IN AUSTRALIA Restructuring and insolvency
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RESTRUCTURING AND INSOLVENCY
AUSTRALIAN INSOLVENCY PROCESSES
The key insolvency-related processes relevant to Australian companies under Australian law are:
A company is also able to use a Scheme of Arrangement to agree a compromise of its debts with its creditors. This can occur prior to any insolvency process or work in parallel with an insolvency process.
When a company is facing financial distress, voluntary administration gives a company `breathing space' so that it can implement an arrangement with its creditors to continue to trade. This breathing space is achieved through a moratorium on enforcement action.
The trigger for the appointment of voluntary administrators will usually be cash-flow related; that is, the inability of a company to pay its debts as and when they become due and payable. Subject to certain defences (and subject to proposed new safe harbour laws to be introduced later this year), directors of Australian companies will be personally liable if they allow a company to trade whilst insolvent.
A voluntary administrator may be appointed by:
a resolution of the board of directors that the company is insolvent, or is likely to become insolvent in the future;
any secured creditor, with a security interest over all or substantially all of the assets of the company, who is entitled to enforce that security interest; or
a liquidator, if he or she considers that the company is insolvent, or is likely to become insolvent in the future.
A voluntary administrator is an independent insolvency practitioner who is a registered liquidator. There is no Court involvement in the appointment process. In performing his or her functions, the administrator will act in the best interests of all creditors of the company, even if a secured creditor appointed the administrator. The administrator will take control of the company's business, property and affairs. This person will investigate the affairs of the company, including offences in relation to officers or employees of the company.
The objective of the administration is to maximise the chances of the company continuing to trade or, if that is not possible, providing a better return to its creditors and shareholders than in a winding up. An administrator is liable for the general debts of the company that he or she incurs in the performance or exercise of his or her functions as administrator, as well as lease payments on the company's assets.
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The administrator has the benefit of a statutory indemnity against the company's assets for debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise of his/her functions or powers as administrator. This indemnity takes priority over the company's unsecured debts, debts secured by a security interest registered on the Personal Property Securities Register and debts secured by a circulating security interest (subject to that secured party's consent). Such indemnity is secured by a statutory lien on the company's property.
Upon the appointment of the voluntary administrator:
the company's directors will not be permitted to exercise any powers, except with the administrator's consent;
legal proceedings in respect of all existing claims and new claims based on existing contracts will be stayed, except with leave of the Court or administrator's consent;
enforcement actions against the company will be stayed, except with leave of the Court or administrator's consent;
owners of property (other than perishable property used or occupied by the company), or lessors of such property, cannot recover their property;
a creditor holding security over the whole or substantially the whole of the assets of the company has 13 business days from the date that the administrator is appointed to appoint a receiver (unless a consent from the administrator or court approval has been obtained to appoint a receiver at a later date).
It is very common in Australia for commercial contracts to contain terms allowing a party to elect to terminate the contract if another party suffers from some insolvency related event, including entering administration, liquidation or receivership. Note that these termination rights are subject to the restrictions set out above.
The insolvency laws in Australia are changing to restrict, subject to certain exceptions, a counterparty from terminating a contract by reason of insolvency alone (known as "ipso facto" clauses). These changes are expected to become effective on, and only apply to contracts entered into after, 1 January 2018 pursuant to the Insolvency Law Reform Act 2016 (Cth). After an administrator finalises his or her investigations, he or she will prepare a report (called a section 439A report), under which he or she will present the following options to the creditors about the company's future for the creditors to approve:
execute a deed of company arrangement, under which creditors will receive more than in a winding up (see "Deed of Company Arrangement" below);
if the company is insolvent wind up the company, which would become a creditors' voluntary liquidation process (see "Liquidation" below); or
if the company is solvent hand control of the company back to its directors (note that this rarely happens).
DEED OF COMPANY ARRANGEMENT
Creditors may resolve for a company to enter into a deed of company arrangement (DOCA) at the second creditors' meeting in an administration process. The DOCA requires approval by a majority of creditors in number and by value of the debt voting, in person or by proxy, at this meeting.
A DOCA is a flexible arrangement between a company and its creditors, which governs how the company's affairs will be dealt with, including those claims of the company's creditors which will be extinguished in exchange for some consideration.
A DOCA binds all creditors (unless any creditors are expressly excluded from its operation), including secured creditors. Although this will not prevent the secured creditors' ability to deal with their security, unless they voted in favour of the DOCA. The DOCA also binds the company, its officers, shareholders and the deed administrator. The DOCA will not affect third party guarantees and the rights of owners or lessors of property, unless they voted in favour of the DOCA.
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There are two types of insolvent liquidation processes:
creditors' voluntary liquidation; and
compulsory winding-up through a court ordered liquidation.
Creditors' voluntary liquidation
A creditors' voluntary liquidation process may occur if:
the directors of the company resolve that it is insolvent and it should be wound up;
a member's voluntary liquidation is initiated (i.e. a solvent voluntary liquidation process) where the liquidator forms the opinion that the company is insolvent; or
after creditors have voted that the company enter into liquidation following a voluntary administration or termination of a DOCA.
In the first scenario above, where the directors determine that the company is insolvent, they must convene a meeting of shareholders. The shareholders will vote by special resolution (i.e. 75% of those present and voting) that the company be wound-up and appoint a liquidator.
A creditors' meeting is then called to either confirm the liquidator's appointment or appoint a liquidator of the creditors' choice (as well as appoint a committee of inspection).
The Court may make an order winding-up a company on the grounds of insolvency or other grounds including where it is just and equitable that the company be wound up. An application for such an order may be made by certain persons, including the company, a creditor, a shareholder or ASIC. It is usual for a creditor to serve a company with a statutory demand requesting repayment of an outstanding debt, given that if the demand remains unsatisfied for 21 days, a presumption of insolvency arises and the Court order will not be controversial.
Like voluntary administrators, liquidators will act in the best interests of all creditors of the company. The liquidators' objectives are to wind down the company's affairs in an orderly and equitable way, for the benefit of all creditors.
The liquidator will take control of the company and its assets to:
collect and realise its assets;
distribute the proceeds among creditors rateably; and
distribute any surplus among members according to their entitlement.
A liquidator also investigates the company's affairs, including whether certain voidable transactions entered into prior to the appointment of the liquidator may be set aside (which includes unfair preferences, uncommercial transactions, unfair loans and unreasonable director-related transactions).
Upon appointment of a liquidator:
the company's directors will not be permitted to exercise any powers, except with the liquidator's consent;
legal proceedings or an enforcement process cannot be commenced or continued against the company or in relation to its property, except with leave of the Court; and
the liquidator may decide to disclaim certain contracts and, in this case, the liquidator must apply to court for leave to disclaim such contracts except for an unprofitable contract or lease of land.
Note that contractual counterparties will be able to exercise any termination rights against the company in liquidation (subject to the rights of a liquidator to disclaim certain contracts and the changes to the insolvency laws mentioned under `Administration' above). The appointment of a liquidator does not alter a secured creditor's rights to realise or otherwise deal with its security interest.
Once the liquidator has realised the assets of the company and finalised any duties and obligations, he or she will call for proofs of debt. Once these debts are admitted, there will be a distribution of the proceeds which the liquidators have obtained from the sale of the company's assets. The Corporations Act 2001 (Cth) (Corporations Act) sets out the payments which rank ahead of unsecured creditors in a liquidation, which include liquidation expenses and employee entitlements.
Receivership is not strictly an `insolvency' process but often accompanies an insolvency process (eg, voluntary administration or liquidation). It is a remedy available to secured creditors to enable them to enforce a validly registered security interest.
There are two triggers which will entitle a secured creditor to appoint a receiver over the company and/or its secured assets:
an event of default (not necessarily insolvency) under the terms of a security document; or
where the secured creditor holds security over all or substantially all of a company's assets, within 13 business days after a voluntary administrator is appointed (see "Voluntary Administration").
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A receiver must be a registered liquidator. The Court may also order the appointment of a receiver but this is not common. Receivers act as agents of the company with a primary duty to their appointor to recover the secured debt. They take their directions from their appointor and the appointor will generally provide an indemnity to the receivers (given the receiver's liability for debts incurred during the course of their appointment).
A receiver takes control of some or all of the company's secured assets, depending on which assets have been charged in favour of the secured creditor. The receiver will have the power to continue to trade the business and sell the assets that are subject to the security. These powers will be set out in the security and the Corporations Act.
Upon the appointment of receivers there is no stay of legal proceedings against the company. However, typically the appointment of a receiver follows the appointment of an administrator, such that the receiver will benefit from the moratorium from the appointment of administrators. The receivership and the administration process run in parallel with the receivership process typically being the dominant process. The receiver will collect and realise enough of the secured assets to repay the secured creditor. These assets will be sold by the receiver for market price, or, if no market exists, the best possible price in the circumstances.
SCHEME OF ARRANGEMENT
A scheme of arrangement is a versatile tool that can be used in either a solvent or insolvent restructuring scenario. It is a compromise or arrangement between a company and a specified class or classes of its creditors and is often used for the purpose of deleveraging the company's balance sheet.
The scheme of arrangement must be approved by each "class" of creditor by at least:
75 per cent by value (i.e. 75 per cent of the value of the relevant class of debt); and
50 per cent in number, voting, in person or by proxy, at the meeting.
Where these thresholds are met and the scheme is subsequently approved by the Court, the scheme will be binding on all creditors (including secured creditors, whether they consented or not). A creditors' scheme of arrangement is typically used to implement a debt-for-equity swap to transfer ownership of a company from the incumbent shareholders to those stakeholders that have the most senior economic interest in the company.
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