Guide” for a summary.
[ii] I don’t intend this to be political, nor do I think the impact is entirely bad. US consumer spending, for example, increased in March and early April, with people front-loading purchases in anticipation of coming price hikes. And if there is one thing the White House has proven, it can cause significant economic shifts by dominating the news. If it starts to behave more predictably, I think most negative effects can be short-lived.
However, as a friend said to me, it “seems like the impact on shipping, trucking, warehousing, and logistics will be nearly immediate.” Indeed, leaving the big boys (Fed Ex, UPS, etc.) aside, the last-mile delivery industry alone includes thousands of companies, ranging from small local courier services to larger regional logistics firms. And the recent increased demand on supply chain players caused by increased buying in advance of the tariffs’ impact will be short-lived. FedEx and UPS have both, for example, announced layoffs, due in part to the uncertainty created by the tariff situation. I’m not suggesting the impact will be catastrophic, but there likely will be fallout among weaker competitors.
A Bothersome Amphibology
Jargon Divergence: Liability Management Transactions & Liability Management Exercises, and Why & How LMEs/LTEs Should be Performed Early & Often
According to Merriam-Webster, an amphiboly [i] is a sentence or phrase (such as ‘nothing is good enough for you’) that can be interpreted in more than one way.
In the corporate restructuring world, the phrase ‘Liability Management Transaction’ (also known as a ‘Liability Management Exercise’) has become a trendy term in the last few years. But what does it mean? And does it describe something new?
The bottom line is that while some people in the industry say it’s a new concept, it’s not. However, the term can be used to differentiate certain related strategies used in the corporate restructuring industry. More on that below.
In Search of a Progenitor [ii]
Taking a step back, I’ve been a corporate restructuring professional since 1994. I taught a corporate restructuring MBA class at Chicago Booth, and as a visiting professor at the University of Tennessee College of Law, and I’ve authored a couple of books about business bankruptcy and its alternatives. In all these travels, I never heard anyone use the term ‘Liability Management Transaction’ or ‘Liability Management Exercise’ before around 2017, and I didn’t hear it used more than once in a blue moon even then, until sometime last year.
I was curious, so I looked back. The earliest reference to either term that I could find was in connection with the J.Crew Chapter 11. It was used there to describe that debtor’s shuffling of some of its intellectual property assets into an unrestricted subsidiary, enabling it to issue fresh debt secured against that IP. King & Spalding’s J Crew & The Original Trap Door is a great summary of what happened.
The J.Crew restructuring got a lot of press, and that move created quite a stir. But it’s anything but clear that that’s where the term was born. In fact, best I can tell, the term was a simultaneous invention (like calculus, being developed independently by both Newton and Leibniz or, more precisely, a cumulative innovation, in that it seems to have been developed by many folks.
LMTs & LMEs Defined
So, what does it mean? My definition is that Liability Management Transaction (LMT) and Liability Management Exercise (LME) are synonymous, catch-all phrases encompassing various personal (through the use of estate planning and asset protection planning) and corporate (through the use of front-end corporate structuring and back-end restructuring techniques like debt exchanges, maturity extensions, tender offers, covenant modifications, and asset transfers) strategies aimed at limiting the pool of assets from which creditors can collect.
But it’s also an annoying amphiboly. More on that below.
New or a Re-Brand?
If you were in the industry before 2017, you would likely be familiar with these various techniques, even if you had never heard of the umbrella term before.
But hey, if you think restructuring professionals coming up with clever names for debt-shuffling maneuvers is novel, remember Wall Street has been repackaging the same ideas under fancier names since before Gordon Gekko proclaimed, “Greed is good.”
Examples:
‘High-yield debt’ was once simply ‘junk bonds”
Today’s ‘independent sponsor’ was yesterday’s ‘fundless sponsor’
Investing in ’emerging markets’ sounds a lot better than investing in ‘third-world countries’
And I’d rather invest in a ‘growth stock’ than a ‘speculative stock’
‘Rightsizing’ sounds better than ‘downsizing’
You’d rather your company make a ‘facilitation payment’ instead of a ‘bribe’
What’s that expression about putting lipstick on a pig? Anyway…
For those who crave precise taxonomy, I define corporate restructuring as activities that involve reorganizing a company’s financial, operational, and/or legal structures. This includes but is not limited to debt restructurings, operational turnarounds, mergers, divestitures, bankruptcy proceedings, etc.
The term LMT/LME, in contrast, refers to “various corporate restructuring techniques like debt exchanges, maturity extensions, transferring assets to unrestricted subsidiaries (the J.Crew trapdoor), tender offers, covenant modifications aimed at optimizing a company’s capital structure, or otherwise negotiating directly with select creditor groups to improve a company’s debt profile, liquidity, or strategic flexibility.” (See what I did there? I quoted myself.) These techniques are typically considered aggressive and sometimes considered controversial.
So, I say the term, when used by corporate restructuring attorneys, is mostly a rebranding of certain techniques that they have long used.
So, How’s This an Amphibology?
If I were to stop here, then I’d have not made a good case that the term is amphiboly. But here’s the thing: I can’t stop. I won’t stop. And now I’ll raise the ante: not only are the dual terms LMT/LME amphibologies, but so is ‘corporate restructuring.’ [iii]
Take a step back: you know that expression, ‘when you’re a hammer, everything looks like a nail?’ Well, consider the following terms of art that mean one thing in one context and something quite different in another.
For example:
‘Equity’ means, in-
Finance: Ownership value in an asset or company.
Law: A system of rules that supplements strict legal rules and aims for fairness.
Real Estate: The value of an owner’s interest in a property.
‘Discharge’ means, in-
Medicine: The release of a patient from care.
Law: The release from a legal obligation or debt (e.g., bankruptcy discharge).
Military: A person leaving service, often honorably or dishonorably.
‘Draft’ means, in-
Sports: A system for assigning new players to teams.
Banking/Finance: A written, signed, and dated order for payment.
Writing: A preliminary version of a document.
‘Attachment’ means, in-
Law: Seizing a defendant’s property through court order.
Psychology: The emotional bond between a child and caregiver.
Email/Tech: A file sent along with an email.
See where I’m going?
The Duality of the Term ‘Corporate Restructuring’
The term is often used as a euphemism for layoffs. But if you spend all day, every day, dealing with financially distressed companies, then you know the term has a broader meaning, something like ‘efforts to reorganize a company’s obligations, typically because it is in financial distress.’
However, other professionals use the term more broadly to refer to any change in a company’s financial structure. Yet other professionals use the term even more broadly, including reorganizing a company’s operations.
So, what’s my point?
Liability Management Exercises Should be Performed Early & Often
Aside from noting a couple of obvious truisms, like that words matter and context matters, my point is that an ounce of prevention is worth a pound of cure.
Terms like ‘corporate restructuring,’ ‘liability management transactions,’ and ‘liability management exercises’ seldom are used in the literature to include engaging in longer-term strategic planning by a company when it is at its strongest (i.e., not only not distressed, but not even stressed) to restructure the legal organization/relationships among the various legal entities that comprise the corporate family (and/or their respective operations), to provide maximum protection to each of the legal entities in the event one of them comes under attack.
Quite to the contrary, corporate restructuring attorneys use LMEs/LTEs reactively to clean up messes. But wouldn’t it be better to engage in preventive medicine?
In other words, I’m advocating an ounce of protection (several ounces, really, performed regularly).
More specifically:
LMEs should begin before you start a company. These take the form of perfectly legal/ethical personal estate planning and asset protection actions that founders can take before they amass wealth, which, if taken after wealth has been accumulated, would be problematic if not forbidden.
LME’s should continue as a company’s operations grow. Examples include using separate legal entities (i.e., subsidiaries) to perform various functions and setting them up and running them in a manner that can isolate problems at one entity from impacting other members of the corporate family. In other words, if one’s toe gets infected beyond repair, one should not wait and let the infection spread to infect the rest of the body if there is a way to amputate it.
When a company borrows money, the lender commonly seeks intercompany guarantees, pledges of assets by affiliates, and even equity pledges. But none of these things are pre-ordained, and the specifics of each are undoubtedly subject to negotiations. After all, if they were not, many of the techniques commonly referred to as LMEs/LTEs could not be done, as many rely on negotiated holes in the legal documents for their very existence.
Further, not all financial crises are brought on by voluntarily incurred financial debt. Tort liability and unforeseen litigation, for example, can take down an otherwise healthy company. But the damage can be contained if that liability infects just a toe that can be amputated.
Insurance is another helpful tool that commonly does not get enough attention. Note, I didn’t say “does not get used.” Most companies have insurance, but most do not utilize the right professionals to review, advise, or negotiate it regularly. [iv]
Insurance coverage is the quintessential LME, yet it is like buying a pig in a poke if not properly scoped and tailored. [v] So much so that I all but insist that the companies for whom I serve as general counsel have my firm review their policies in toto every few years.
Engaging in proactive, front-end LMEs can reduce the need for reactive, emergency LMEs. Excluding the former from the definition is wrong because failing to engage in them is irresponsible.
Additional Reading About LMEs/LTEs
If you want a deeper dive into the sort of LMEs/LTEs represented by cases like AMC, Audax Credit Opportunities Offshore, Boardriders, Bombardier, Golden Nugget, J Crew, Murray Energy, Neiman Marcus, Mitel, PetSmart, Revlon, Serta, TPC Group, TriMark, and Wesco Aircraft, I commend the following:
“Drafting Tips to Address Liability Management Transactions” by King & Spalding (2020)
“Liability Management Exercises: A Transatlantic Perspective” by Akin (2023)
“Spotlight: Liability Management Exercises” by Kirkland & Ellis (2023)
“Uptier Transactions and Other Lender-on-Lender Violence: The Potential for More Litigation and Disputes on the Horizon” by Laura Davis Jones and Jonathan Kim (2023)
“Liability Management Exercises: What They Are and What They Mean for Market Participants by Quinn Emanuel” by Rajat Prakash (2025)
“Corporate Restructuring — Liability Management Transactions, Private Credit, and the Road Ahead” by Rajat Prakash (2025)
Editors’ Note: This article is based on a similar one published in the LinkedIn Newsletter, “Opportunity Amidst Crisis,” on 5/1/25. This article is subject to the disclaimers found here.
Footnotes
[i] A few other fun ones: (1) You can’t get too much sun, (2) Flying planes can be dangerous, (3) They are hunting dogs, (4) The chicken is ready to eat.
[ii] Did you know that Leonard Nimoy hosted a TV documentary series from 1976 to 1982 called “In Search of…?” It explored mysterious phenomena like extraterrestrials, myths, lost civilizations, and strange phenomena. And get this, Rod Serling was the original choice to host but he passed away before the show began production. And get this: Zachary Quinto, who, like Nimoy, stars as Spock in the rebooted Star Trek films, hosted a reboot of the series.
[iii] I know, you think I’m bold. Sort of like the James Dean of restructuring, or dare I say, even more like this guy.
[iv] This is a mistake. For whatever reason, these tasks typically go to insurance brokers who are not usually attorneys and who, I think, are conflicted because the insurer often pays them for their work. Moreover, not all brokers are equally skilled at complex policy negotiations, endorsements, or claims advocacy. Specialized coverage lawyers or risk management consultants might sometimes be better suited for negotiating bespoke coverage terms.
[v] In case you like phraseology, this one comes from medieval times, when unscrupulous market sellers might try to trick buyers by selling them a ‘poke’ (a bag) that was supposed to contain a valuable pig, but actually contained something worthless, like a cat or a less valuable animal. If the buyer didn’t look inside the bag before buying, they’d get cheated.
Weekly Bankruptcy Alert May 12, 2025 (For the Week Ending May 11, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
American Performance Polymers, LLC(Colebrook, NH)
Not Disclosed
Concord(NH)
$0to$50,000
$1,000,001to$10 Million
5/5/25
Bearsville, LLC(Colebrook, NH)
Not Disclosed
Concord(NH)
$0to$50,000
$1,000,001to$10 Million
5/5/25
Synthego Corporation(Redwood City, CA)
Scientific Research and Development Services
Wilmington(DE)
$50,000,001to$100 Million
$100,000,001to$500 Million
5/5/25
WW North America Holdings LLC2(New York, NY)
Personal Care Services
Wilmington(DE)
$1,000,000,001to$10 Billion
$1,000,000,001to$10 Billion
5/6/25
Accelerate Diagnostics, Inc.(Tucson, AZ)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$10,000,001to$50 Million
$50,000,001to$100 Million
5/8/25
Accelerate Diagnostics Texas, LLC(Tucson, AZ)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$10,000,001to$50 Million
$50,000,001to$100 Million
5/8/25
Sysorex Government Services, Inc.(Herndon, VA)
Computer Systems Design and Related Services
Manhattan(NY)
$1,000,001to$10 Million
$10,000,001to$50 Million
5/5/25
Shallows 514 Corp.(New York, NY)
Not Disclosed
Manhattan(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
5/6/25
Elmwood Ventures LLC(New York, NY)
Restaurants and Other Eating Places
Manhattan(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
5/6/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
TCB Electrical Services. Corp.(Burlington, MA)
Not Disclosed
Concord(NH)
$500,001to$1 Million
$1,000,001to$10 Million
5/7/25
SJP Realty Holdings LLC(Spring Valley, NY)
Activities Related to Real Estate
White Plains(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
5/8/25
Dr. Butt’s Orthodontics, P.C.(Somerville, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$1,000,001to$10 Million
5/9/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: WW International, Inc., W Holdco, Inc., Weekend Health, Inc., WW Canada Holdco, Inc., WW Health Solutions, Inc., WW.com, LLC and WW NewCo, Inc.
Weekly Bankruptcy Alert May 6, 2025 (For the Week Ending May 4, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
ACCRX, Inc.(Newton, MA)
Health and Personal Care Stores
Boston(MA)
$100,001to$500,000
$1,000,001to$10 Million
4/28/25
ESG Clean Energy, LLC(West Springfield, MA)
Not Disclosed
Springfield(MA)
$10,000,001to$50 Million
$1,000,001to$10 Million
4/30/25
ESG-H2, LLC(West Springfield, MA)
Not Disclosed
Springfield(MA)
$10,000,001to$50 Million
$1,000,001to$10 Million
4/30/25
National Fence and Supply Co.(North Attleboro, MA)
Construction
Boston(MA)
$50,0001to$100,000
$500,001to$1 Million
5/1/25
Embassy of the Seas Limited(London, United Kingdom)
Amusement Parks and Arcades
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
5/4/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
J & B Food Services, LLC(Hanson, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$50,001to$1000,000
4/28/25
Freight Farms, Inc.(Boston, MA)
Not Disclosed
Boston(MA)
$500,001to$1 Million
$1,000,001to$10 Million
4/30/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Rite-Aid Files a Chapter 22: Second Chapter 11 Bankruptcy Filing in Two Years
Rite Aid Corporation filed a Chapter 11 bankruptcy petition for the second time in two (2) years in the District of New Jersey Bankruptcy Court, docket #25-14731 (MBK) on May 5, 2025. A repeat filing like this is often referred to as a “Chapter 22” – two (2) Chapter 11 filings in a row.
The company issued a press release that noted it was pursuing a sale process, which it intends to conduct under section 363 of the U.S. Bankruptcy Code. The company also noted that it secured commitments from certain of its existing lenders to access $1.94 billion in new financing. This financing, along with cash from operations, is expected to provide sufficient funding during the sale and court-supervised process.
Rite Aid also noted that intends to divest or monetize any assets that are not sold through the court-supervised process.
If you are a landlord or trade creditor of Rite-Aid, it is important to know your rights now.
Weekly Bankruptcy Alert April 28, 2025 (For the Week Ending April 27, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
The Mark Real Estate Holdings, LLC(Cumberland, ME)
Activities Related to Real Estate
Portland(ME)
$10,000,001to$50 million
$10,000,00to$50 million
4/22/25
DanPower64 LLC(Salem, MA)
Unknown
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
River Fall 529 LLC(Fall River, MA)
Activities Related to Real Estate
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/23/25
Greystone Property Development LLC(Dorchester, MA)
Residential and Nonresidential Building Construction
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/24/25
NB 700 Logan, LLC(San Clemente, CA)
Single Asset Real Estate
Wilmington(DE)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
NP Hampton Ridge, LLC(San Clemente, CA)
Single Asset Real Estate
Wilmington(DE)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Sebago Lake Distillery LLC(Sebago, ME)
Beer, Wine, and Distilled Alcoholic Beverage Merchant Wholesalers
Portland(ME)
$100,001to$500,000
$500,001to$1 million
4/22/25
120 Willow Holdings LLC(Spring Valley, NY)
Activities Related to Real Estate
White Plains(NY)
$1,000,001to$10 million
$1,000,001to$10 million
4/22/25
Ultima, Limited(Waltham, MA)
Unknown
Boston(MA)
$0to$50,000
$0to$50,000
4/25/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Corporate Restructuring — Liability Management Transactions, Private Credit, and the Road Ahead
While corporate restructuring is a domain that business leaders and finance executives generally prefer to avoid, some recent developments in this area have underscored the need for better understanding it.
It may seem counterintuitive, but the reality is that management teams — both in highly leveraged or struggling companies and perfectly healthy ones — can operate more effectively and even shift the balance of power in negotiations by equipping themselves with a deep understanding of the complexities of corporate restructuring.
The utilization of liability management transactions (LMTs), sometimes also referred to as Liability Management Exercises, in particular, including the use of private credit in some recent restructurings, and the potential role of artificial intelligence could permanently change the game of negotiating credit agreements.
Liability Management Transactions
Some view an LMT as a cunning tactic for borrowing corporations to relieve their debt burdens by exploiting the loopholes of credit documentation. A borrower can often execute an LMT via parallel agreements (side deals) with certain lenders, much to the chagrin and expense of the other lenders.
The primary categories of LMTs are as follows:
‘The Double-Dip’
In a double-dip transaction, certain lenders end up having two claims in the event of a default on the same debt. This is functionally executed by:
The parent company (P) that is the principal borrower in a credit facility causes an unrestricted [i] subsidiary (US) to issue (e., sell) debt to a third party (Lender) that is guaranteed [i] by a restricted subsidiary (RS) [ii].
This guarantee serves as the first claim for Lender in a potential default/bankruptcy. In the event of P’s bankruptcy, and subsequent liquidation, this guarantee gives Lender a claim on the recovery proceeds
US then loans the proceeds of this debt to P (or other subsidiaries) in exchange for a receivable.
The receivable from P is pledged by US to the Lender, and serves as the second claim by Lender on the recovery proceeds if P liquidates.
If P later files for bankruptcy, US’s Lender will be protected by RS’s guarantee and US’s receivable from P. Practically, however, Lender’s recovery is usually capped at the par value of the debt due to a legal principle called the single satisfaction rule [iii].
The objective of a double-dip is for Lender to bolster its claim in a potential bankruptcy of the corporate enterprise. Without the transaction, and assuming such Lender pari passu with another senior lender, it would receive 50% of the collateral in a liquidation. By executing the double-dip, Lender would receive 2/3rd of the collateral proceeds due to two claims.
Dropdown
In a dropdown, existing lenders of the borrower become subordinated to senior debt issued by an unrestricted subsidiary. This is accomplished by the borrower/parent utilizing certain provisions within the credit agreement (e.g., investment, asset sale, or other restricted payment baskets) to transfer collateral from restricted subsidiaries to unrestricted subsidiaries not bound by the covenants of the existing credit agreement. This transferred collateral is then used to issue structurally senior debt at the unrestricted subsidiary, thereby allowing the borrower (the corporate enterprise, that is) to raise additional capital through its unrestricted subsidiary without encumbering additional assets.
Uptiering
An uptiering transaction enables a borrower to raise senior debt without actually transferring any collateral. This is generally executed by the borrower amending its leveraged loan agreement, most commonly the credit agreement which is usually broadly syndicated. Depending on the size of the loan, the number of lenders in the syndicate could range from a couple to 20+. Amending the credit agreement that governs such facilities usually requires consent from syndicate member lenders with aggregate commitments more than 50% of the principal amount of the loan. Moreover, in this type of LMT, a borrower negotiates consents with certain existing lenders to amend its credit agreement to permit raising senior debt and invites participating lenders to exchange their existing debt for this new senior debt. This, in turn, subordinates the non-participating existing lenders.
Prominent LMTs
J. Crew
One of the most notorious LMTs in recent years was a dropdown executed by J. Crew in 2017.
The apparel retailer transferred intellectual property from restricted subsidiaries to unrestricted subsidiaries to reduce its debt by $340 million without pledging any new collateral, having additional encumbrance on existing assets. J. Crew accomplished this by utilizing three investment baskets permitted in the credit agreement:
Investment in unrestricted subsidiaries up to the higher of $100 million or 3.25% of total assets,
Investment in certain restricted subsidiaries up to the higher of $150 million or 4% of total assets, and
Investments by certain restricted subsidiaries in unrestricted subsidiaries financed with proceeds of investments in these restricted subsidiaries.
J. Crew utilized baskets (i) and (ii) to transfer $250 million of intellectual property assets (which had already been pledged to the existing $1.5 billion term loan facility) to an unrestricted subsidiary. This unrestricted subsidiary licensed the use of intellectual property back to J. Crew, raised senior notes secured by these intellectual property assets, and exchanged them at a discount for the existing unsecured PIK notes with impending maturity. The lenders of the existing term loan facility lost their claim on $250 million of collateral, had to share their claims with lenders of the new senior notes issued by the unrestricted subsidiary in a potential liquidation, and let J. Crew use term loan proceeds to pay licensing fees for the use of intellectual property.
Revlon
Revlon attempted a similar drop-down transaction more recently but with a higher degree of panache.
In 2016, Revlon executed a $1.8 billion term loan facility that allowed for additional revolving loans and was secured partly by intellectual property. In 2019, as its financial performance declined, credit ratings suffered, and leverage piled up, Revlon approached the term loan lenders seeking to transfer intellectual property collateral to an unrestricted subsidiary in order to raise fresh capital outside the purview of the credit agreement.
Unsurprisingly, lenders with aggregate commitments exceeding 50% of the total facility rejected, but several others did consent. Revlon borrowed an additional $65 million in revolving loans from these consenting lenders which was the exact amount necessary to increase the aggregate holdings of the consenting lenders above 50%. Their votes were now enough to allow the transfer of intellectual property to the beauty brands subsidiary, which was unrestricted and raised a super senior facility funded by the consenting lenders with rolled-up commitments of the $1.8 billion term loan facility and $880 million of new money. Its existing lenders, who were thus subordinated to the super senior facility, challenged it in court, but the case was ultimately dismissed. (Case No. 22-10760 at United States Bankruptcy Court Southern District of New York)
Serta
An even more recent uptiering transaction with an unhealthy dose of twists and turns was executed by Serta. In 2020, Serta caused certain of its lenders to exchange $1.2 billion of existing loans (of a total facility of $1.95 billion) for $1.075 billion of new super-priority debt. This was accomplished by relying on the ‘open market purchases’ condition in its credit agreement.
The credit agreement contained customary provisions about the pro rata treatment of similarly situated lenders and prohibited amendments to the pro rata clause without the consent of all impacted lenders. One exception to the prohibition was for open market purchases. An open market purchase is where the borrower purchases loans from lenders who elect to sell their loans; this effectively enables participating lenders to receive consideration on a non-pro-rata basis.
The transaction was challenged in bankruptcy court by non-participating lenders, who argued violation of pro-rata distribution and good faith clauses in the credit documents. While the bankruptcy court ruled in favor of Serta, agreeing with it on the utilization of the open market purchases principle, the Fifth Circuit subsequently reversed the bankruptcy court’s ruling, providing some hope going forward for non-participating lenders on the short end of the LMT stick. (Case No. 23-20181(5th Dec.31, 2024) at the U.S. Court of Appeals for the Fifth Circuit).
In the last few years, lenders and management teams have been more cognizant of LMT related discord. As a result, credit documents in syndicated deals have tended to be much tighter, with less room for conflicting interpretations of covenants.
Private Credit
Going forward, a potential decline in LMTs could also be attributed to the contemporaneous blossoming of private credit. The largest segment of private credit is ‘direct lending’ which, as the name suggests, often involves a non-bank lender directly loaning capital to borrowers.
Since direct lending usually involves a single lender, the borrower cannot privately negotiate on a selective basis with other lenders, which is often the case in broadly syndicated loans. Moreover, non-bank lenders that make direct loans are often players who are not afraid of engaging in shareholder activism and other tactics that can incentivize a borrower to prefer to avoid conflict.
Lastly, direct loans are customized to the borrower’s circumstances, and an LMT might eventually place the borrower (especially if the borrowing entity’s operations are of significant size and scale, or if the loan amount is meaningful) in a worse-off situation from capital structure and cash flow standpoints, all things considered. These underlying attributes of direct lending suggest an organic mitigation of LMTs in the years to come.
In response to the 2008 financial crisis, as traditional banks had to cut back on lending due to increased regulatory scrutiny, risk aversion, and higher capital adequacy requirements, private credit sensed an opportunity to target underserved borrowers and expanded aggressively. According to a recent Bloomberg report, private credit had grown to $1.5 trillion globally (at the end of June 2024) – a meteoric rise for a sector in its infancy less than 20 years ago, with more than half of this volume in the form of direct lending and more than 2/3rds if we also include distressed debt. ( see Bloomberg article titled “Private Credit is the Hot New Thing on Wall Street. But What Is It?” published on February 19, 2025).
Most of the capital in private credit originates from financial institutions (pension funds, insurance companies, etc.) and affluent individuals with long-term investment horizons. Such lenders have the luxury of holding their loans through volatile periods until maturity (in stark contrast to broadly syndicated loans (BSLs) and being able to provide capital to borrowers with weaker credit. In exchange for paying slightly higher interest, borrowers not only have less onerous reporting obligations (since private debt does not trade), but they also receive customized solutions as well as more flexible terms.
The very nature of direct lending and the structure of private loans fits perfectly with the capital requirements of financially distressed companies that can focus on turning around operations instead of worrying about the entire loan syndicate and related haggling — a harbinger of liability management transactions. Private credit funds have been aggressively hiring professionals with bankruptcy and restructuring experience [iv] — further underscoring the ability of these funds to proficiently navigate and profit off any potential restructuring within and outside their portfolios.
The Road Ahead
As it pertains to corporate restructuring, no two negotiations or workouts are alike. The reorganization plan in every restructuring is often a solution that addresses most of the agenda items of every stakeholder. In order to get to such solution, debtor and its advisors have to constantly weigh the ever-evolving priorities of most critical constituents of the estate and strive to present a plan that satisfies most parties. In such dynamic environment of corporate restructuring, LMTs have muddied the waters by promoting yet another set of private negotiations. The gamesmanship, litigation, and everchanging value preservation tactics have already led to higher courts ruling in favor of non-participating lenders.
Since Wall Street wizards are nothing but creative, any decline in LMTs could very well yield other maneuvers to abruptly alter capital structures. It remains to be seen, for example, how artificial intelligence (AI) may play a role in all this, but borrowers have already been leveraging it to improve their forecasting processes. This could be extended to preemptively flag potential distressed situations, and sophisticated AI models could assist a company in restructuring to refine its plan of reorganization prior to a confirmation hearing by predicting product or service performance based on analyses of simulated data. AI could also assist in the restructuring process by using machine learning to replace manual labor associated with court filings, as well as to analyze comprehensive datasets to identify fraudulent activity. [v]
One additional ‘pulled from the headlines’ stumbling block to redefining capital structures is the eventual application of tariffs by trade partner nations. At the time of writing this article, a Chuck E. Cheese financial deal had been delayed due to market swings and tariff discussions. Hopefully the financing environment stabilizes in time for the company to replace the $660 million debt due in May 2026. Similarly, the retailer At Home is in the market to raise a loan to address declining cash reserves but needs a financing window to open up soon or otherwise faces a looming default. More than $50 billion of corporate debt is due in 2026 and $120 billion is due in 2027.
[Editors’ Note: We think you’ll also like “Uptier Transactions and Other Lender-on-Lender Violence: The Potential for More Litigation and Disputes on the Horizon.”]
This article was originally published on April 21, 2025.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
Footnotes
[i] Assumes permissibility and capacity for such guarantees under relevant covenants including Permitted Debt, Permitted Liens, Investments, etc.
[ii] A ‘restricted’ subsidiary refers to one that is bound to requirements contained in the corporate enterprise’s existing credit agreement. A restricted subsidiary is also typically a guarantor of the obligations of the parent under the credit agreement. If lenders do their job correctly, most of the value of a corporate enterprise resides in the primary borrower and its restricted subsidiaries. The term ‘corporate enterprise’ is used to denote all of the legal entities that comprise a single business. Most publicly traded companies, for instance, are comprised of numerous legal entities.
[iii] A common law principle that a claimant should only recover once for a particular loss thereby preventing overcompensation for the same loss.
[iv] See The Wall Street Journal, “Private-Credit Firms Expand Restructuring Teams Amid Bankruptcy Surge,” March 12, 2025.
[v] See “A Story of Two Holy Grails: How Artificial Intelligence Will Change the Design and Use of Corporate Insolvency Law,” The University of Chicago Law Review: noting that experts are also exploring the possibility of utilizing AI to predict court decisions and make the contracting process more efficient.
Weekly Bankruptcy Alert April 21, 2025 (For the Week Ending April 20, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Francis Trust LLC(New Harbor, ME)
Lessors of Real Estate
Bangor(ME)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/15/25
Creativemass Holdings, Inc.(Melbourne, VIC)
Not Disclosed
Wilmington(DE)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/14/25
Viridos, Inc.(La Jolla, CA)
Electric Power Generation, Transmission and Distribution
Wilmington(DE)
$10,000,001to$50 Million
$1,000,000to$10 Million
4/14/25
Controladora Dolphin, S.A. de C.V.(Cancun, Mexico)
Amusement Parks and Arcades
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/16/25
Arch Therapeutics, Inc.(Framingham, MA)
Medical and Diagnostic Laboratories
Worcester(MA)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/18/25
Arch Biosurgery, Inc.(Framingham, MA)
Medical and Diagnostic Laboratories
Worcester(MA)
$100,001to$500,000
$0to$50,000
4/18/25
Molecular Templates, Inc.(Foxboro, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/20/25
Molecular Templates Opco, Inc.(Foxboro, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/20/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
HS Exteriors LLC(Sutton, NH)
Not Disclosed
Concord(NH)
$0to$50,000
$50,001to$100,000
4/14/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Nevada Supreme Court: Chapter 7 Filing Dooms Shareholder Breach Of Fiduciary Claim
Globe Photos, Inc. owned a portfolio of millions of images of celebrities and musicians, including Marilyn Monroe, the Beatles, and Jimi Hendrix, some taken by famous photographers such as Frank Worth. Despite these assets, Globe didn’t make a go of it and its assets were used to pay off its secured creditors, leaving the shareholders and unsecured creditors with nothing. Some of the shareholders sued alleging that the directors breached their fiduciary duties.
The defendant directors unsuccessfully moved to dismiss on the basis that the plaintiffs lacked standing to sue them because the breach of fiduciary duty claim seeks to redress harm to Globe. Consequently, the claim belonged to Globe’s bankruptcy estate which the trustee controlled, and over which the bankruptcy court had exclusive jurisdiction. The plaintiffs countered by claiming that the breach of fiduciary duty claim hurt them specifically while benefiting another shareholder.
The Nevada Supreme Court reversed, finding that the plaintiffs’ claims were derivative, not direct, and the plaintiffs therefore lacked standing to bring the claim. Black v. Eighth Judicial Dist. Ct, 141 Nev. Adv. 11 (April 17, 2025). It should be noted that the Supreme Court applied Delaware, not Nevada, law because Globe was a Delaware corporation. Thus, it applied the two-part test enunciated in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) which asks:
who suffered the alleged harm (the corporation or the suing stockholders, individually); and
who would receive the benefit of any recovery or other remedy (the corporation or thestockholders, individually)?
The Nevada Supreme Court’s original decision issued as an unpublished order. The Court subsequently granted the petitioners’ (defendants below) request to publish the order as an opinion. The opinion was signed by all seven justices.
What Are the Key Takeaways for Managing HMRC In a UK Restructuring Plan (Rps) and Beyond?
Much will depend on the specifics of a company’s financial position, but there are some themes from the OutsideClinic and Enzen judgments that are helpful – and arguably so even beyond the context of RPs for a company’s managing its relationship with HMRC.
Is HMRC in or out of the money?
In OutsideClinic HMRC had reservations about the valuation evidence put forward by the plan company in support of its position that administration was the relevant alternative. Under the RP HMRC stood to recover 5p in the £ but nil in the relevant alternative – HMRC was therefore out of the money.
The valuation evidence was based on certain assumptions in respect of the recoverability of book debts which if those turned out to be inaccurate would have entitled HMRC to a distribution in the alternative – meaning it would have been in the money. It was acknowledged by the plan company that it would only take a “relatively small shift” in the assumptions for this to be the case.
Recognising the likelihood of HMRC being an in the money creditor on a contested application the parties negotiated an improved outcome for HMRC – funded by the plan investors – which would not impact the returns to other creditors.
Take Away
HMRC is different to other creditors given its secondary preferential status, and its voice as a creditor that is potentially in the money, where there is a prospect (even small) of it being paid in the relevant alternative should be listened to. This voice may in fact be louder now, following the Court of Appeal confirming in Thames Water that the views and treatment of out of the money creditors can be relevant when considering whether a plan is fair – particularly so given the elevated status that HMRC has on insolvency.
Recognising HMRC’s role
HMRC has preferential status on an insolvency such that its claims for certain tax liabilities rank ahead of other claims as preferential claims. That status does not exist on an RP where a plan company is free to ignore the statutory order of priorities (provided it can be justified).
Not only that, but HMRC’s as a creditor is also different to other creditors. It has not chosen to trade with the company but is an “involuntary creditor” that continues regardless of whether HMRC is paid or not. HMRC cannot “opt” out of that relationship like other creditors might do.
The judge in Enzen observed that HMRC’s treatment under the Enzen plans (of which there were two) reflected:
the standing of HMRC as preferential creditor;
the commercial leverage that it is able to exert in consequence of Naysmyth and the Great Annual Savings Company; and
the inevitability of an ongoing relationship as trading continues.
Take Away
What we have seen as a consequence of these particular RPs (and those before) is judicial acknowledgement of HMRCs status as a “prominent” creditor which could be translated to – treat them differently and better than unsecured creditors.
That is all well and good, but we think it is probably fair comment to say that HMRC’s role in supporting a failing business can sometimes be seen as lacking or at least taken to be unsupportive. But perhaps now is the time for both practitioners and HMRC to reflect on their historic views.
What HMRC did demonstrate in both cases is that it was willing to engage, something that Mr Justice Norris said in Enzen was a “welcome development”. This signals a positive change, not only, we hope for RPs but also more generally.
On the flip side, if a company is prepared to recognise at an earlier point that HMRC is an involuntary and ongoing creditor in its business then surely that would help manage that relationship in a positive way (whether in the context of an RP or otherwise).
To pay or not to pay HMRC, that is the question?
What we can gauge from OutsideClinic is that although certain HMRC liabilities were unpaid for three months in 2024, its remaining 2024 liabilities were paid in full and continued to be paid during 2025.
In Enzen too, there were historic arrears but from June 2024 tax liabilities were being paid as they fell due, and current liabilities were excluded from the plan – in other words the companies did not seek to compromise those.
Take Away
Although there is no comment in the judgments about whether paying current liabilities influenced HMRC’s attitude, HMRC’s guidance makes it clear that it will consider whether other creditors are being paid when HMRC is not, and whether the company will make future payments in full, and on time, when deciding whether to support a plan,
Paying HMRC current liabilities is likely to encourage engagement and willingness to re-schedule or compromise historic liabilities. Falling further into a black hole with tax debts, not paying HMRC and trading at its expense is likely to do the opposite.
Arguably the starting point for any company requiring HMRC’s support (whether that be for an RP or a time to pay agreement) is to be able to demonstrate that at least it will be able to meet future liabilities.
Concluding Comments
We have seen a positive change in HMRC’s approach in these cases which is very encouraging, but do we as practitioners need to do the same when it comes to managing relationships with HMRC generally? That may depend on whether HMRC’s change in attitude extends beyond RPs.
If there is more of a willingness to recognise HMRC’s role as an involuntary preferential creditor in negotiations, then perhaps we will see that reciprocated by HMRC showing a greater willingness to compromise in return. However, given that the thorny relationship runs quite deep, we expect practitioners will first want to see HMRC engage more regularly in a positive manner outside of RPs, and that would be a “welcome development”.