This article is an extract from The Restructuring Review, 14th Edition
Overview of restructuring and insolvency activity
Australia was not spared the transformative and far-reaching effects of the covid-19 pandemic in 2020. In terms of direct health impact, Australia fared comparatively better than other similarly developed nations, with approximately 30,000 cases of the virus in total as at May 2021.2 The relatively low transmission of the virus is a product, in large part, of Australia's geographic isolation and extremely stringent quarantine policies.
The Australian government was also quick to react to the potential economic impact of the virus. Beginning in March 2020, overseas travel was curtailed and many businesses were locked down, with the consequence that a huge swath of business ground to a halt and consumer confidence plummeted. In order to mitigate against the dire economic consequences wrought by the pandemic, the Commonwealth government moved quickly, passing in early April 2020 the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) and Coronavirus Economic Response Package Omnibus (Measures No. 2) Act 2020 (Cth), along with a number of ancillary regulations and rules.
The legislative response to the pandemic introduced a series of new terms into the Australian lexicon. The 'JobKeeper' programme – the Commonwealth government's signature pandemic policy – was introduced as a wage subsidy available to certain businesses that experienced a downturn in revenue because of covid-19, allowing those businesses to claim A$1,500 (gross) a fortnight. JobKeeper, which ended on 28 March 2021, was widely hailed as a success, with the programme allowing many businesses to avoid widespread layoffs of employees. In concert with JobKeeper, the 'JobSeeker' programme replaced previous welfare programmes for those seeking employment, and the 'JobMaker' scheme offered businesses incentives to take on additional young employees. These programmes, though largely successful in avoiding unprecedented increases in unemployment, have come at a cost, estimated at over A$90 billion.3
The combination of economic stimulus and relatively successful covid-19 suppression meant that Australia's economy did not suffer a sustained depression in the wake of the pandemic. The June 2020 quarter saw Australia's first technical recession in over 30 years, with the economy contracting 7 per cent, but this was followed by strong rebounds in the September and December 2020 quarters, which saw 3.4 and 3.1 per cent growth, respectively.4 Similarly, JobKeeper was successful in avoiding widespread and sustained unemployment, with the seasonally adjusted unemployment rate peaking at 7.5 per cent in June 2020 before declining back to 5.6 per cent in March 2021.5
The Commonwealth's legislative response to covid-19 also included a series of broad measures aimed at limiting the number of insolvencies arising from the economic turmoil caused by the pandemic. In particular, between March 2020 and 1 January 2021, a temporary moratorium was imposed that:
- increased the threshold by which creditors could issue a statutory demand from A$2,000 to A$20,000;
- increased the time by which companies had to respond to a statutory demand from 21 days to six months; and
- provided relief for directors and holding companies from any civil or criminal liability for insolvent trading for new debts incurred during which a company trades while insolvent, provided that the debt is incurred in the ordinary course of the company's business.
By both increasing the minimum debt required and increasing the time in which a creditor had to comply with a statutory demand, the Commonwealth moratorium vastly reduced the number of insolvency appointments in 2020: overall, the number of companies which appointed external administrators in 2020 fell to its lowest level in almost two decades, with an almost 50 per cent year-on-year reduction in the September 2020 quarter alone. This lower number of insolvency appointments has continued (despite the expiry of the moratorium) into 2021, with fewer appointments year-on-year in January to March 2021.6
The combined effect of the temporary moratorium on statutory demands and massive economic stimulus raised fears that there were a high number of companies that had been temporarily propped up during 2020 but were otherwise insolvent. Indeed, in June to August 2020, the deferred SME monthly loan repayments amounted to over A$50 billion, which was over 16 per cent of all SME loans.7 However, the expiry of the moratorium (as yet) has not spurred a 'tidal wave' of insolvencies, with January to March 2021 seeing fewer appointments than in 2020.8
In December 2020, the Commonwealth passed the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) which amended the Corporations Act 2001 (Cth) (the Act) to implement, from 1 January 2021, entirely new restructuring and liquidation processes for companies with total liabilities under A$1 million. Crucially, the new restructuring process contemplates a shift towards a debtor-in-possession model, with the company's directors retaining some control over the company's usual business dealings. This is a marked shift away from the existing voluntary administration framework, whereby directors cede control of a company's affairs to administrators upon appointment.
As with previous years, the authors anticipate that schemes of arrangement will continue to be a popular mechanism for effecting larger and more complex restructuring. While formal appointments (i.e., of liquidators and administrators) may be increasingly uncommon, they are often used as leverage against debtors in restructuring negotiations. Voluntary administration and deeds of company arrangement continue to be frequently used in debt-for-equity swaps, particularly at the small to mid-market level. The main driver for restructurings of this type is the power given to deed administrators to compulsorily transfer shares with court approval pursuant to Section 444GA of the Act (if the shares have no economic value).
The insolvency and restructuring market will continue to develop and be shaped by the post-pandemic Australian and global economy. The authors anticipate that the sustained consequences from the pandemic will define the coming years and will provide novel challenges for all insolvency and restructuring practitioners in Australia.
Recent legal developmentsi New restructuring and liquidation rocesses
As described above, in late 2020 the Commonwealth government passed new legislation which added a new restructuring process and simplified liquidation process for SMEs into the Act. The introduction of entirely new frameworks marks the most significant change to Australia's insolvency regime in 30 years.
Perhaps the most far-reaching impact of the new frameworks is not their direct effect (given that they are constrained to companies with total liabilities of under A$1 million) but their acknowledgment of the merits of a debtor-in-possession model, drawing inspiration from other jurisdictions such as the United Kingdom and United States.
There has not yet been a significant uptake of the new frameworks, in line with the broad drop in the number of external administrations in 2021 as a whole.
In addition to the new processes outlined above, the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), which inserted the new frameworks, allowed for a three-month period (1 January 2021 to 31 March 2021) during which eligible SMEs that sought to enter into the new restructuring process were eligible for an extension of the temporary insolvency relief moratorium (which otherwise expired on 1 January 2021, as described above).ii Personal liability for expenses incurred during administration
The impact of covid-19 on the insolvency landscape in Australia was not limited to direct legislative or economic changes, but also included novel developments in the practicalities of the external administration regimes for insolvency practitioners. One area which saw key development was in the apportionment of personal liability on insolvency practitioners, particularly in industries that were most significantly affected by covid-19. To this end, several major court decisions in 2020 clarified and developed the law in regard to Section 443B of the Act, which concerns (inter alia) personal liability for property leased or used by a company in administration.
Section 443B(2), in particular, states that administrators are personally liable for payments for property used, occupied or in the possession of the company in administration unless the administrators (within five business days of the commencement of the administration) give notice that the company will not exercise rights in relation to the property in question.
In Re CBCH Group Pty Ltd (Administrators Appointed) (No. 2)  FCA 472 (CBCH), the administrators elected for the company in administration to continue to lease certain retail properties and consequently pay rent during the administration period – for which the administrators were prima facie personally liable pursuant to Section 443B(2). However, the onslaught of the pandemic led to the conclusion (of the administrators) that the course of action most favourable to creditors was, in fact, not to pay rent for the property. On this basis, the administrators applied to the Federal Court of Australia for orders relieving them of personal liability for the unpaid rent (for a short period of time), and a declaration that they were justified in causing the company not to pay rent. Taking into account the effect of covid-19, and the interests of the creditors as a whole, the Court granted the orders. The Court found that the landlords of the companies (which retained a right to claim in the administration for the amount of unpaid rent) would be left no worse off by the decision.
Similar orders were made in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed)  FCA 571 (Virgin), which was one of a series of Federal Court of Australia cases involving the Virgin Australia group, Australia's second largest airline. In Virgin, the Court extended the five-business-day period in which administrators do not face personal liability under Section 443B(2) on the basis that, given the complexity of the group under administration and the effects of covid-19, it was in the best interests of creditors as a whole.
A third significant decision in the Federal Court, Ford (Administrator, in the matter of The PAS Group Limited (Administrators Appointed) v. Scentre Management Limited  FCA 1023) (Ford v. Scentre Management Ltd), also considered the effect of Section 443B. In that case, the administrators had (as in Virgin) been granted an extension of the five-business-day period in which no personal liability was apportioned under Section 443B(2). The company under administration ultimately proceeded to liquidation. The Court found that the rent payable by the company during the five-business-day period was not merely unsecured debt (for the purposes of the company's liquidation) but was in fact an expense properly incurred in the administration and thus afforded priority in the company's ultimate liquidation, pursuant to Section 556(1)(a) of the Act.
The decisions outlined above are a welcome clarification and extension of the law as it regards personal liability for insolvency practitioners, and show that Australian courts are willing to accommodate the dramatic effects of covid-19 within Australia's insolvency regime.
Significant transactions, key developments and most active industriesi Greensill Capital
Gilbert + Tobin has a major role advising a large creditor in the ongoing saga involving Greensill Capital, the multinational supply chain finance conglomerate that was placed into administration in March 2021.
The Greensill Capital group, which as recently as 2019 was valued at US$6 billion, collapsed after certain insurance policies lapsed in early 2021. Greensill Capital's core business involved supply chain financing whereby supplier businesses were able to receive payment quicker than otherwise possible (under usual payment terms). Greensill Capital subsequently securitised (inter alia) the accounts receivable generated by its supply chain finance that were then offered as securities in large-scale funds to institutional investors.31
In March 2021, the insurance policy for the securitised products offered by Greensill Capital lapsed, following an unsuccessful injunction application in the Federal Court of Australia.32 Within one week, Greensill Capital's UK entity had entered into administration, and receivers were appointed over certain Australian entities of the group.33
The repercussions of Greensill Capital's external administration have also drawn in steel conglomerate GFG Alliance, which had been closely tied with Greensill Capital. GFG Alliance owns several important Australian assets, including the Whyalla Steel Mill in South Australia and Tahmoor coal mine in New South Wales.
The Greensill Capital insolvency involves highly complex, international issues that will have worldwide implications, and it is the belief of the authors that the saga may generate novel and precedent-setting applications of the Australian insolvency framework across a range of industries.ii Virgin Australia
2020 also saw Virgin Australia enter into voluntary administration and (ultimately) into a deed of company arrangement. The administration of Virgin Australia was the largest insolvency in the Australian aviation industry since the collapse of Ansett Australia in 2001.
The Virgin Australia administration involved highly complex issues and produced several landmark cases that help provide further clarity around the process of complex voluntary administrations.
Ultimately, Virgin's deed of company arrangement (the proponent of which was Bain Capital) was approved by approximately 99 per cent of creditors and was executed in September 2020. Bain Capital is now poised to spearhead the recovery of the airline.iii Kikki.K
Gilbert + Tobin advised Barry Wight and Bruno Secatore of Cor Cordis in their capacity as receivers and managers of Swedish design and stationery brand Kikki.K on the sale of its Australian business to EC Designs, parent company of Erin Condren. Kikki.K currently has stores across Australia, New Zealand, Singapore, Hong Kong and the UK.
Kikki.K was placed into voluntary administration and receivership in March 2020 after battling difficult retail conditions and other challenges, including the December bushfires and the covid-19 pandemic.
The sale was structured through a deed of company arrangement and involved complex tax and restructuring issues that needed to be resolved in an accelerated timeframe.
Overall, the successful sale provided an opportunity for Kikki.K to return to profitability by strengthening its brand presence across the US market and growing its e-commerce business, as well as allowing Erin Condren to expand internationally across target regions such as Europe and Australia. Significantly, the sale ensured the continued presence of the popular retailer in Australia and the preservation of approximately 256 jobs.