I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
It is well documented that Australia emerged from the turbulent times that followed the collapse of Lehman Brothers in comparatively good shape. The market has in recent times, however, become increasingly susceptible to financial stresses caused by factors at both domestic and international levels. At the international level, such factors include decreased demand and consumption emanating from China and the changes to capital requirements resulting from the Basel Accords. On the domestic front, businesses and individuals have focused on reducing their debt burden; however, at the consumer level, due to record low interest rates and appetite in the housing market, individuals are taking on more debt.
Within this landscape, the secondary debt trading market has steadily grown, and this has seen a growth in consensual restructurings, particularly where borrowers have found it difficult to refinance. The relative stability of the Australian banking sector, the robust prudential regulations imposed on Australian banks and a willingness of par lenders to exit their positions – often at considerable discounts – has promoted increased activity in the secondary debt trading market since 2009, which reached peak levels in 2012.
This increased willingness to trade has seen a number of international players enter the market, commonly in the form of credit funds and private equity funds. These funds can have very different goals, time frames and strategies from the former dominant local financial institutions. In combination, these circumstances have also given rise to an increase in the pursuit of ‘debt-for-equity’ restructurings. Given that the ultimate goal of this strategy is often ownership of the business, credit fund participants are more conscious of enterprise value destruction, and there has been a reluctance to proceed to formal insolvency in these circumstances (particularly at the higher end of the market). As a result, schemes of arrangement are becoming an increasingly common mechanism through which to effect these strategies, although the threat of a formal insolvency process, such as receivership or voluntary administration, is often used as a bargaining tool in restructuring negotiations. Having said that, administration and deeds of company arrangement are being used more frequently to effect debt-for-equity swaps.
The increase in debt trading over recent times has led to the debt in restructured entities being held by credit funds and other institutions, and not necessarily by traditional lenders. The restructurings of Centro, Alinta, Redcape, I-Med, Colorado and, more recently, Atlas Iron, Billabong, Mirabela Nickel, Nexus Energy and the Nine Entertainment Group, have all had a large number of credit and private equity fund participants. This has seen a consequential change in dynamics within lender groups, as credit funds are more willing than traditional banks to take equity positions. This has begun to evolve in recent times, however, and certain banks are now more willing to consider quasi-equity positions in the Australian market. Traditional lenders are also increasingly requiring the issue of warrants in return for their agreement to restructure debt facilities.
While foreign banks with exposures in Australia (predominantly from the United States, United Kingdom and continental Europe) took active steps after the GFC to reduce their exposure in Australia, this has largely stabilised and foreign banks are now starting to show interest in returning to Australia.
The past couple of years saw a number of loan portfolio sales whereby both Australian and foreign banks sought to exit their potential exposures completely. Some key examples have included the sale of Lloyd’s businesses, GE Capital’s book, Barclays’ book and the ANZ/Esanda book. These sales processes were very competitive, and involved both credit funds and Australian institutional banks.
Economic indicators continue to paint a patchy outlook for Australia’s economy in the near term. There are areas of increased vulnerability in the marketplace, particularly as the resources boom continues to slow, commodity prices continue their decline and mining investment steadily contracts. Corporate collapses are occurring throughout Australia due in large part to slackening demand, cash-flow concerns and an inability to refinance at the same leverage levels. Some of the most notable collapses of the past year have included Arrium, Dick Smith, BBY Ltd and Queensland Nickel.
Sectors that have been hit particularly hard in recent times include mining and commodities, and service-based businesses associated with the mining sector, retail (which is a reflection of broader factors playing out on a global scale, such as an increased focus on savings and shoppers turning to online purchasing) and the construction sector, which has been a victim of cash-flow problems, particularly as government spending has slowed. There is also increased evidence of consolidation in the mining sector, and this is expected to continue as commodity prices remain volatile and companies continue to take cost-cutting steps to raise efficiency. Mining companies are increasingly conscious of improving efficiency of production as margins continue to drop. Increased restructuring activity is expected in each of these categories and, in particular, in mid-market mining projects and mining services companies in Western Australia and Queensland.
A significant proportion of external administration appointments have resulted from borrowers breaching financial covenants, failing to meet an amortisation payment or an inability to refinance debt facilities at the end of their term. In these circumstances, where a mutually acceptable deal has not been able to be reached between equity, management and the lenders, directors will invariably opt to appoint a voluntary administrator or invite the secured lenders to appoint a receiver over the company’s assets. It would, however, be rare for the board of a company with secured lenders to appoint a voluntary administrator without first inviting the secured lenders to appoint a receiver, or to make a dual appointment of both a voluntary administrator and receiver in a coordinated fashion.
Curiously, during this period secured lenders have granted far more leniency to borrowers, and have been more willing to work through restructurings to ensure businesses remain viable as a going concern. Put another way, formal appointments are often seen as the least attractive option, and therefore the rate of appointments could have been higher if lenders had been quicker to commence external administration, as they were in the recession of the early 1990s.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Formal procedures
The formal procedures available under Australian law are:
- a receivership (both private and court-appointed);
- b voluntary administration;
- c a deed of company arrangement (DOCA);
- d provisional liquidation;
- e liquidation; and
- f a court-sanctioned scheme of arrangement between creditors and the company.
For receivership, voluntary administration, DOCA and liquidation, the individual appointed must be an independent registered liquidator, except in the case of a members’ voluntary liquidation.
The main role of a receiver is to take control of the relevant assets, and realise those assets for the benefit of the secured creditors. One or more individuals may be appointed as a receiver or a receiver and manager of the relevant assets. Despite some historical differences, in practice it is difficult to distinguish between the two roles and most security interests will allow for the appointment of either. Receivers are not under an active obligation to unsecured creditors on appointment, although they do have a range of duties under statute and common law. Despite being appointed by the secured creditors, a receiver is not obliged to act on the instructions of the secured creditors. A receiver must, however, act in their best interests, and this will invariably lead a receiver to seek the views of secured creditors on issues that are material to the receivership.
There are two ways in which a receiver or receiver and manager may be appointed to a debtor company. The most common manner is pursuant to the relevant security document granted in favour of the secured creditor when a company has defaulted and the security has become enforceable. Far less common in practice is the appointment of a receiver pursuant to an application made to the court. Court appointments normally take place to preserve the assets of the company in circumstances where it may not be possible to otherwise trigger a formal insolvency process. Given the infrequency of court-appointed receivers, however, this chapter focuses on privately appointed receivers.
For a privately appointed receiver, the security document itself will entitle a secured party to appoint a receiver, and will also outline the powers available (supplemented by the statutory powers set out in Section 420 of the Corporations Act 2001 (Cth) (the Act)). Generally, a receiver has wide-ranging powers, including the ability to operate, sell or borrow against the secured assets. The appointment is normally effected contractually through a deed of appointment and indemnity, and the receiver will be the agent of the debtor company, not the appointing secured party.
On appointment, a receiver will immediately take possession of the assets subject to the security. Once in control of the assets, the receiver may elect to run the business if he or she is appointed over all or substantially all of the assets of a company. Alternatively, and depending on financial circumstances, a receiver may engage in a sale process immediately. While engaging in a sale process, a receiver is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances; this obligation is enshrined in Section 420A of the Act. It is this duty that has posed the most significant stumbling block to the adoption of pre-packaged restructuring processes through external administration2 that have been seen in, for example, the UK market. This is because of the inherent concern that a pre-packaged restructure that involves a sale of any asset without testing against the market could be seen as a breach of the duty under Section 420A.
Once a receiver has realised the secured assets and distributed any net proceeds to the secured creditors (returning any surplus to the company or later ranking security holders), he or she will retire in the ordinary course.
The concept of voluntary administration was introduced in 1993. Voluntary administration, unlike receivership, is entirely a creature of statute, and its purpose and practice is outlined in Part 5.3A of the Act. Voluntary administration has been compared with the Chapter 11 process in the United States, but unlike the Chapter 11 process, voluntary administration is not a debtor-friendly process. In a voluntary administration, the creditors control the final outcome to the exclusion of management and members. The creditors ultimately decide on the outcome of the company, and it rarely involves returning management responsibilities to the former directors.
The purpose of Part 5.3A is to either:
a maximise the chances of the company, or as much as possible of its business, to continue in existence; or
b if (a) is not possible, achieve a better return for the company’s creditors and members than would result from an immediate winding up of the company.3
There are three possible ways an administrator may be appointed under the Act:
- a by resolution of the board of directors that, in their opinion, the company is, or is likely to become, insolvent;4
- b a liquidator or provisional liquidator of a company may, in writing, appoint an administrator of the company if he or she is of the opinion the company is, or is likely to become, insolvent;5 and
- c a secured creditor who is entitled to enforce security over the whole or substantially whole of a company’s property may, in writing, appoint an administrator if the security interest is over the property and is enforceable.6
An administrator has wide powers and will manage the company to the exclusion of the existing board of directors. Once an administrator is appointed, a statutory moratorium is activated, which restricts the exercise of rights by third parties under leases and security interests7 and in respect of litigation claims, which is designed to give the administrator the opportunity to investigate the affairs of the company, and either implement change or be in a position to realise value, with protection from certain claims against the company.
There are two meetings over the course of an administration critical to the outcome of the administration. Once appointed, an administrator must convene the first meeting of creditors within eight business days (at such meeting, the identity of the voluntary administrator is confirmed, the remuneration of the administrator is approved and a committee of creditors may be established). The second creditors’ meeting is normally convened 20 business days after the commencement of the administration (this may be extended by application to the court). At the second meeting, the administrator provides a report on the affairs of the company to the creditors and outlines the administrator’s views as to the best option available to maximise returns. There are three possible outcomes that can be put to the meeting: entry into a DOCA with creditors (discussed further below); winding up the company; or terminating the administration.8
The administration will terminate according to the outcome of the second meeting (i.e., either by progressing to liquidation, entry into a DOCA or returning the business to operate as a going concern (although this is rare)). When the voluntary administration terminates, a secured creditor that was estopped from enforcing a security interest due to the statutory moratorium becomes entitled to commence steps to enforce that security interest unless the termination is due to the implementation of a DOCA approved by that secured creditor.
Deed of company arrangement
A DOCA is effectively a contract or compromise between the company and its creditors. Although closely related to voluntary administration, it should in fact be viewed as a distinct regime where the rights and obligations of the creditors and company will differ from those under a voluntary administration.
The terms of a DOCA may provide for, inter alia, a moratorium of debt repayments, a reduction in outstanding debt, and the forgiveness of all or a portion of the outstanding debt. It may also involve the issuance of shares, and can be used as a way to achieve a debt-for-equity swap through the transfer of shares either by consent or with leave of the court.9 This was how the successful debt for equity restructure was achieved in Mirabela.
Entering into a DOCA requires the approval of a bare majority of creditors both by value and number voting at the second creditors’ meeting. A DOCA will bind the company, its shareholders, directors and unsecured creditors. Secured creditors do not need to vote at the second creditors’ meetings, and only those who voted in favour of the DOCA at the second creditors’ meeting are bound by its terms. Unlike a scheme of arrangement, court approval is not required for a DOCA to be implemented provided it is approved by the requisite majority of creditors.
Upon execution of a DOCA, the voluntary administration terminates. The outcome of a DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. If a DOCA does not achieve its goals or is challenged by creditors it may be terminated by the court.
A provisional liquidator may be appointed by the court in a number of circumstances. The most commonly used grounds include:
- a insolvency;
- b where an irreconcilable dispute at a board or shareholder level has arisen that affects the management of the company;
- c where the shareholders of the company have, by special resolution, resolved that it be wound up; or
- d if the court is of the opinion that it is just and equitable to do so.
A creditor, a shareholder or the company itself has standing to apply for the appointment of a provisional liquidator, although in most cases a creditor will be the applicant. A provisional liquidator will normally only be appointed by the court when there is a risk to the assets of a company prior to a company formally entering into liquidation. As such, a provisional liquidator is normally only given very limited powers (i.e., the power to take possession of the assets), and the main role of the provisional liquidator is to preserve the status quo.
A court determines the outcome of a provisional liquidation. It may order either that the company move to a winding up, with the appointment of a liquidator, or that the appointment of the provisional liquidator is terminated.
Liquidation is the process whereby the affairs of the company are wound up and its business and assets are realised for value. A company may be wound up voluntarily by its members if solvent or, alternatively, if it is insolvent, by its creditors or compulsorily by order of the court.
Voluntary liquidation (members and creditors)
The members of a solvent company may resolve that a company be wound up if the board of directors is able to give a 12-month forecast of solvency (i.e., an ability to meet all its debts within the following 12 months). If not, or if the company is later found to be insolvent, the creditors take control of the process. Creditors may resolve at a meeting of creditors to wind up the company and appoint a liquidator (this may take place at the second meeting of creditors during an administration). If the requisite approvals are obtained in either a members’ voluntary winding up or a creditors’ voluntary winding up, a liquidator is appointed.
The most common ground for a winding-up application made to the court is insolvency, usually indicated by the company’s failure to comply with a statutory demand for payment of a debt or a judgment debt. Following a successful application by a creditor, a court will order the appointment of a liquidator.
In both a voluntary and compulsory winding up, the liquidator will have wide-ranging powers, including the ability to challenge voidable transactions and take control of assets. Generally, a liquidator will not run the business as a going concern, unless it will ultimately result in a greater return to stakeholders. During the course of the winding up, the liquidator will realise the assets of the company for the benefit of its creditors and, to the extent of any surplus, its members. At the end of a winding up, the company will be deregistered and cease to exist as a corporate identity.
Scheme of arrangement
A scheme of arrangement is a restructuring tool that sits outside formal insolvency; that is, the company may become subject to a scheme of arrangement whether it is solvent or insolvent.
A scheme of arrangement is a proposal put forward (with input from management, the company or its creditors) to restructure the company in a manner that includes a compromise of rights by any or all stakeholders. The process is overseen by the courts and requires approval by all classes of creditors. In recent times, schemes of arrangement have become more common, in particular for complex restructurings involving debt-for-equity swaps in circumstances where the number of creditors within creditor stakeholder groups may make a contractual and consensual restructure difficult.
A scheme of arrangement must be approved by at least 50 per cent in number and 75 per cent in value of creditors in each class of creditors. It must also be approved by the court in order to become effective.
The outcome of a scheme of arrangement is dependent on the terms of the arrangement or compromise agreed with the creditors but, most commonly, a company is returned to its normal state upon implementation as a going concern but with the relevant compromises having taken effect.
The scheme of arrangement process does, however, have a number of limiting factors associated with it, including cost, complexity of arrangements (i.e., class issues), uncertainty of implementation, timing issues (i.e., because it must be approved by the court it is subject to the court timetable and cannot be expedited) and the overriding issue of court approval (a court may exercise its discretion to not approve a scheme of arrangement, despite a successful vote, if it is of the view that the scheme of arrangement is not equitable). These factors explain why schemes of arrangement tend only to be undertaken in large corporate restructures and in scenarios where timing is not fatal to a restructure.
ii Rights of enforcement
Secured creditors may enforce their rights in every form of external administration. During a voluntary administration, a secured creditor with security over all or substantially the whole of the company’s property may enforce its security, provided it does so within 13 business days of receiving notice of appointment of the voluntary administration, or with leave of the court or consent of the administrator. In addition, if a secured creditor takes steps to enforce its security before the voluntary administration commences, it may continue to enforce its security.
Where a company pursues a DOCA, a secured creditor who did not vote in favour of such a proposal will have the ability to enforce its security interests once the DOCA becomes effective. If a voluntary administration otherwise terminates, a secured creditor may also commence steps to enforce its security interest upon termination.
iii Directors’ duties in distressed situations
Case law in Australia, particularly the Westpac Banking Corporation v. Bell Group Ltd (in liq) case (Bell),10 has reaffirmed the position that a director must be increasingly mindful of the interests of creditors as a company approaches insolvency. A director’s duty to creditors arises by operation of the well-established fiduciary duty owed by a director to the company more generally. When a company is solvent, the interests of the shareholders are paramount, and conversely, as recent case law has emphasised, when a company is near insolvency or of doubtful solvency, the interests of the creditors become increasingly relevant. It is important to emphasise that the duty to take into account creditors’ interests is owed to the company, not to the creditors per se.11
The extent of this duty continues to be an evolving area of the law. It is, however, now well established under Australian law that directors must at the very least have regard to the interests of creditors when a company is in financial distress or insolvent. As noted by Lee AJA in Bell:
At the point of insolvency, or the pending manifestation of insolvency, the duty to act in the best interests of each company was of central importance for the companies to comply with statutory obligations and the obligation of the companies not [to] prejudice the interests of creditors.
Further, it has been suggested that when the solvency of a company is doubtful or marginal, it would be a misfeasance to enter into a transaction that the directors ought to know is likely to lessen the company’s value if to do so will cause a loss to creditors. Directors should not, for instance, allow the company to enter into commitments that it clearly will not be in a position to meet or that may prejudice the interests of creditors generally.
It is also conceivable that directors could be held liable for loss suffered as a result of a transaction during a period of insolvency or near insolvency that is clearly value-dilutive. Transactions that are challenged, and that could put directors at risk, normally involve shareholders, directors and related parties receiving a benefit to the detriment of the company. It has, however, been noted that there are limitations on this duty to creditors, and specifically that it is ‘a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator’.12
Put another way, a breach of such a duty does not give rise to a direct right of action that may be brought by the creditors against the directors; rather, it gives rise to a right of action that must be undertaken either by the company itself or a liquidator, if and once appointed.
Directors may be held liable for new debts incurred by a company trading while cash-flow insolvent. This potential liability does not extend to debts incurred prior to the date a company became cash-flow insolvent, or recurring payments that become due after that date under the terms of pre-existing arrangements such as rent or interest (i.e., when the liability to pay such amounts already existed at the time of insolvency).
In terms of a director’s personal liability, a court may make an order requiring the director to compensate the company for loss arising out of the insolvent trading, prevent a director from managing a corporation for a period of time and, in rare circumstances where the failure to prevent insolvent trading is ruled as a result of dishonesty, a fine of A$200,000 may be levelled against the offending director.
In certain circumstances, the insolvent trading provisions will also extend to holding companies.13
The appointment of a voluntary administrator or a liquidator by the directors protects a director from any claim that he or she allowed the company to trade while insolvent in respect of any debts incurred after the date of such appointment.
Under Australian law, transactions will only be vulnerable to challenge when a company does in fact enter into liquidation. A liquidator only has the ability to bring an application to the court to declare certain transactions void. In the report to creditors at the second meeting, a voluntary administrator may identify potentially voidable transactions, but he or she is not empowered to pursue a claim in respect of such transaction. Any such claim must be brought by a subsequently appointed liquidator.
To be subject to challenge, such transactions will need to have been entered into while the company was proven to be cash-flow insolvent and include:
- a director-related transactions;
- b unfair preferences;
- c uncommercial transactions;
- d transactions entered into to defeat or delay creditors; or
- e unfair loans.
Each type of voidable transaction has a different criterion and a different time threshold (transactions with related parties are afforded a longer hardening period).
Upon the finding of a voidable transaction, a court may make a number of orders, including directions that the offending person pay an amount equal to some or all of the impugned transaction; directions that a person transfer the property back to the company; or directions that an individual pay an amount equal to the benefit received.
III australian insolvency law reform
There have been three key developments in Australian insolvency law reform in 2015 and 2016.
First, the Insolvency Law Reform Act (ILRA) received Royal Assent on 29 February 2016 and will come into effect on 1 March 2017. The ILRA amends the Act, the Australian Securities and Investments Commission Act 2001 (Cth) and Bankruptcy Act 1966 (Cth) to create common rules that will:
- a minimise costs and increase efficiency in insolvency administrations;
- b align the registration and disciplinary frameworks that apply to registered liquidators and registered trustees;
- c align a range of specific rules relating to the handling of personal bankruptcies and corporate external administrations;
- d enhance communication and transparency between stakeholders (including by giving creditors increased rights to request information about external administrations);
- e promote market competition on price and quality;
- f improve the corporate regulator’s powers to regulate the corporate insolvency market as well as both regulators’ powers to communicate in relation to insolvency practitioners operating in both the personal and corporate insolvency markets; and
- g improve overall confidence in the professionalism and competence of insolvency practitioners.
Much of the detail of these reforms will be set out in the Insolvency Practice Rules, which will form part of the regulations to the ILRA and are yet to be released.
Second, on 7 December 2015, the federal government released its National Innovation and Science Agenda, which included (inter alia) a commitment to:
- a introduce a ‘safe harbour’ rule to protect directors from insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company;
- b make ‘ipso facto’ clauses (i.e., clauses that permit a contract to be terminated if an insolvency event occurs) unenforceable if a company is undertaking a restructure; and
- c reduce the default bankruptcy period from three years to one year.
At this stage, it is expected that a proposal paper will be released in 2016, with draft legislation to follow in mid-2017.
Third, on 30 September 2015, the Productivity Commission issued its Inquiry Report: Business Set-Up, Transfer and Closure. In addition to the reforms specifically picked up by the federal government in its National Innovation and Science Agenda, the Productivity Commission’s report also recommended introduction of the following:
- a amendments requiring an administrator, within one month of appointment, to certify that he or she has reasonable grounds to believe that a company (or a large component entity of it, which may emerge following a restructure) is capable of being a viable business. If the administrator is unable to do this, then they will be under a duty (enforceable by the Australian Securities and Investments Commission) to convert the administration into a liquidation;
- b amendments that allow for ‘pre-positioned’ sales (i.e., sales negotiated or effected prior to a formal insolvency appointment);
- c amendments introducing a voluntary administration-style moratorium on creditor enforcement action during the formation of schemes of arrangement; and
- d amendments introducing a simplified ‘small liquidation’ process for companies with liabilities to unrelated parties of less than A$250,000.
The Productivity Commission has also recommended an independent review of the provisions of the Act relating to receivers and the practices of receivers in the market.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
One of the most notable collapses of the past year has been that of Arrium. Arrium Ltd (Arrium) is an international mining and materials company listed on the Australian stock exchange, with three key business segments: mining consumables, mining and steel. Following an unsuccessful attempt to sell its mining consumables business in 2015 and the group’s inability to secure lender support for GSO Capital’s recapitalisation plan (admittedly one that required Arrium’s lenders to agree to a ‘haircut’ of more than 50 cents to the dollar), on 7 April 2016, Arrium and 93 of its Australian subsidiaries appointed voluntary administrators. Not all companies in the group are in administration. The wider Arrium group includes entities located in Australia, Canada, the United States, Mexico, Peru, Chile, Hong Kong and Indonesia that carry on the group’s highly successful mining consumables business known as the ‘Moly-Cop’ business.
In addition to keeping the Arrium entities in administration operating on a ‘business as usual’ basis, the administrators have been kept very busy dealing with the following notable (and widely reported) issues:
- a Enforced replacement of administrators – Following pressure from the Australian Workers’ Union and the group’s unsecured lenders, the administrators appointed by the companies’ directors resigned and were replaced by four new administrators (from KordaMentha) by way of federal court order, on 12 April 2016.
- b Cross-border dispute with Morgan Stanley – On 15 April 2016, Morgan Stanley filed an action in the Delaware Chancery court seeking orders that Arrium and its subsidiaries repay a US$75.4 million bilateral facility. On 18 April 2016, the administrators brought proceedings to the Federal Court of Australia, seeking orders to extend the moratorium to prevent Morgan Stanley from enforcing guarantees given to it until further order. The proceedings are on hold pending the standstill referred to below coming into effect.
- c GSO Interim Facility – In connection with the above-mentioned recapitalisation plan, GSO provided Arrium with a US$140 million secured interim facility (the GSO Interim Facility), US$100 million of which was drawn down prior to the appointment of the administrators. Following the appointment of administrators, the facility agent purported to accelerate the GSO Interim Facility and issued a letter of demand on all borrowers and certain guarantors. The administrators arranged to have all principal and interest refinanced by Australia’s big four major banks (Westpac, ANZ, CBA and NAB), but remain in dispute with the GSO facility agent (which is refusing to permit its security to be released) regarding the proper construction of the recapitalisation documents and whether any amounts owing under those documents (including, the GSO facility agent alleges, a US$15 million work fee) constitute ‘secured money’ and are enforceable against the Moly-Cop entities that have provided security. The administrators have sought orders from the Federal Court in respect of these matters of construction and the proceeding is scheduled for hearing on 8–9 September 2016.
- d Standstill arrangements – The administrators are currently negotiating standstill arrangements with the group’s syndicated and bilateral lenders, Morgan Stanley and US noteholders. At the date of writing, these standstill arrangements are close to being finalised.
- e Consideration of available options – The administrators have appointed Deutsche Bank to run a dual-track IPO/trade sale process for the Moly-Cop business. The steel and mining side of the business will also be restructured and realised.
ii Atlas Iron restructure
A major and novel recent restructure transaction was that of Atlas Iron. Atlas had US$267 million outstanding secured debt that was scheduled to mature in 2017. In 2015, as a result of fluctuating and uncertain global iron ore prices, Atlas begun to experience financial difficulties, and in April temporarily suspended operations at its three operational mines, and began formal engagement with its creditors and their advisors. In early May 2015, two of the mines resumed mining after arrangements were finalised with key contractors to reduce the cost price per ton. Despite these steps undertaken by the company, its financial position continued to deteriorate in the second half of 2015, which ultimately led the company to engage with its lenders in respect of a comprehensive restructuring of the company’s balance sheet.
On 23 December 2015, Atlas announced that it had signed a Restructuring Support Agreement with more than 75 per cent of the lenders (by value) in conjunction with agreeing to an interim amendment to its Syndicated Facility Agreement. The proposed recapitalisation plan by way of a creditors’ scheme of arrangement included the following features:
- a The company paying down a portion of the Term Loan B Debt (TLB Debt) in an aggregate amount of US$10 million.
- b The lenders subscribing for new shares and new options on a pro rata basis in consideration for extinguishment of a portion of the secured TLB Debt of approximately US$122 million.
- c The issue of new shares and new options pursuant to the scheme, subject to court approval pursuant to Section 411 of the Act.
Post the restructure, the lenders held in aggregate approximately 70 per cent of Atlas’s shares and options on issue on a fully diluted basis. The company also reduced its TLB Debt from US$267 million to US$135 million, extended the maturity date of the debt from December 2017 to April 2021 and reduced its cash interest expense by over 65 per cent as a result of the lower debt balance and reduced interest rate.
The deal involved a number of innovative aspects and firsts for the Australia restructuring market, including:
- a entry by the Ad-hoc Group into a restructuring support agreement to effectively ‘pre-pack’ the recapitalisation;
- b the compromise of subordinated ‘class action’ shareholder claims in accordance with Section 411(5A) of the Act by way of a creditors’ scheme of arrangement, the first time this mechanic has been used in Australia; and
- c the use of an explanatory statement including an independent expert’s report to explain the transaction to Atlas shareholders and to show that there was no residual equity value in the company (i.e., the transfer as contemplated under the creditors’ scheme would not be unfairly prejudicial).
Lower growth forecasts, a decline in Australian competitiveness as a result of worsening labour market flexibility and dwindling consumer confidence indicates that the Australian economy is likely to face a challenging 12 to 18-month period. The resources sector continues to show signs of decline, and this will see increased insolvency activity in this sector as both mining and mining services companies face the prospect of lower liquidity, lower terms of trade and an ongoing inability to refinance.
Australian courts cooperate with foreign courts and insolvency practitioners, and will recognise the jurisdiction of the relevant court in which the ‘centre of main interest’ is located. This approach follows the UNCITRAL Model Law on insolvency, which was codified into Australian law through the Cross-Border Insolvency Act 2008 (Cth).
There is also scope under different legislation such as the Act for Australian courts to recognise foreign judgments in Australia. Specifically under Section 581 of the Act, Australian courts have a duty to render assistance when required by a foreign insolvency court. Further, the Act has extraterritorial application; for example, an Australian court has jurisdiction to wind up a foreign company.
Receivers do not have the benefit of taking action in foreign jurisdictions that other insolvency administrators have under the Cross-Border Insolvency Act 2008.14 This is because receiverships relate only to a debt owed to the appointer, and as such cannot be said to be collective proceedings in terms of the application of the Model Law.
Vi FUTURE DEVELOPMENTS
The Basel capital requirements and the desire to exit distressed scenarios with some value will continue to incentivise Australian institutional banks and traditional foreign banks to trade debt. The Australian market will continue to be attractive for credit funds looking to pursue control transactions after acquiring debt positions.
It continues to be anticipated that any large-scale restructures will continue to occur outside formal insolvency procedures, although it is likely there will be a decline in their frequency. The pursuit of debt-for-equity strategies will continue at the instigation of credit funds willing – and often seeking – to take an equity interest in a company (including management roles). This debt-for-equity play is likely to extend to bilateral arrangements over time, should opportunities present themselves. This is likely to be particularly attractive in the small and medium-cap mining space.
The number of formal insolvency appointments at the small to mid-cap level of business will increase as companies continue to struggle with liquidity problems and waning local and international demand.
In terms of future legislative development and as mentioned above, the key items to watch out for over the next 12 months are:
- a the introduction of the Insolvency Practice Rules (which will provide much of the detail behind the Insolvency Law Reform Act, which is presently due to come into force on 1 March 2017); and
- b the federal government’s proposal paper in connection with the reforms it announced in its National Innovation and Science Agenda.
At the time of writing this article, both items are expected to be released in the second half of 2016.
1 Dominic Emmett and James Lewis are partners and Jessica Arscott is a senior lawyer at Gilbert + Tobin.
2 Often referred to as a ‘pre-pack’, this is where a restructure is developed by the secured lenders prior to the appointment of a receiver, and is implemented immediately or very shortly after the appointment is made.
3 Section 435A of the Act.
4 Section 436A of the Act.
5 Section 436B of the Act.
6 Section 436C of the Act.
7 There is, however, an exception to the moratorium on the exercise of rights under security interests in the case of a secured creditor that has security over all or predominantly the whole of the assets of the company.
8 Section 439C of the Act.
9 Section 444GA of the Act.
10  WASC 157.
11 Spies v. the Queen  HCA 43.
12 Gummow J in Re New World Alliance Pty Ltd (Receiver and Manager Appoint); Sycotex Pty Ltd v. Baseler (No. 2)  51 FCR 425 (and cited with approval in Bell).
13 Section 588V of the Act.
14 Section 8.