I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
Australia has experienced soft economic conditions over the past few years despite record low interest rates. In this respect, while it has been over 27 years since Australia's last technical recession (being in the quarter ending June 1991), the country is effectively still recovering from the aftermath of the global financial crisis. Accordingly, while commentators routinely refer to 'green shoots' appearing, economic conditions are generally sluggish. Businesses appear susceptible to economic shocks and vulnerable to increases in interest rates that, based on the current conditions in the United States, may be inevitable. Despite these prevailing factors, debt levels in Australia (particularly for individuals and households) have been increasing, which has until very recently fed a growing housing market. It has only been in the past six to 18 months that the heat has come out of the housing market and prices have plateaued or even slightly decreased, particularly in Sydney and Melbourne.
In the background, the banking landscape in Australia has changed dramatically over the past few years. In the shadow of the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry (the Royal Commission) (currently expected to be completed at the end of 2018), the corporate and institutional banking market has changed, perhaps indefinitely. The key driver of this transformation in banking practice has been the increased media spotlight (both traditional and social media) on banking behaviour. Reputational risks are now at the forefront of banks' minds, and are a prominent concern for management and general counsels. As a result of this, in general, banks are granting more leniency to borrowers and are less inclined to take active steps to 'call in' their loans (i.e., take any enforcement steps or make formal appointments). Instead, they are looking at alternative measures to de-risk their exposures (e.g., by encouraging informal restructures). 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). Some have argued that this is creating a 'moral hazard' risk for the banks' customers. The corollary of this for banks is that they are using this change in focus as an opportunity to reallocate advisor fees to customers. Regardless, this shift in bank behaviour does not appear to be changing any time soon.
Among the backdrop of a changing banking environment, new participants are entering the corporate and institutional lending spaces. This is particularly evident in industries such as property, construction and agriculture where banks are arguably overexposed. Tighter capital adequacy restrictions (through the Basel Accords) and prudential standards and internal risk directives have resulted in banks limiting their exposures to these industries and allowing 'non-traditional' lenders to enter this space. Such lenders include hedge funds, investment banks and alternative capital providers. This has led to the proliferation of more creative financing structures for leveraged transactions such as unitranche facilities (which have traditionally been more popular overseas). A unitranche facility is essentially a combined senior and junior facility with a blended interest rate documented in the one facility document. The move towards such structures has been an interesting development over the past 24 months and may create challenges in the market if any of these deals become distressed.
As a result of the banks' changing risk appetite, and the current banking environment, the secondary debt market has stagnated in recent times. While buyers remain active in Australia and are looking for deal flow, the opportunities to purchase debt have, generally speaking, become more limited. Having said that, on some of the larger and more complex restructures, such as Slater and Gordon and BIS Industries, lenders did trade their debt to enable the ultimate restructure (the eventual driver to sell the debt being the banks' general unwillingness to hold equity in these entities). Thus, given the relative stability of the Australian banking sector and the robust prudential regulations imposed on Australian banks, which provide comfort to those actively trading in the secondary debt market, we expect to see an increase in secondary debt trading if economic conditions worsen.
In respect of recent activity in the market, such as the restructuring of Slater and Gordon and BIS Industries (mentioned above), schemes of arrangement continue to be a popular mechanism for effecting larger and more complex restructures. However, the threat of a formal insolvency process, such as receivership or voluntary administration, is often used as a bargaining tool in restructuring negotiations. Voluntary administration and deeds of company arrangement are still being used more frequently to effect debt-for-equity swaps, particularly at the small to mid-market level. The main driver for restructures of this type is the power given to deed administrators to compulsorily transfer shares with court approval pursuant to Section 444GA of the Corporations Act 2001 (Cth) (the Act) (if the shares have no 'economic' value).
Sectors that have been hit particularly hard in recent times include mining and mining services, retail (increasingly so over the past 12 months) and construction. Increased restructuring activity is expected in each of these sectors 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 continued to result from borrowers breaching financial covenants, failing to meet amortisation payments or an inability to refinance at the end of the facility 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. Often this will result in concurrent appointments where the secured creditor appoints a receiver 'over the top' of a voluntary administrator. Despite this, although receivership appointments have decreased in light of banks' revised approaches to distressed situations, these dual appointments still commonly occur and are and a feature of the Australian restructuring landscape.
Overall, while slower than previous years owing to various external factors, the insolvency and restructuring market continues to throw up surprises. With more and diverse parties entering the lending market, new legislation coming into effect and borrowers susceptible to interest rates rises and other shocks (such as decreases in commodities), the ensuing years could be very interesting in the restructuring and insolvency market in Australia.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Formal procedures
The formal procedures available under Australian law are:
- receivership (both private and court-appointed);
- voluntary administration;
- a deed of company arrangement (DOCA);
- provisional liquidation;
- liquidation (both solvent (members' voluntary liquidation) and insolvent); and
- 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 subject to the security pursuant to which they are appointed, 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 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.2 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 (particularly given a receiver cannot effectively undertake a transaction involving the secured property without a release by, or the consent of, the secured creditor).
There are two ways in which a receiver 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 Act). Generally, a receiver has wide-ranging powers, including the ability to operate the business, borrow against or sell the secured assets. The appointment is normally effected contractually through a deed of appointment and indemnity. By way of the underlying security document, the receiver will be the agent of the debtor company, not the appointing secured party (although this agency relationship will change if a liquidator is appointed to the debtor company, whereby the receiver will become the agent of the 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 relevant) 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 reasonably 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 administration3 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.4 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 into Australian law 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 often been compared with the Chapter 11 process in the United States, but unlike Chapter 11, 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:
- 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.5
There are three ways an administrator may be appointed under the Act:
- by resolution of the board of directors that, in their opinion, the company is, or is likely to become, insolvent;6
- 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;7 and
- 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.8
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 interests,9 and in respect of litigation claims, the 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 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.10
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 the directors 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 as 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 (as noted above).11 This mechanism has been utilised numerous times to effect debt-for-equity restructures including, for example, in Mirabela, Nexus Energy, Channel Ten and Paladin.
Entering into a DOCA requires the approval of a bare majority of creditors both by value and number voting at the second creditors' meeting. In order to resolve a voting deadlock, for example, where there is a majority in number but not in value or vice versa, under Rule 75-115(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) an 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. 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.12 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.
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. 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 a 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. 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 entity.
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 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 to be 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.13 Thus, the basis upon which parties have previously grouped creditors into classes is now a less certain benchmark for class composition in the future.
The outcome of a scheme of arrangement is dependent on the terms of the arrangement or compromise agreed with the creditors. 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, 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 it 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.
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 the whole 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 in the ordinary course of business.
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.14 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),15 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, 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.16
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.17
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.
Under Australian law, transactions will only be vulnerable to challenge when a company enters liquidation. Only a liquidator 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 a 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 including:
- unreasonable director-related transactions;
- unfair preferences;
- uncommercial transactions;
- transactions entered into to defeat, delay or interfere with the rights of any or all creditors on a winding up; and
- 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.
v Insolvent trading
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 levied against the offending director.
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.
III RECENT LEGAL DEVELOPMENTS
i Summary of new laws
On 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill (the 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., safe harbour); and
- restrictions on the enforcement of certain ipso facto rights.
The safe harbour provisions had immediate effect whereas the ipso facto provisions are likely to commence on 1 July 2018 (unless proclaimed earlier).
ii Safe harbour provisions
The TLA Act introduced a new Section 588GA into the Act, which provides that 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'. A director that seeks to rely upon Section 588GA(1) of the Act bears the evidential burden in relation to that matter. That is, providing evidence that suggests a reasonable possibility that the matter exists or does not. The safe harbour protection will not apply in certain circumstances, including where, at the time the debt is incurred, the company has failed to pay employee entitlements or comply with certain reporting or taxation requirements.
In order to assist directors in seeking to ensure they obtain the benefit of the safe harbour protection, the Act lists some indicia for a director to regard when determining whether a course of action is reasonably likely to lead to a better outcome for the company. This includes whether the relevant director is:
- properly informing himself or herself of the company's financial position;
- 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; or
- ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
- obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
- developing or implementing a plan for restructuring the company to improve its financial position.
Upon its enactment, one issue that was identified by commentators was what type of disclosure would be required by companies listed on the Australian Securities Exchange (ASX) entering into the 'safe harbour'. That is, how would such companies comply with their continuous disclosure obligations under the ASX Listing Rules.
Helpfully, the ASX (by way of an update to its guidance note) has expressed a view that reliance on the safe harbour provisions does not necessitate disclosure in and of itself and the safe harbour provisions do not affect any obligation to comply with any continuous disclosure obligations otherwise existing. Therefore, if the facts around a director's reliance on the safe harbour provisions are price-sensitive, it is likely that the ASX would require disclosure in the ordinary course. However, mere reliance on the new provisions is not itself a trigger for disclosure.
To date, there has been no case law providing judicial interpretation of Section 558GA as a defence to insolvent trading, including guidance as to how some of the important concepts and terminology associated with the safe harbour provisions should be applied.
iii Ipso facto provisions
An ipso facto clause is a contractual clause that allows one party to enforce a contractual right, or terminate a contract, upon the occurrence of a particular event; usually upon insolvency or a formal insolvency appointment (e.g., the appointment of a voluntary administrator). Ipso facto clauses can be enforceable against parties to a contract despite the relevant company otherwise continuing to meet and perform their contractual obligations.
By their operation, these clauses can result in value destruction through the disruption of contractual arrangements, making it harder to sell businesses as going concerns and reducing returns. Such provisions also, arguably, limit a company's ability to successfully restructure and recover from financial hardship. This is especially troubling for a company that is short on cash flow, but otherwise asset rich, that could lose a major supplier or client. This loss of value is not limited to the company itself, but can adversely affect other stakeholders such as employees and creditors.
The TLA Act introduces reforms to the application of ipso facto provisions that aim to allow companies to continue trading with existing contractual arrangements and facilitate recovery following the events described below. By extension, the reforms will seek to increase investment certainty, retain company value and encourage equitable outcomes for all stakeholders.
The TLA Act introduces an 'automatic stay' into the Act on the enforceability of ipso facto provisions that allow a contract to be terminated or altered owing to:
- a company entering into a scheme of arrangement;
- the appointment of a receiver or controller to all or substantially all of the company's assets;
- the appointment of an administrator to a company; or
- the appointment of a liquidator immediately following administration or a scheme.
The automatic stay will not apply retrospectively (i.e., for agreements entered into prior to the TLA Act coming into force). In addition, the automatic stay does not explicitly apply to receiver or controller appointments that are not over all or substantially all of the company's assets, entry into a deed of company arrangement or liquidations which do not immediately follow an administration or scheme.
Under the proposed new Sections 415E and 451F of the Act, a court may lift the automatic stay in respect of certain ipso facto clauses if it is satisfied that doing so is in the interests of justice or where a relevant scheme of arrangement is found to not be for the purpose of avoiding winding up.
The automatic stay will not apply to ipso facto rights attached to financial products that are necessary for their provision, in agreements made after the commencement of the formal restructure or to other types of contracts set out in regulation or declared by the minister. The proposed Sections 415F and 451G will allow the courts to make an order requiring leave of the court, or the satisfaction of other terms, before broader contractual rights are enforced (i.e., termination for convenience).
The sections become operative where the court is satisfied that a contractual right is (or might be) exercised, or if there is a threat of its exercise merely because a company is under administration, subject to a Section 411 application or a scheme of arrangement.
'Stay orders' may be granted with respect to broader rights not covered by the automatic stay carve-out – but may only be granted upon application of the administrator, if an application is included in a Section 411 application or if such an application is made by an administrator of a scheme of arrangement.
Neither the automatic stay nor stay orders will prevent secured creditors from appointing a receiver during the decision period under Section 441A of the Act or enforcing security interests over perishable goods or secured creditors or receivers from continuing enforcement action that commenced before administration.
On 16 April 2018, the government released for public consultation draft Regulations and a Ministerial Declaration that prescribe certain contract types and rights as being exempt to the automatic stay.
The Ministerial Declaration precludes certain rights from the automatic stay in the proposed new Sections 415D, 434J and 451E. Such rights include: (1) a right to terminate under a standstill or forbearance arrangement; (2) a right to change the priority in which amounts are to be paid under a contract, agreement or arrangement; and (3) a right of set-off, combination of accounts or a right to net balances or other amounts.
Similarly, the Regulations (which were passed on 21 June 2018) list contract types, agreements or arrangements that would be precluded from the application of the new Automatic Stay provisions. Among the agreement types listed under the proposed Regulation 5.3A.50(2) are: (1) contracts, agreements or arrangements that are a licence or permit issued by federal, state or local government; (2) contracts that are derivatives and contracts for the underwriting of an issue or sale of securities or financial products; and (3) contracts under which a party is or may be liable to subscribe for, or to procure subscribers for, securities or financial products.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i Slater and Gordon scheme of arrangement
The highest profile restructure for a publicly listed company in the Australian market in 2017 was the successful restructure of Slater and Gordon Limited (S&G).
Gilbert + Tobin acted for the secured lender syndicate on all aspects of the restructure, which was completed by way of two inter-conditional creditor schemes of arrangement implemented on 22 December 2017.
The key aspects of the restructure and recapitalisation of the S&G Group were as follows:
- securing resolution of shareholder class actions (both brought and threatened) against S&G and unusually, utilising a scheme to achieve this outcome;
- limiting the claims that could be brought against third parties by shareholder claimants in a manner that ensured that there are no future adverse financial consequences for S&G or its directors;
- the senior scheme and the shareholder claimant scheme were interconditional;
- bifurcation or separation of the company's Australian and European operations including transition and separation arrangements;
- introduction of A$90 million in super senior working capital facilities (split A$65 million across the Australian operations and the GBP equivalent of A$25 million across the UK and Malta operations); and
- S&G's senior lenders took 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.
The restructure and recapitalisation of the Slater and Gordon Group created a stable and solid platform for Slater and Gordon to grow and succeed in its future operations.
ii Paladin restructure through a deed of company arrangement
Another interesting restructure of a listed company in the calendar year 2017 and early 2018 was the restructure of Paladin Energy Limited (Paladin). Paladin is an Australian listed company with substantial uranium and mining assets in Namibia, Malawi, Canada and certain Australian states. It was placed into administration in July 2017 after one of its major customers, Electricité de France (EDF) advised Paladin it was not prepared to enter into a standstill agreement and required repayment of US$277 million under its long term supply agreement with the company.
Gilbert + Tobin advised an ad hoc committee of Paladin's bondholders on the restructure, undertaken by way of a DOCA that provided for the extinguishment of two major claims against the company (EDF's US$277 million claim, along with the US$378 million claim of two tranches of Paladin's bonds), an underwritten US$115 million high-yield secured note offering, a court approved transfer of 98 per cent of the issued capital of the company to those holding those extinguished claims and new investors, acquisition of the secured facility to the group and a change of the board of directors.
The outcome demonstrates the flexibility of DOCAs to effect a restructure and recapitalisation and will again 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.
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).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.
VI FUTURE DEVELOPMENTS
While the Royal Commission is ongoing, and in the context of a very low interest rate environment, it is likely to be a subdued year for restructures in 2018. 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 (e.g., mining, mining services and retail), it would not take much for the needle to turn. We also expect to see a return to banks trading their debt in the near term (particularly after the Royal Commission), and we consider the various overseas participants that are actively present in Australia are here to stay.
While we are of the view that the safe harbour regime will impact voluntary administration appointments at the small to mid-market level, with some directors willing to seek to rely on the safe harbour and trade the company out of its difficulties, in an environment where there are only very few domestic bank-led receiverships, we anticipate the number of voluntary administrations will remain constant.
What will be particularly interesting will be the impact the ipso facto legislation has on restructures. We also envisage further discussion around potential future reforms to our insolvency laws (which may, for example, seek to facilitate pre-packs); however, any additional insolvency and restructuring legislation is extremely unlikely in the 2018 calendar year. In any event, we will be watching with interest.
1 Dominic Emmett and Peter Bowden are partners at Gilbert + Tobin.
2 For the purposes of this chapter, the terms 'receiver' and 'receiver and manager' will be used interchangeably.
3 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.
4 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.
5 Section 435A of the Act.
6 Section 436A of the Act.
7 Section 436B of the Act.
8 Section 436C of the Act.
9 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).
10 Section 439C of the Act.
11 Section 444GA of the Act.
12 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 Section 444D(1) of the Act. However, this extinguishment is subject to the preservation of the secured creditor's ability (by virtue of Section 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.
13 See First Pacific Advisors LLC v. Boart Longyear Ltd  NSWCA 116.
15  WASC 157.
16 Spies v. the Queen  HCA 43.
17 Westpac Banking Corporation v. The Bell Group Limited (In Liq) [No. 3]  WASCA 157 at 920.
18 Section 8.