I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
The Corporations Act 2001 (Cth) (Corporations Act) is the primary legislative reference for, amongst other things, the registration, insolvency and reorganisation of companies incorporated in Australia. In the context of insolvency, the Corporations Act prescribes the manner in which an Australian company enters into a formal insolvency process and how its assets are ultimately distributed amongst creditors.
The legislative framework for personal insolvency is set out in the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), which prescribes the manner in which an individual may enter into a personal insolvency agreement or a formal bankruptcy process. Unlike some other jurisdictions, bankruptcy in the Australian context refers to the insolvency of an individual only.
Notwithstanding that the regulation and rules governing corporate and personal insolvency are set out in two separate and distinct pieces of legislation, the Australian government has recently introduced legislative reform, by way of the Insolvency Law Reform Act 2016 (Cth), intended to align to the extent possible the Bankruptcy Act and the Corporations Act and, where possible, create common rules for both corporate and personal insolvency processes.
For the purpose of this chapter, however, we have focused on the statutory framework and substantive law for corporate insolvency processes only.
The broad aim of insolvency law is to balance the interests of the primary stakeholders in an insolvent estate, these being debtors and creditors. A number of formal procedures are available under the Corporations Act in the event of insolvency. These include: receivership (private and court-ordered); voluntary administration; deeds of company arrangement; provisional liquidation; liquidation (voluntary and involuntary, and solvent and insolvent); and schemes of arrangement (court-sanctioned).
The Australian test for solvency is set out in Section 95A of the Corporations Act, which provides that:
A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
A person who is not solvent is insolvent.
The courts have not applied Section 95A as a rigid rule but rather as a factual question to be determined as a matter of commercial reality and in light of all the surrounding circumstances. The Section has been applied in a wide and varied manner.
Despite the broad reading of Section 95A, courts have highlighted certain key issues that must be considered when faced with the question of assessing a company's solvency at a particular point in time. These key issues relate to the 'cash flow' test and prospective considerations.
The position in Australia is that the key test of solvency is the cash flow test, rather than the 'balance sheet' test (and this is clear from the wording of the legislation). That is, a company must have sufficient cash flow available to it in order to meet its debts as and when they fall due. The balance sheet analysis is not, however, immaterial as the courts have held that it is often relevant in providing background and context for the proper application of the cash flow test.2
There has been a historical view propounded by some that Australia's insolvency regime has focussed more on punitive measures rather than the rehabilitation of the debtor company. This is in contrast to other jurisdictions3 where it is considered that those insolvency laws better promote restructuring, innovative reorganisations and value preservation. In order to seek to address some of these perceived issues, on 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill (TLA Act) received Royal Assent. The TLA Act brought into operation two fundamental changes to Australia's insolvency laws:
- a new safe harbour from civil liability for insolvent trading for directors seeking to restructure financially distressed or insolvent companies (i.e., a 'safe harbour'); and
- a legislative stay on the enforcement of certain ipso facto rights (i.e., an 'Automatic Stay' on the enforcement of ipso facto rights).
The safe harbour provisions commenced in September 2017 through the introduction of Section 588GA into the Corporations Act. Under this new Section, a director will not be liable for debts incurred by a company while it is insolvent if, 'at a particular time after the director starts 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'.4
The new safe harbour provisions are not intended to protect directors against more general breach of duty claims. A director will not be able to rely on the new safe harbour provisions where, at the time the debt is incurred, the company has failed to pay employee entitlements or comply with certain reporting or taxation requirements.
The second new development, the introduction into the Corporations Act of an 'automatic stay' on the enforceability of ipso facto provisions, came into effect from 1 July 2018. Broadly, the automatic stay operates to preclude a party from enforcing certain rights (including terminating a contract) simply because the company has entered into certain formal insolvency processes.
The automatic stay will not, however, apply to:
- receiver or controller appointments that are not over the whole or substantially the whole of the company's assets;
- entry by the company into a deed of company arrangement (DOCA);
- liquidations, other than those immediately preceding a voluntary administration or where the company is fully wound up in connection with a scheme of arrangement;
- rights or self-executing provisions arising under contracts entered into prior to 1 July 2018; and
- certain contract types and rights prescribed in the Regulations and Ministerial Declaration as being exempt from the Automatic Stay.
Pursuant to the new Sections 415E, 434K and 451F of the Corporations Act, a court may lift the automatic stay if the court is satisfied that it is in the interests of justice to do so or where a relevant scheme of arrangement is found to not be for the purpose of avoiding being wound up in insolvency.
iii Insolvency procedures
The formal insolvency procedures available under Australian law are:
- receivership (both private and court-appointed);
- voluntary administration;
- a DOCA;
- provisional liquidation;
- liquidation (both solvent (members' voluntary liquidation) and insolvent); and
- a court-sanctioned scheme of arrangement between creditors and the company.
For all insolvency processes, other than for a members' voluntary liquidation, the individual appointed must be a registered liquidator.
The main role of a receiver is to take control of the assets of the company (subject to the security pursuant to which the receiver is appointed) and realise those assets for the benefit of the secured creditor. One or more individuals may be appointed as a receiver or a receiver and manager of the assets. Despite some historical differences, in practice, it is difficult to distinguish between a receiver and a receiver and manager.5 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.
A receiver can be appointed to a debtor company in the following manner: (1) pursuant to the relevant security document granted in favour of the secured creditor when a company has defaulted and the security has become enforceable; or (2) pursuant to an application made to the court.6 The latter is far less common and, as such, this chapter focuses on privately appointed receivers.
The security document itself will set out the secured party's rights to appoint a privately appointed receiver (usually by way of a deed of appointment and indemnity). Once appointed, the receiver will be the agent of the debtor company (not the appointee) and will have wide-ranging powers, including the ability to operate the business, sell assets and/or borrow against the secured assets. Those powers are set out in the underlying security document and are supplemented by the receiver's statutory powers set out in Section 420 of the Corporations Act.
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 relevant) if he or she is appointed to oversee the whole or substantially the whole of the assets of a company. Alternatively, and depending on the financial circumstances, a receiver may immediately engage in a sale process. When engaging in a sale process, a receiver has a statutory obligation to obtain market value or, in the absence of a market, the best price reasonably obtainable in the circumstances. This obligation is enshrined in Section 420A of the Corporations Act. It is this duty that has presented the most significant stumbling block to the adoption of pre-packaged restructuring processes through external administration7 that have been seen in, for example, the UK market (colloquially referred to as 'pre-packs'). This is because of the inherent concern that a pre-pack that involves a sale of any asset without testing against the market could be seen as a breach of the duty under Section 420A.8
Having said that, pre-packs are becoming more common in circumstances where time and funding is short and/or the value of that which is being sold is clearly below the value of the secured debt or a sale process with integrity has been conducted prior to the receiver's appointment.
Once a receiver has realised the secured assets and distributed any net proceeds to the secured creditor (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 into Australian law in 1993. Voluntary administration, unlike receivership for example, is entirely a creature of statute. The purpose and practice is outlined in Part 5.3A of the Corporations Act. While voluntary administration has often been compared to the Chapter 11 process in the United States, it is not a debtor-friendly process like Chapter 11. In a voluntary administration, the administrator and creditors control the final outcome to the exclusion of management and members.
The object of Part 5.3A is to:
- maximise the chances of the company, or as much as possible of its business, to continue in existence; or
- 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.9
There are three ways an administrator may be appointed under the Corporations Act:
- by resolution of the board of directors that, in their opinion, the company is, or is likely to become, insolvent;10
- 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;11 and
- a secured creditor that is entitled to enforce security over the whole or substantially the whole of a company's property may, in writing, appoint an administrator if the security interest is enforceable.12
An administrator (often called a 'voluntary administrator') has wide powers to 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 interests13 and in respect of litigation claims. This moratorium 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 that are critical to its outcome of it. Once appointed, an administrator must convene the first meeting of creditors within eight business days. At this first 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 to creditors. 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 administration14 (this is rare as it would only occur where the company is solvent).
The administration will terminate following the outcome of the second meeting (i.e., either by progressing to liquidation, entry into a DOCA or returning the business to the directors to operate as a going concern (although this is rare)). When the administration terminates, a secured creditor that was previously estopped from enforcing a security interest due to the statutory moratorium becomes entitled to take steps to enforce that security interest unless the termination is due to the implementation of a DOCA approved by that secured creditor.
As noted above, the Automatic Stay on ipso facto provisions (referred to earlier in this chapter) will not apply where the company enters into a DOCA. If the creditors of the company resolve at the second meeting that the company should be wound up, the Automatic Stay will apply.
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 as the rights and obligations of the creditors and company will differ from those under administration.
DOCAs are flexible. 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. They may also involve the issuance of shares (subject to certain conditions), 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.15
In order for a debtor company to enter into a DOCA, a bare majority of creditors both by value and number voting at the second creditors' meeting must vote in favour of the company executing a DOCA. Where there is a voting deadlock, for example where there is a majority in number but not in value or vice versa, pursuant to Rule 75-115(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth), the chairperson of the meeting (usually the administrator) may exercise a casting vote in order to pass, or not pass, a resolution. The right to exercise a casting vote is not mandatory and cannot be used where the resolution relates to the administrator's remuneration.
Once executed, 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' meeting, and typically only those who voted in favour of the DOCA at the second creditors' meeting are bound by its terms.16 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 stated aims it will terminate. If a DOCA does not achieve its objectives, or is challenged by creditors, it may be terminated by the court or in accordance with its terms.
A provisional liquidator may be appointed by the court in a number of circumstances. The most commonly used grounds include:
- where an irreconcilable dispute at a board or shareholder level has arisen that affects the management of the company; or
- 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 if there is a risk to the assets of a company prior to a company formally entering 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, and 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 a company are wound up and its business and assets are realised. 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 and it converts to a creditor's voluntary liquidation.
Creditors may also 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 being made to the court is insolvency, usually indicated by the company's failure to comply with a statutory demand issued by a creditor for payment of a 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 the assets of the company. Most likely, 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 entity.
Scheme of arrangement
A scheme of arrangement is a restructuring tool that sits outside a formal insolvency process; 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 (it requires court approval at two stages). The test for identifying classes of creditors for the purposes of a scheme is that a class should include those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a 'common interest'. Despite this long-standing proposition, recent case law has suggested that courts may be willing to stretch the boundaries of what would ordinarily be considered the composition of a class and, in doing so, may agree to put creditors in classes even where such creditors within the class appear to have objectively distinct interests.17 Thus, the basis upon which parties have previously grouped creditors into classes is now a less certain benchmark for class composition moving forward.
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 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, uncertainty of implementation, timing issues (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 the court is of the view that the scheme of arrangement is not equitable). These factors explain why schemes of arrangement tend to only be undertaken in large corporate restructures and in scenarios where timing is not fatal to a restructure.
iv Starting proceedings
The Federal Court of Australia and the Supreme Courts of each Australian state and territory have jurisdiction to hear matters relating to the insolvency of a corporation (both civil and criminal offences arising from insolvency proceedings).
Matters pertaining to debt recovery and monetary compensation can also be dealt with by other courts such as district courts, county courts and magistrates' courts within their jurisdictional limits. The judicial institutions have discretion to transfer matters between them if considered appropriate.
It is generally only the Federal Court and the Supreme Courts that have jurisdiction to wind up a company.
Interestingly, two of the more common forms of insolvency process, voluntary administration and receivership, often have no court involvement.
v Control of insolvency proceedings
For administrations and liquidations, the relevant insolvency practitioner has control of the company itself to the exclusion of the directors.
In an insolvent winding up, the members lose any right to management of the company. The liquidator is vested with wide powers of investigation and inquiry as well as the power to recover and gather in and secure the company's property. Liquidation does not interfere with the rights of a secured creditor who is able to retain and enforce the security and recover the full amount for the debt owed.
In a voluntary administration, the creditors control the final outcome to the exclusion of management and members, and ultimately decide on the outcome of the company.
Upon execution of a DOCA, the voluntary administration will terminate and the company will no longer enjoy the benefit of any automatic statutory stay or moratorium prescribed in the Corporations Act. Once the DOCA has been executed, a director's powers are no longer suspended, but they can only exercise their powers consistently with the provisions of the DOCA.
Where the powers granted to a receiver are broadly expressed, as they usually are, the receiver will control the management of the company and its business to the exclusion of the directors.
Following the implementation of a scheme, often an administrator will be appointed (a 'scheme administrator') to implement the terms of the scheme, which role ceases once the scheme is implemented. This is not a requirement under the Corporations Act but is often utilised in large and complex creditors' schemes.
vi Special regimes
As noted earlier in this chapter, the Corporations Act is the primary legislative instrument for insolvency and restructuring in Australia and governs the insolvency proceedings of all companies incorporated in Australia and companies incorporated or possessing separate legal personality in foreign jurisdictions that carry on business in Australia along with building societies, credit unions and managed investment schemes.
The provisions of the Corporations Act do not govern the potential insolvency proceedings for:
- government agencies;
- state or federal corporate bodies; or
- entities created by statute that are not companies.
The individual statutes creating these bodies will normally provide for their dissolution or winding up.
As a general comment, we note that there is no precedent in Australia for a government-owned enterprise becoming insolvent.
The Personal Property Security Act 2012 (Cth) is the primary legislation in Australia that governs personal property security and is therefore an integral part of restructuring and insolvency law in Australia.
vii Cross-border issues
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' (often referred to as the 'COMI') is located. This approach follows the UNCITRAL Model Law on insolvency (Model Law), which was codified into Australian law through the Cross-Border Insolvency Act 2008 (Cth) (Cross-Border Act).
Under Section 581 of the Corporations Act, Australian courts have a duty to render assistance when required by a foreign insolvency court. Receivers do not have the benefit of taking action in foreign jurisdictions that other insolvency administrators have under the Cross-Border Act.18 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.
As above, the Cross-Border Act allows for the recognition of foreign proceedings. The court's power to grant relief appears to also extend to the enforcement of foreign judgments. Furthermore, the Foreign Judgments Act 1991 (Cth) creates a general system of registration of judgments obtained in foreign countries but will only apply to judgments pronounced by courts in countries where, in the opinion of the Governor-General, substantial reciprocity of treatment will be accorded by that country in respect of the enforcement in that country of judgments of Australian courts. While in most cases Australian courts have formally recognised foreign proceedings under Section 581 of the Corporations Act when requested to do so, there have been exceptions. For example, in the case of Yu v. STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (receivers appointed in South Korea)  FCA 680 the Federal Court of Australia was reluctant to grant additional relief as the relief sought would adversely affect any rights that other Australian creditors may otherwise have had, whether under the Corporations Act or otherwise.
An important concept under the Model Law is that of a debtor's COMI. This is because the determination of whether a foreign proceeding should be recognised as a 'foreign main proceeding' or a 'foreign non-main proceeding' depends on the location of the debtor's COMI. This distinction is important because recognition of a foreign proceeding as a 'foreign main proceeding' will automatically lead to a stay of actions of individual creditors against the debtor and of enforcement proceedings concerning the assets of the debtor in all non-main jurisdictions (this is not necessarily the case for a 'foreign non-main proceeding'). Under the Cross-Border Act, there is a rebuttable presumption that a debtor's COMI is its registered office, or in the case of a natural person, his or her habitual residence.
The Model Law provides no guidance on the standard required for COMI determination. It is noted in the explanatory memorandum for the Model Law that this silence was deliberate as the concept of a COMI has been developed through case law. To that end, we note that Australian courts have applied the general test from Re Eurofood IFSC Ltd  Ch 508 when considering whether this presumption has been rebutted, as follows:
The 'centre of main interests' should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.
In addition, the Australian courts will look to and adopt similar reasoning when considering a COMI as similar jurisdictions (such as the bankruptcy courts in the United States) and have equated the concept of COMI with the principle place of business. In considering where the COMI of a debtor or group of companies exists the courts will look at a number of factors, including:
- the location of the debtor's headquarters;
- the location of those who actually manage the debtor;
- the location of the debtor's primary assets;
- the location of the majority of the debtor's creditors or a majority of creditors who would be affected by the case; and
- the jurisdiction whose law applies to most disputes.
II INSOLVENCY METRICS
The banking landscape in Australia has changed dramatically over the past few years. We are presently at the midpoint of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry (Royal Commission) which is currently expected to be completed at the end of 2018. With increased media spotlight (both traditional and social media) on banking behaviour and with reputational risks now at the forefront of banks' minds, in general, banks are granting more leniency to borrowers and are less inclined to take active enforcement steps or 'call in' their loans. Accordingly, formal appointments are often now seen as the least attractive option or 'last resort' in a distressed scenario resulting in a decrease in secured creditor-led enforcement outcomes (i.e., receiverships).
Sectors that have suffered particular distress in recent times include retail (in particular), mining and mining services, property and construction. Increased restructuring activity is expected in each of these sectors in the foreseeable future.
A significant proportion of external administration appointments have continued to result from borrowers breaching financial covenants, not meeting amortisation payments or an inability to refinance at the end of facility terms. In these circumstances, where there are no other options available, directors will invariably opt to appoint a voluntary administrator. Often this will result in concurrent appointments where the secured creditor appoints a receiver 'over the top' of a voluntary administrator. Even though receivership appointments have decreased in light of banks' revised approaches to distressed situations, these dual appointments still occur and are a feature of the Australian restructuring landscape.
Each quarter the Australian Securities and Investment Commission (ASIC) publishes quarterly insolvency statistics outlining the total number of companies which entered into external administration (that is administration, liquidation or receivership) during that quarter and a comparative analysis of the previous quarter and a 12-month comparison.
For the March 2018 quarter, ASIC reported a notional 0.2 per cent increase in external administration appointments against the December 2017 quarter, with a total of 1,813 companies entering into external administration. By contrast, the March 2018 quarterly total was 5.6 per cent higher than the 2017 March quarter being a total of 1,717 companies.
III PLENARY INSOLVENCY PROCEEDINGS
Significant proceedings in the Australian market include the recent restructures of:
- the Bis Industries Group (Bis Group) involving the implementation of two concurrent creditors' schemes of arrangement in respect of debt facilities well in excess of A$1 billion. Significantly, this transaction confirmed the Australian application of the use of 'standstill' schemes of arrangement as well as the ability to use the scheme process to amend lender voting thresholds under finance documentation;
- Slater & Gordon Limited (S&G) (arguably the highest-profile restructure for a publicly listed company in the Australian market in 2017) was achieved by way of two inter-conditional schemes of arrangement resulting in S&G's senior lenders taking control of the S&G Group via a debt for equity swap involving the exchange of 95 per cent of S&G's equity for a reduction of A$636.6 million in senior secured debt owed by S&G. Significantly, this transaction involved resolution of shareholder class actions (both brought and threatened) against S&G and unusually, utilising a scheme to achieve this outcome in a manner that ensured that there are no future adverse financial consequences for S&G or its directors;
- Paladin Energy Limited (Paladin) by way of a voluntary administration followed by a DOCA (approved by Paladin's creditors) involving an extinguishment of certain claims in exchange for the transfer of 98 per cent of the equity from existing shareholders by way of a court application under Section 444GA of the Corporations Act (and without the need for existing shareholder approval – note our above comments regarding Section 444GA of the Corporations Act). The successful outcome demonstrates the flexibility of DOCAs to effect a restructures and recapitalisations and should encourage creditors of listed companies to pursue value-preserving debt-for-equity transactions without the need for shareholder approval, or the need for the 75 per cent in value threshold to be met for each class of creditors as required under a creditors' scheme;
- Ten Network Holdings Limited (Ten) by way of a voluntary administration resulting in a contested bidding process with competing DOCA proposals put forward. A DOCA proposal involving the use of a creditors' trust mechanism (whereby the DOCA completes and converts into a creditors trust enabling the company to come out of insolvency quickly and the creditors release their claims against the company in exchange for a claim as a beneficiary against the trust) and a court application for orders under Section 444GA of the Corporations Act was accepted by creditors. The Paladin and Ten restructures demonstrate the flexibility of DOCAs and the ability of a deed administrator, under Section 44AGA of the Corporations Act, to transfer shares in a company with leave of the court where this is opposed by the owners of the shares. The court will only grant orders under this Section if 'it is satisfied that the transfer would not unfairly prejudice the interests of members of the company'. Such shareholders would not be prejudiced, based on the existing case law, if their shares have no 'economic value'. This provision ensures that existing shareholders are afforded a level of protection and consideration, through the court process, while allowing creditors, or others, to acquire the equity interests through a DOCA when it is fair to do so; and
- the Arrium Group of companies (Arrium Group) by way of a voluntary administration involving the use of holding DOCAs (involving the transfer of assets, operations, employees and future sales proceeds within the Arrium Group) and a 'distribution company' as a preparatory step in contemplation of an asset sale process that involved a dual-track sale process with competing IPO and business sale options. Public examinations have also been initiated with respect to potential future proceedings against directors and other stakeholders.
IV ANCILLARY INSOLVENCY PROCEEDINGS
There have been no significant ancillary insolvency proceedings in the past 12 months.
Recent case law has, however, foreshadowed the prospect that foreign representatives administering international formal processes in Australia (as part of applying for recognition under the Model Law) might be required to make a security payment into court so as to ensure that local courts are kept better informed of any changes in the status of foreign processes.19
The Australian economy has experienced only limited growth over the past few years despite record low interest rates. It feels as if we are still recovering from the aftermath of the global financial crisis.
Further, tightening capital adequacy requirements (through the Basel Accords) and prudential standards, and more conservative approaches to risk, have resulted in banks limiting their exposure to certain industries and allowing 'non-traditional' lenders (such as hedge funds, investment banks and alternative capital providers) to enter certain sectors.
As a result of the changing risk appetite for banks and the current banking environment, activity in the secondary debt market has decreased significantly. While buyers remain active in Australia and are looking for opportunities, distressed situations have, generally speaking, become more limited. Given the relative stability of the Australian banking sector and the robust prudential regulations imposed on Australian banks, we expect to see an increase in secondary debt trading if economic conditions worsen.
With the Royal Commission ongoing and a very low interest rate environment prevailing (as noted above), it has thus been a subdued year for restructures in the calendar year 2018. We expect that to continue for the remainder of the year. However, with the number of new entrants entering the leveraged finance market and operating at the higher end of the risk curve, together with the numerous industries continuing to face structural difficulties (for example, mining, mining services, construction and retail), this is susceptible to change.
With more and increasingly diverse parties entering the lending market, new legislation having just come into effect and borrowers still vulnerable to interest rates rises and other shocks (such as decreases in commodity prices), the ensuing years could be very interesting in the restructuring and insolvency market in Australia.
1 Dominic Emmett and Peter Bowden are partners at Gilbert + Tobin.
2 For further consideration of the cash flow test, see Bell Group Limited (in liq) v. Westpac Banking Corporation [No. 9]  WASC 239.
3 The best example of a liberal insolvency regime is found in Chapter 11 of the US Bankruptcy Code. The UK, Germany and Canada have also reformed their insolvency regimes in an effort to promote financial recovery.
4 See Section 588GA of the Corporations Act.
5 Most security interests will allow for the appointment of either. We use these terms interchangeably in this chapter.
6 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.
7 A pre-pack 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.
8 The regulation of pre-packs in Australia was flagged in the Productivity Commission's Report on Business Set-up, Transfer and Closure that was released to the public on 7 December 2015, although no further steps have been taken at this stage.
9 Section 435A of the Corporations Act.
10 Section 436A of the Corporations Act.
11 Section 436B of the Corporations Act.
12 Section 436C of the Corporations Act.
13 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 and such rights are exercised within the 'decision period' (being 13 business days after the appointment of the administrator).
14 Section 439C of the Corporations Act.
15 See Section 444GA of the Corporations Act. We note that the mechanism under Section 444GA was to effect various 'high profile' debt for equity restructures such as Mirabela, Nexus Energy, Channel Ten and Paladin.
16 There have been two recent 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 Section 444D(1) of the Corporations Act. However, this extinguishment is subject to the preservation of the secured creditor's ability (by virtue of Section 444D(2)) 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.
17 See First Pacific Advisors LLC v. Boart Longyear Ltd  NSWCA 116.
18 Section 8, Cross-Border Insolvency Act 2008 (Cth)
19 See Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v. Rizzo-Bottiglieri-De Carlini Armatori SpA  FCA 153.