Ian Walker of Minter Ellison assesses the bankruptcy and insolvency regime in Australia
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
Part 5.1 of chapter 5 of the Corporations Act 2001(Cth) contains provisions for compromises or arrangements between a company and its creditors or the company and its members. These are generally called schemes. The scheme approval process is controlled by the court that orders the holding of meetings of creditors, classes of creditors or members. The court must also approve the information to be sent to creditors in relation to the scheme. A liquidator can also promote a scheme.
Once a corporate entity is insolvent and in administration under part 5.3A of the Corporations Act, the mechanism for a corporate reorganisation is a deed of company arrangement (Doca). The entire administration and the entry into the Doca can be done without actually involving a court.
1.2 Is a stay on creditor enforcement action available?
If not in liquidation and a scheme has been proposed for a compromise or arrangement between the company and its creditors or any class of them, then an application can be made to the court for an injunction to restrain proceedings in any current action or other civil proceedings against the company except with leave of the court.
In administration there is an automatic stay on proceedings against the company in relation to its property, and in relation to proceedings against the company unless the administrator gives written consent or leave of court is obtained. The stay prevents third parties such as secured creditors and lessors of property used, occupied by or in the possession of the company from exercising their rights.
A secured creditor with a security interest in the whole or substantially the whole of the company's property is not necessarily bound by the stay and can enforce its security in relation to all the secured property, or on or before the 13th business day after the administration begins or later if the administrator consents.
1.3 What are the key features of a reorganisation plan and how is it approved?
A scheme of arrangement or compromise can provide for a number of options. These include a payment that compromises creditors' debts for less than 100 cents in the dollar, an assignment of creditor debt in return for a payment, a debt for equity swap limited to a certain class of creditor, such as a secured creditor, to ensure that the secured creditor can effectively take control of the shareholding of the company. In a corporate group scheme a court can order the transfer of assets and liabilities from entities within the group to a new entity or another entity in the group. Creditors owed debt by the subsidiary whose assets are transferred to the new holding company could be given a compromise sum or shares in the new holding company.
The required scheme vote involves majority creditors, whose debts or claims against the company aggregate to at least 75% of the total amount of the debts and claims of creditors, voting in favour of the scheme. Once that vote is obtained, final approval of the scheme depends on the court reviewing the meeting results and approving the scheme
In administration, a Doca can be put forward by any person. The administrator can propose it as the most effective way of dealing with creditors' claims which may be released or compromised under the terms of the Doca. A party interested in reviving or acquiring the company, such as the group's major secured creditor looking to convert its debt to equity in a loan to own scenario will propose a Doca. Under a Doca, shares may only be transferred if the owners of the shares consent or the court provides leave. Shareholders often resist the transfer. The court may only give leave for the share transfer to occur if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company. This is feasible if the shares would be worthless if liquidation occurred.
In administration, a resolution can be decided on the voices of creditors unless a poll is demanded. However if a poll is required, the resolution will only be carried if it is passed by a majority in number and the value of the debts owed to creditors who vote in favour is more than half of the total debts owing to creditors who vote. If a majority of creditors in number vote for it while the majority of creditors in value vote against it then the resolution is not carried. If that deadlock occurs, the person presiding at the meeting, generally the administrator, has a casting vote and can vote either for, or against, the resolution. In this case, the resolution will be carried or lost depending on which way the casting vote is exercised.
1.4 Can a creditor or a class of creditor be crammed-down?
In relation to a scheme of compromise or arrangement, its terms are binding on the creditors provided the necessary meetings are convened in compliance with the court order and the requisite majority vote is achieved. The vote requires the majority in number of creditors whose debts or claims amount in aggregate to at least 75% of the debts and claims of those voting at the meetings. The scheme will have the effect of cramming down the 25% minority who vote against it and any creditor that doesn't vote.
A Doca, when passed by the required majority (in both number and value) will bind all creditors including those in the 49% minority in number and in value that voted against the deed. The Doca will also bind creditors that did not vote. A secured creditor cannot realise, enforce or deal with its security interest unless the Doca provides that the secured creditor is bound by it and in favour of the Doca. A secured creditor that votes against the Doca can still be ordered by the court to be bound by the Doca, on the basis that allowing the secured creditor to realise or deal with its security interests would have a material adverse effect on the Doca if the court is satisfied that the secured creditor's interests will be adequately protected.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
Australia has no equivalent provision to section 363(k) of the US Bankruptcy Code, which permits a secured creditor to buy property sold during the bankruptcy by a credit bid that sees the secured debt offset against the purchase price of the property. There is no regular practice of credit bidding in Australia. Nor is there a legislative justification for a stalking horse bid, where a first bidder is identified as a possible buyer who can place a bid creating a floor for the price of the assets.
Statutory constraints on Australian insolvency practitioners engaged in the sale of assets during an insolvent administration must be complied with. For example, in a receivership, the receiver is obliged under section 420A of the Corporations Act to take reasonable care to sell the property for its market value, or if there is no market for the property, for the best price reasonably obtainable. The receiver will have to go through a proper sale process to achieve the sale at market value. Administrators are given the power to dispose of all or part of the company's business and property. They are not bound by s 420A, but still have to act in accordance with their statutory duties of care, diligence and good faith. They are given broader scope in the exercise of their powers of sale than receivers. In Australia, it is difficult for receivers or administrators to engage in pre-packaged sales. There is no formal process or mechanism in Australia that enables the use of a pre-pack.
1.6 What are the duties of directors of a company in financial difficulty?
In Australia, one of the major drivers if the company is facing financial difficulty is the director's duty to prevent insolvent trading under section 588G of the Corporations Act. A breach of that duty can lead to a civil penalty of up to A$200,000 ($161,000) but also personal liability for the loss or damage suffered by the unsecured creditor as a result of the company's insolvency for debt that was incurred at a time when the company was insolvent.
Under the Corporations Act and under the general law, when a company is approaching insolvency directors must, in their fiduciary position, take into account the interests of creditors. This is because their interests may be potentially adversely affected by the directors' choices for the company.
1.7 What priority claims are there and is protection available for post petition credit?
Australia has statutory priorities that apply in liquidation that include the costs and expenses that an administrator has personal liability for. This includes money borrowed by the administrator together with interest and costs, as long as the secured creditor with a circulating security interest has consented to the administrator having priority over it.
The statutory priority takes priority over all unsecured creditors and ranks the administrator's expenses and remuneration and those of the liquidator ahead of employee entitlements. Employee entitlements are also given priority over unsecured creditors. If there is a circulating security interest, the employees' claims also have priority over the secured creditor.
1.8 Is there a different regime for banks and other financial institutions?
Under the Banking Act 1959 (Cth), Australian Prudential Regulation Authority (Apra) can appoint a statutory manager to a bank (Authorised Deposit Institute – ADI) who has the power to sell or dispose of the whole or any part of the ADI's business but also has the power to issue, cancel or reduce the company's share capital, cancel shares and vary or cancel rights attached to shares. If Apra has appointed a statutory manager, there is a stay in respect of beginning or continuing a court proceeding and creditors cannot apply to appoint an external administrator unless Apra approves the appointment.
If an ADI statutory manager is in control of the business and Apra considers that the company is insolvent, Apra can apply to the Federal Court for an order that an ADI be wound up. Once wound up the ADI will be liquidated in accordance with the Corporations Act 2001.
Under the Insurance Act 1973, Apra or a general insurer can apply to the Federal Court for an order that the general insurer be placed under judicial management. Judicial management brings with it a stay against proceedings, and has the power to recapitalise the company and to sell or dispose of all or any part of the property of the insurer or issue shares in the company.
In the winding up of an insurer, the insurer's assets in Australia must not be applied in discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia. That is not the case for a normal company being wound up under the Corporations Act.
Section 2 – international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
The winding up of a foreign company that is a part 5.7 body may be subject to winding up under the Corporations Act. A part 5.7 body is a registrable, foreign company and is either registered under division 2 of part 5B.2 of the Corporations Act or is not registered but carries on business in Australia. The Australian part 5.7 body can be wound up despite the fact that it is being wound up or has been dissolved, deregistered or ceased to exist under the laws of its place of incorporation. There is also the possibility that an Australian court can order the winding up of a foreign body corporate if approached with a request for assistance by a court from another jurisdiction.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
The Uncitral (United Nations Commission on International Trade Law) Model Law on Cross Border Insolvency is now part of Australian law in the Cross Border Insolvency Act 2008 (Cth) (CBIA). Under Australia's CBIA a foreign representative, as defined in article 2(d) of the Model Law as a person authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor's assets or affairs or authorised to act as a representative of the foreign proceeding, can apply for recognition of the foreign proceeding in Australia and be granted relief under the Corporations Act in respect of a corporate entity or the Bankruptcy Act in the case of an individual.
For example, in Australia a US chapter 11 proceeding has been recognised as a foreign proceeding on at least a couple of occasions, one of which occurred in relation to a Australian-listed company, Buccaneer Energy, where the centre of main interests of the listed company was found to be the United States.
Section 3 – other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
If the company is indebted to the Australian Taxation Office (ATO) then there needs to be an agreement with the ATO about the outstanding debt. Failure to observe an arrangement with the ATO can lead to the ATO pressing for liquidation of the company.
Further, if the company goes into liquidation and subsequently into administration and the unpaid employees claims have been paid under the fair entitlements guarantee scheme by the government department involved. Once those payments are made, the government department has the same priority as a creditor in liquidation and administration as the employees would have had and will have a right to vote on what is proposed.
Section 4 – current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
Australia's insolvency law does not readily facilitate reconstruction and turnarounds. If a formal step is taken into the insolvency process the business could be affected by ipso facto clauses in contracts that will be terminated as a result of the insolvency event, that will cause potential damage to the business and the value of its assets. Australia's climate for troubled companies is influenced by secured creditors that, rather than enforcing securities, regularly allow the debtor time to achieve the sale, disposition or restructuring of its business or assets.
Australia is also facing a series of insolvency law reforms contained in the Insolvency Law Reform Bill 2014 that was introduced in November 2014. They are meant to increase efficiency and remove unnecessary costs in insolvency administration and to align and modernise some of the rules relating to both personal bankruptcy and corporate insolvency. The bill has not yet been passed in Parliament, but if passed in the second half of 2015 it will commence in February 2016. Under the Bill, there will be amendments to both the Corporations Act and the Bankruptcy Act. As yet there are no changes proposed to Australian insolvency laws to facilitate restructuring and turnarounds.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Ian Walker is one of Australia's leading insolvency and reconstruction specialists. He has more than 25 years' experience in security enforcement for all types of creditors, banking litigation, and insolvency, reconstruction and work-out issues, including drafting schemes of arrangement and deeds of company arrangement. His practice spans a wide range of industries and private and public sector clients, including those in the financial services industry.
Walker advises insolvency appointees including liquidators, receivers, administrators and deed administrators on creditors' rights, their powers and duties, and on the full range of commercial and legal issues that insolvency practitioners may face during the course of an insolvency administration. He advises third parties affected by insolvency such as creditors and directors, such as advising company directors on governance issues when insolvency is imminent.