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, the Nine Entertainment Group, Atlas Iron, Billabong, Mirabela Nickel, Nexus Energy, Emeco, Boart Longyear, BIS Industries and Slater and Gordon, 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, the United Kingdom and continental Europe) took active steps after the global financial crisis 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 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 to oversee 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 the first option 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 creditors' 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 can, but do not need to, vote at the second creditors' meetings, and typically only those who voted in favour of the DOCA at the second creditors' meeting are bound by its terms.10 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.11 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),12 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.13
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'.14
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 preexisting 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.15
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 creditors' 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.
There are several types of transactions that can be found to be voidable:
- a unreasonable director-related transactions;
- b unfair preferences;
- c uncommercial transactions;
- d transactions entered into to defeat, delay or interfere with the rights of any or all creditors on a winding up; and
- e unfair loans.
Transactions in categories (b), (c) and (d) will only be voidable where they are also found to be ‘insolvent transactions', that is, transactions that occurred while the company was cash-flow insolvent, or contributed to the company becoming cash-flow insolvent. Each type of voidable transaction has a different criterion and must have occurred during certain time periods in the lead up to administration or liquidation. The relevant time period is generally longer if the transaction involves a related party.
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 two significant developments in Australian insolvency law reform in 2016 and 2017.
i Insolvency Law Reform Act 2016
The Insolvency Law Reform Act 2016 (Cth) (ILRA) was introduced with a split commencement, with some provisions starting on 1 March 2017 and the remainder starting on 1 September 2017. The ILRA makes a number of amendments to the Act, Bankruptcy Act 1966 (Cth) (Bankruptcy Act) and other pieces of legislation, including the insertion of:
- a a new Schedule 2 into the Act, known as the Insolvency Practice Schedule (Corporations), which is designed to: (1) regulate persons registered as liquidators; and (2) regulate external administrations consistently and to give greater control to creditors; and
- b Schedule 2 into the Bankruptcy Act, known as the Insolvency Practice Schedule (Bankruptcy), which is designed to: (1) regulate persons registered as bankruptcy trustees; and (2) regulate the administration of regulated debtors' estates consistently and to give greater control to creditors.
A number of other legislative instruments have also been introduced to give full effect to the ILRA, namely the:
- a Insolvency Practice Rules (Corporations) 2016, which provides a range of rules regarding the external administration of companies and the registration and discipline of external administrators;
- b Insolvency Practice Rules (Bankruptcy) 2016, which provides a range of rules regarding the external administration of private individuals and the registration and discipline of bankruptcy trustees;
- c Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016, which amends the Bankruptcy Regulations 1996 (Cth), Corporations Regulations 2001 (Cth) and other relevant regulations consequential on the Insolvency Practice Rules. This instrument also provides for the partial delay of certain corporate law amendments under the ILRA;
- d Insolvency Law Reform (Transitional Provisions) Regulation 2016, which provides for the partial delay of certain personal insolvency amendments under the ILRA; and
- e Corporations (Fees) Amendment Regulation 2016, which allows for the change of fees required due to the Insolvency Practice Rules (Corporations) 2016.
Although the ILRA and Insolvency Practice Rules (Corporations) 2016 do not make wholesale changes to Australia's corporate insolvency laws, they will complicate the day-to-day operation of external administrations and bolster creditor information rights.
On 3 May 2017, the federal government released further draft legislation of amendments to the Act and Bankruptcy Act to refine aspects of the ILRA. Public submissions regarding that draft legislation closed on 17 May 2017.
ii Safe harbour and ipso facto reforms
On 1 June 2017, following an extensive public consultation on draft legislation, the government introduced the Treasury Laws Amendment (2017 Enterprise Incentives No. 2 Bill) 2017 (the Bill) into the Federal Parliament. The Bill contains two major reforms to Australia's insolvency laws:
- a a new safe harbour from civil liability for insolvent trading for directors seeking to restructure financially distressed or insolvent companies (safe harbour provisions); and
- b restrictions on the enforcement of certain ipso facto rights (ipso facto provisions).
The Bill was passed by the House of Representatives (after a third reading) on 22 June 2017. The Senate referred the provisions of the Bill to the Senate Economics Legislation Committee, whose report, tabled on 8 August, recommended that the Bill be passed unamended.
Safe harbour provisions
The Bill introduces a new Section 588GA into the Act, which provides that Section 588G(2) of the Act (i.e., the provision that makes directors liable for debts incurred by a company whilst it is insolvent) will not apply if, after starting to suspect the company may become or be insolvent, the director starts developing one or more courses of action that are ‘reasonably likely to lead to a better outcome for the company' than the immediate appointment of an administrator or liquidator to the company.
In determining whether a course of action is ‘reasonably likely to lead to a better outcome for the company', the Bill provides that regard may be had as to whether the director:
- a has properly informed himself or herself of the company's financial position;
- b is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts;
- c is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
- d is obtaining advice from an appropriately qualified entity who has been given sufficient information to provide appropriate advice; or
- e is developing or implementing a plan for restructuring the company to improve its financial position.
Accordingly to the explanatory memorandum, ‘reasonably likely' requires that there is a chance of achieving a better outcome that is not fanciful or remote, but is ‘fair', ‘sufficient' or ‘worth noting'.
It is important for directors to appreciate that:
- a the safe harbour provisions do not provide protection in respect of all debts. The provisions only covers debts that are:
• incurred directly or indirectly in connection with any such course of action. According to the explanatory memorandum this would include ordinary trade debts incurred in the usual course of business as well as debts taken on for the specific purpose of affecting a restructure (e.g., fees of a professional turnaround adviser); and
• incurred during the period commencing at the time the director starts to develop one or more courses of action after starting to suspect that the company may become or be insolvent (start time) and ending at the earliest of the following times: (1) the end of a reasonable period after the start time, if the director fails to take any such course of action within that reasonable period; (2) when the director ceases to take any such course of action; (3) when any such course of action ceases to be reasonably likely to lead to a better outcome for the company; and (4) the appointment of an administrator or a liquidator to the company;
- b further, directors cannot rely upon the safe harbour provisions:
• in respect of a particular debt if at the time the debt is incurred, the company is failing to pay employee entitlements when due or comply with its tax reporting obligations, and that failure amounts to less than substantial performance or constitutes one of two or more failures by the company to do any or all of those matters during the preceding 12 months; or
• in respect of any debt if after the debt is incurred, the director substantially fails to comply with certain statutory duties to provide information to any controller, administrator or liquidator that is subsequently appointed to the company, unless, in each case the court orders otherwise, in circumstances where the court is satisfied that the failures were due to exceptional circumstances or that making such orders is in the interests of justice;
- c directors will not be permitted to rely upon company books and information in insolvent trading proceedings, if they have previously breached their statutory duties to provide these materials to a controller, administrator or liquidator that is ultimately appointed to the company. This requirement is designed to ensure that where a company eventually goes into controllership, administration or liquidation, the directors do not try to prevent the controller, administrator or liquidator from investigating the company's activities, by withholding books or information about the company. This rule will not apply if:
• the director did not possess the books or information at the relevant time and there were no reasonable steps the director could have taken to obtain the books or information;
• the controller, administrator or liquidator (as relevant) failed to inform the director of the effect of failing to comply with any request for materials; or
• the court so orders, where the court is satisfied that the failure was due to exceptional circumstances or making such an order is in the interest of justice.
The Bill also provides a safe harbour for holding company liability for the insolvent trading of a subsidiary.
The safe harbour provisions will commence the day after the Bill receives Royal Assent and will apply in relation to debts incurred at or after that commencement.
Ipso facto provisions
If enacted, the Bill will introduce two kinds of stay provisions:
- a an automatic stay on the enforcement of certain ipso facto rights; and
- b stay orders in respect of a potentially broader range of rights (e.g., termination for convenience rights), where a court is convinced such rights are or might be exercised or there is a threat that they might be exercised solely because the company has entered administration or a scheme of arrangement.
The Bill will introduce new provisions into the Act that create an automatic stay on the enforcement of contractual rights that are triggered merely because:
- a the company has publicly announced that it will apply for, has in fact applied for or become subject to, a scheme of arrangement;
- b a receiver or other managing controller has been appointed to the whole or substantially the whole of the company's property;
- c an administrator has been appointed to the company; or
- d the company's financial position or any other reason prescribed in the regulations, where one of the above-mentioned circumstances has occurred.
The automatic stay will operate during the following stay periods:
- a in the case of a scheme designed to avoid the company being wound up in insolvency, during a period that starts when the company publicly announces that it will or otherwise does in fact, apply to hold a scheme meeting under Section 411, and ends:
• if the company fails to make the announced application - at the end of three months after the announcement, or such longer period as is ordered by a court;
• when the application is withdrawn or rejected by the court; or
• when the scheme ends, unless this occurs because the company is to be wound up, in which case when the company's affairs have been fully wound up;
- b in the case of a receivership or managing controllership, during a period that starts when the receiver or managing controller is appointed and ends when the receiver's or managing controller's control ends or such later time as is ordered by the court;
- c in the case of an administration, during a period that starts when the company comes under administration and ends the latest of:
• when the administration ends;
• if an application is made before the administration ends to extend the period of the stay - when the court so orders; or
• if the administration ends because of a resolution or order for the company to be wound up - when the company's affairs have been fully wound up.
In addition, and notwithstanding the above-mentioned stay periods, the Bill also makes provision for rights to remain unenforceable indefinitely against the company (i.e., beyond the expiry of the relevant stay period), where the reason for seeking to enforce the right is:
- a the company's financial position before the end of the stay period;
- b the fact that the company experienced before the end of the stay period any of the above-mentioned circumstances that could or did trigger the automatic stay in the first place; or
- c a prescribed reason relating to the circumstances in existence during the stay period.
If enacted, these particular provisions (namely Section 415D(4), 434J(4) and 451E(4) of the Act) will be very significant, as they will effectively make the automatic stay permanent. In the authors' view, the reason the Bill's drafters have approached the legislation this way (i.e., introduced an automatic stay that only applies for a defined period; while simultaneously introducing a provision that makes the same rights unenforceable indefinitely) is to ensure the legislation had a concept of a stay period, which could then be used to delimit the concomitant stay on the company's ability to require new advances of money (discussed further below).
That being said, companies should be aware that:
- a The automatic stay will not apply to rights arising under all contracts. The stay will not apply to:
• rights arising under contracts, agreements or arrangements entered into before the commencement of the ipso facto provisions (see below for commencement details);
• rights arising under contracts entered into after the court approves the scheme, the receiver or managing controller is appointed or the company comes under administration (as relevant);
• other types of contracts or contractual rights prescribed in the regulations or by ministerial declaration; or
• rights where the scheme administrator, receiver or managing controller or administrator (as relevant) has consented in writing to the enforcement of the right.
- b Courts will have the power to lift the automatic stay in respect of certain ipso facto rights if satisfied that doing so is in the interests of justice or (in the case of a scheme only) the relevant scheme is not for the purpose of the company avoiding being wound up.
- c Contractual counterparties cannot be required to provide the company with additional credit or money during a period where one or more of the counterparty's own rights cannot be enforced against the company by reason of the automatic stay. as noted above and notwithstanding the comment above regarding the automatic stay ‘effectively' being made permanent, in the authors' view, the drafters of the legislation do not intend this concomitant stay on the company's ability to demand additional credit to extend beyond the expiry of the relevant and above-mentioned stay periods.
The Bill also provides that courts will be able to make orders that for a period of time specified in the order, one or more rights under a contract may only be enforced with the leave of the court or on terms imposed by the court (stay orders), if the court is satisfied that the relevant right:
- a is being exercised;
- b might be exercised; or
- c there is a threat that it might be exercised, merely because the company has experienced any of the circumstances which could or did trigger an automatic stay. It is also possible for a court to make interim orders before deciding an application for a stay order.
While it is clear that stay orders may not be granted in respect of rights specifically carved out from the operation of the automatic stay (see discussion above), as there are no other limitations on the types of contractual rights that may be the subject of stay orders, it appears to be the drafters' intention that stay orders will be able to be made in respect of a potentially broader range of contractual rights than the automatic stay. In this regard, we note the drafting note within the Bill that states that a stay order could be sought, for example, in respect of a right to terminate for convenience.
If enacted, the ipso facto provisions will commence on a date to be fixed by proclamation. However, if the provisions have not commenced by 30 June 2018 or six months after the Bill receives Royal Assent (whichever is later), the ipso facto provisions will commence on the day after that later date.
The Bill also makes some additional amendments to the Act, to ensure, for example that the automatic stay will not interfere with the right of a substantially secured creditor to appoint a receiver during its 13-business-day decision period following the appointment of administrators (discussed above).
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i Arrium Administration and Mol-Cop sale
One of the most notable collapses in recent times has been that of Arrium Ltd (Arrium). 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 a 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. However, not all companies in the group went into administration. At the time of its collapse, the wider Arrium group included entities located in Australia, Canada, the United States, Mexico, Peru, Chile, Hong Kong and Indonesia that carried on the group's highly successful mining consumables business known as the ‘Moly-Cop' business.
The administrators sought to reduce the group's debt through a number of asset sales. Arrium's grinding products business, Moly-Cop, not in administration, was sold to US private equity firm American Industrial Partners forUS$1.23 billion, completing in the first few days of 2017. This multi-jurisdictional divestment, which included a complex restructure with 65 steps to separate Moly-Cop from Arrium, was a successful outcome after the highly competitive, concurrently run dual-track sale process and IPO (with a trade sale being finally adopted). The multi-faceted, cross-border transaction was coordinated across teams of lawyers from Gilbert + Tobin (lead counsel) as well as lawyers in the US, Canada, Mexico, Chile and Peru.
The remaining Arrium group of companies, including the Whyalla steelworks and east coast steel distribution business, remains subject to a competitive trade sale process with the sale expected to be announced in late June 2017.
ii Emeco recapitalisation and three way merger
One of the largest solvent reconstructions to occur over the past year has been the recapitalisation of mining services rental equipment provider Emeco Holdings Limited (Emeco) and its three way merger with Orionstone and Andy's Earthmovers. This complicated transaction involved the following notable aspects:
- a Noteholder and creditor claims held against Emeco, Orionstone, and Andy's Earthmovers were exchanged for senior secured notes due 2022 with a face value of approximately A$465 million and approximately 44 per cent of issued capital in Emeco, with approximately 6 per cent of additional shares on issue provided to major noteholder Black Diamond. The exchange was effected by way of a creditors' scheme of arrangement, which successfully received court sanctioning under Section 411 of the Corporations Act 2001 (Cth) and involved the restructure of New York law governed notes.
- b Emeco's merger with Orionstone was effected by way of exchange of 100 per cent of Orionstone shares for approximately 10 per cent of issued capital in Emeco. Similarly, Emeco's merger with Andy's Earthmovers was effected by way of exchange of 100 per cent of Andy's Earthmovers' shares for approximately 5 per cent of Emeco's issued capital.
- c Approximately 6 per of Emeco's issued capital was issued to a major holdout noteholder of Emeco, Black Diamond, whose support was crucial to the success of the creditor scheme through which the transaction was effected.
- d Complex security arrangements for the merged group with a dual security trust structure and security over assets in Australia, Chile, Canada and the US.
- e Additional funding for Emeco was achieved through a non-renounceable fully underwritten A$20 million rights offer and the introduction of an A$65 million revolving loan facility following cancellation of commitments under Emeco's asset backed loan due to expire in December 2017.
As a mining services equipment rental business, Emeco has had significant exposure to fluctuating commodity pricing, particularly on coal and copper. The company also trades in a market environment where there is an oversupply of mining services equipment rentals. Even as commodity pricing has recovered miners have remained cautious attitudes towards supply expansion and committing significant capital expenditure to greenfield projects. Importantly for Emeco, the merger with Orionstone and Andy's Earthmovers reduced Emeco's fleet age, which presented the company with the opportunity to achieve lower maintenance capital expenditure costs and achieve much needed margin breathing space.
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 (Cth).16 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, the key item to watch out for over the next 12 months is the introduction of the Bill.
1 Dominic Emmett is a partner and Jessica Arscott is a senior associate 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 There have been two cases challenging the validity of the widely held view that secured creditors are not ‘bound' by a DOCA unless they vote in favour of it. In Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd  WASCA 95 and Re Bluenergy Group Limited  NSWSC 977, it was held that a DOCA can (if so expressed) have the effect of extinguishing the debt of a secured creditor that did not vote in favour of the DOCA pursuant to s.444D(1) of the Act. However, this extinguishment is subject to the preservation of the secured creditor's ability (by virtue of s.444D(2) of the Act) to realise or deal with its security in respect of its proprietary interest in the secured property and to the extent that its debt was provable and secured assets were available at the date that debt would otherwise be released under the DOCA, without requiring that that debt be preserved into the future or for other purposes.
11 See footnote 10
12  WASC 157.
13 Spies v. the Queen  HCA 43.
14 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).
15 Section 588V of the Act.
16 Section 8.