The Restructuring Review: Australia
Overview of restructuring and insolvency activity
Australia was not spared the transformative and far-reaching effects of the covid-19 pandemic in 2020. In terms of direct health impact, Australia fared comparatively better than other similarly developed nations, with approximately 30,000 cases of the virus in total as at May 2021.2 The relatively low transmission of the virus is a product, in large part, of Australia's geographic isolation and extremely stringent quarantine policies.
The Australian government was also quick to react to the potential economic impact of the virus. Beginning in March 2020, overseas travel was curtailed and many businesses were locked down, with the consequence that a huge swath of business ground to a halt and consumer confidence plummeted. In order to mitigate against the dire economic consequences wrought by the pandemic, the Commonwealth government moved quickly, passing in early April 2020 the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) and Coronavirus Economic Response Package Omnibus (Measures No. 2) Act 2020 (Cth), along with a number of ancillary regulations and rules.
The legislative response to the pandemic introduced a series of new terms into the Australian lexicon. The 'JobKeeper' programme – the Commonwealth government's signature pandemic policy – was introduced as a wage subsidy available to certain businesses that experienced a downturn in revenue because of covid-19, allowing those businesses to claim A$1,500 (gross) a fortnight. JobKeeper, which ended on 28 March 2021, was widely hailed as a success, with the programme allowing many businesses to avoid widespread layoffs of employees. In concert with JobKeeper, the 'JobSeeker' programme replaced previous welfare programmes for those seeking employment, and the 'JobMaker' scheme offered businesses incentives to take on additional young employees. These programmes, though largely successful in avoiding unprecedented increases in unemployment, have come at a cost, estimated at over A$90 billion.3
The combination of economic stimulus and relatively successful covid-19 suppression meant that Australia's economy did not suffer a sustained depression in the wake of the pandemic. The June 2020 quarter saw Australia's first technical recession in over 30 years, with the economy contracting 7 per cent, but this was followed by strong rebounds in the September and December 2020 quarters, which saw 3.4 and 3.1 per cent growth, respectively.4 Similarly, JobKeeper was successful in avoiding widespread and sustained unemployment, with the seasonally adjusted unemployment rate peaking at 7.5 per cent in June 2020 before declining back to 5.6 per cent in March 2021.5
The Commonwealth's legislative response to covid-19 also included a series of broad measures aimed at limiting the number of insolvencies arising from the economic turmoil caused by the pandemic. In particular, between March 2020 and 1 January 2021, a temporary moratorium was imposed that:
- increased the threshold by which creditors could issue a statutory demand from A$2,000 to A$20,000;
- increased the time by which companies had to respond to a statutory demand from 21 days to six months; and
- provided relief for directors and holding companies from any civil or criminal liability for insolvent trading for new debts incurred during which a company trades while insolvent, provided that the debt is incurred in the ordinary course of the company's business.
By both increasing the minimum debt required and increasing the time in which a creditor had to comply with a statutory demand, the Commonwealth moratorium vastly reduced the number of insolvency appointments in 2020: overall, the number of companies which appointed external administrators in 2020 fell to its lowest level in almost two decades, with an almost 50 per cent year-on-year reduction in the September 2020 quarter alone. This lower number of insolvency appointments has continued (despite the expiry of the moratorium) into 2021, with fewer appointments year-on-year in January to March 2021.6
The combined effect of the temporary moratorium on statutory demands and massive economic stimulus raised fears that there were a high number of companies that had been temporarily propped up during 2020 but were otherwise insolvent. Indeed, in June to August 2020, the deferred SME monthly loan repayments amounted to over A$50 billion, which was over 16 per cent of all SME loans.7 However, the expiry of the moratorium (as yet) has not spurred a 'tidal wave' of insolvencies, with January to March 2021 seeing fewer appointments than in 2020.8
In December 2020, the Commonwealth passed the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) which amended the Corporations Act 2001 (Cth) (the Act) to implement, from 1 January 2021, entirely new restructuring and liquidation processes for companies with total liabilities under A$1 million. Crucially, the new restructuring process contemplates a shift towards a debtor-in-possession model, with the company's directors retaining some control over the company's usual business dealings. This is a marked shift away from the existing voluntary administration framework, whereby directors cede control of a company's affairs to administrators upon appointment.
As with previous years, the authors anticipate that schemes of arrangement will continue to be a popular mechanism for effecting larger and more complex restructuring. While formal appointments (i.e., of liquidators and administrators) may be increasingly uncommon, they are often used as leverage against debtors in restructuring negotiations. Voluntary administration and deeds of company arrangement continue to be frequently used in debt-for-equity swaps, particularly at the small to mid-market level. The main driver for restructurings of this type is the power given to deed administrators to compulsorily transfer shares with court approval pursuant to Section 444GA of the Act (if the shares have no economic value).
The insolvency and restructuring market will continue to develop and be shaped by the post-pandemic Australian and global economy. The authors anticipate that the sustained consequences from the pandemic will define the coming years and will provide novel challenges for all insolvency and restructuring practitioners in Australia.
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;
- deeds of company arrangement (DOCA);
- debt restructuring for SMEs (i.e., companies with liabilities of under A$1 million);
- provisional liquidation;
- liquidation (both solvent (members' voluntary liquidation) and insolvent, as well as the new, 'simplified' process for SMEs with liabilities of under A$1 million); and
- court-sanctioned schemes of arrangement between creditors and the company.
For receivership, voluntary administration, DOCA, liquidation and the SME restructuring process, 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.9 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 that 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 and to 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).
The Act imposes an automatic stay on the ability of contractual counterparties to enforce ipso facto provisions that allow the contract to be terminated or altered by reason of an appointment of receiver to all (or substantially the whole) of the company's property.10
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 administration11 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.12 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 are 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.13
- 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;
- 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 that the company is, or is likely to become, insolvent;14 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.15 The Act imposes an automatic stay on the ability of contractual counterparties to enforce ipso facto provisions that allow the contract to be terminated or altered by reason of an appointment of a voluntary administrator.16
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,17 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. With respect to leases, in addition to the moratorium on enforcement, an administrator can apply to court to extend the rent-free period prescribed in the Act, ranging from a week to a month, with the effect of the administrator further limiting any personal liability for rent for the relevant period.18 Further, while the Act does not permit an administrator to dispose of property that is subject to a security interest or is owned by another party; an administrator may make such a disposition after obtaining a court order to that effect.19
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 this 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 (referred to as the 'convening period'). The convening period 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.20
The administration will terminate according to the outcome of the second meeting (i.e., 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).21 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 by 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 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.22 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 DOCA may also be utilised where the convening period has not been extended and the administrators require more time to sell the business or its assets than provided for in the legislation; for example, an administrator may wish to postpone a sale until market conditions improve, so as to generate a better return for creditors, and might use a DOCA to push out the timeline. Such arrangements are known as holding DOCAs and do not generally contain any specific provisions as to the future of the company or, on their face, any benefit for creditors. Their primary purpose is to provide more time for forming and agreeing a restructuring proposal. Holding DOCAs also confer other benefits, including an extension of the moratorium on all creditors bound by the DOCA, time and cost savings on applying for an extension of the convening period and greater flexibility for the administrator. While the use of holding DOCAs has at times been controversial, the court has generally supported their use as a means of facilitating a better result for creditors.
In 2021, an entirely new debt restructuring framework was added to the Act which enables a company with liabilities of up to A$1 million to appoint a 'small business restructuring practitioner' (SBRP) if the directors of the company believe that it is, or is likely to become, insolvent.23
The SBRP's role is to provide advice to the company, assist the company to prepare a restructuring plan (see below) and make a declaration to creditors regarding the restructuring plan.
Additionally, the SBRP may dispose of company property in order to make payments to creditors in accordance with the restructuring plan, though this right does not extend to any property subject to a security interest or property that is used by, or in possession of, the company but where someone else is the owner or lessor.
A key distinction between this restructuring process and other restructuring processes currently in place (i.e., voluntary administration) is that, to an extent, the company's directors retain some control of the company: the directors can enter into a transaction or dealing affecting the property of the company if doing so is in the 'ordinary course' of the company's business. In this sense, the new restructuring process provides for a 'debtor-in-possession' model that bears some similarity to the Chapter 11 process in the United States, or Part 26A of the Companies Act 2006 (UK).
Where a company is under the restructuring process, property rights cannot be exercised by third parties in relation to property of the company used, occupied or in the possession of the company (without consent of the SBRP, or leave of the court).
A secured party that has security over the whole or substantially the whole of the company's property will be able to enforce during a 13-business-day decision period.
Despite its recent enactment, there has already been judicial consideration as to the operation of the SBR process in two recent decisions of the Supreme Court of Victoria.24 These decisions demonstrate that the new SME restructuring process is being utilised by Australian small businesses.
It is important to note that, as at the date of this chapter, no reforms have been introduced in respect of businesses with an annual turnover of more than A$1 million.
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 (e.g., 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.
In 2021, a new and 'simplified' liquidation framework was added to the Act. The simplified liquidation process allows the liquidator to avoid the requirement to prepare a report to creditors under Section 533 of the Corporations Act, which may otherwise be required if a person involved with the company may have committed an offence or breached a duty, or if the company is unable to pay its unsecured creditors more than 50 cents on the dollar.
With regard to voidable transactions, the simplified liquidation process specifies that:
- for transactions that occurred more than three months before the relation-back day, an unfair preference is only voidable if a creditor under the transaction was a related entity of the company; and
- for transactions that occurred in the three months before the relation-back day (or after that day, but before winding-up commenced), an unfair preference is only voidable if a creditor under the transaction was a related entity of the company and the value of the transaction was more than A$30,000.
A company is eligible for simplified liquidation if (among other things):
- it has resolved to be wound up;
- the directors give to the liquidator a declaration stating their belief that the company meets the eligibility criteria; and
- the company's total liabilities are under A$1 million.
A company may enter into the simplified liquidation process where the company's directors give the liquidator of a company a declaration to the effect that the company is eligible within five business days of the liquidator being appointed.
The liquidator may adopt the simplified liquidation process if the liquidator reasonably believes that the company satisfies the eligibility criteria, but must not adopt the process if (relevantly):
- more than 20 business days have passed since the day on which the triggering event that brought the company into liquidation occurred; or
- at least 25 per cent in value of the creditors' request that the liquidator not follow the SL process in relation to the company.
The liquidator must not continue to engage with the simplified liquidation process if at any point the criteria (including the liability threshold) is no longer met, or if the liquidator has reasonable grounds to believe that the company or a director of the company has engaged in fraud or dishonest conduct that is likely to have a material adverse effect on the interests of creditors.
To date, there has been no detailed judicial consideration of the simplified liquidation process.
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 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.25 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 Act imposes an automatic stay on the ability of contractual counterparties to enforce ipso facto provisions that allow the contract to be terminated or altered by reason of a company proposing a scheme of arrangement.26
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 only to be undertaken in large corporate restructurings and in scenarios where timing is not fatal to a restructuring.
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.27 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 Westpac Banking Corporation v. Bell Group Ltd (in liq) (No 3) (Bell),28 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.29
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.30
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.
As part of the 2018–2019 Federal Budget, the Australian government announced a series of reforms to combat illegal phoenix activity (i.e., transactions taking place at a time when a company is nearing insolvency that are intended to defeat creditors). As part of the wider reforms, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) has extended the power for liquidators to recover property that is the subject of creditor-defeating dispositions (in line with their existing ability to clawback voidable transactions). It also imposes civil and criminal liability for directors and advisors engaging in creditor-defeating dispositions of company property.
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 pre-existing arrangements such as rent or interest (i.e., when the liability to pay such amounts already existed at the time of insolvency).
In terms of a director's personal liability, a court may make an order requiring the director to compensate the company for loss arising out of the insolvent trading, prevent a director from managing a corporation for a period of time and, in rare circumstances where the failure to prevent insolvent trading is ruled as a result of dishonesty, a fine of A$200,000 may be 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.
With effect from September 2017, the new Section 588GA of the Act, provides that a director is not 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. This safe harbour protection does 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.
To date, there has been very little case law providing judicial interpretation of Section 588GA 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.
Recent legal developments
i New restructuring and liquidation rocesses
As described above, in late 2020 the Commonwealth government passed new legislation which added a new restructuring process and simplified liquidation process for SMEs into the Act. The introduction of entirely new frameworks marks the most significant change to Australia's insolvency regime in 30 years.
Perhaps the most far-reaching impact of the new frameworks is not their direct effect (given that they are constrained to companies with total liabilities of under A$1 million) but their acknowledgment of the merits of a debtor-in-possession model, drawing inspiration from other jurisdictions such as the United Kingdom and United States.
There has not yet been a significant uptake of the new frameworks, in line with the broad drop in the number of external administrations in 2021 as a whole.
In addition to the new processes outlined above, the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), which inserted the new frameworks, allowed for a three-month period (1 January 2021 to 31 March 2021) during which eligible SMEs that sought to enter into the new restructuring process were eligible for an extension of the temporary insolvency relief moratorium (which otherwise expired on 1 January 2021, as described above).
ii Personal liability for expenses incurred during administration
The impact of covid-19 on the insolvency landscape in Australia was not limited to direct legislative or economic changes, but also included novel developments in the practicalities of the external administration regimes for insolvency practitioners. One area which saw key development was in the apportionment of personal liability on insolvency practitioners, particularly in industries that were most significantly affected by covid-19. To this end, several major court decisions in 2020 clarified and developed the law in regard to Section 443B of the Act, which concerns (inter alia) personal liability for property leased or used by a company in administration.
Section 443B(2), in particular, states that administrators are personally liable for payments for property used, occupied or in the possession of the company in administration unless the administrators (within five business days of the commencement of the administration) give notice that the company will not exercise rights in relation to the property in question.
In Re CBCH Group Pty Ltd (Administrators Appointed) (No. 2)  FCA 472 (CBCH), the administrators elected for the company in administration to continue to lease certain retail properties and consequently pay rent during the administration period – for which the administrators were prima facie personally liable pursuant to Section 443B(2). However, the onslaught of the pandemic led to the conclusion (of the administrators) that the course of action most favourable to creditors was, in fact, not to pay rent for the property. On this basis, the administrators applied to the Federal Court of Australia for orders relieving them of personal liability for the unpaid rent (for a short period of time), and a declaration that they were justified in causing the company not to pay rent. Taking into account the effect of covid-19, and the interests of the creditors as a whole, the Court granted the orders. The Court found that the landlords of the companies (which retained a right to claim in the administration for the amount of unpaid rent) would be left no worse off by the decision.
Similar orders were made in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed)  FCA 571 (Virgin), which was one of a series of Federal Court of Australia cases involving the Virgin Australia group, Australia's second largest airline. In Virgin, the Court extended the five-business-day period in which administrators do not face personal liability under Section 443B(2) on the basis that, given the complexity of the group under administration and the effects of covid-19, it was in the best interests of creditors as a whole.
A third significant decision in the Federal Court, Ford (Administrator, in the matter of The PAS Group Limited (Administrators Appointed) v. Scentre Management Limited  FCA 1023) (Ford v. Scentre Management Ltd), also considered the effect of Section 443B. In that case, the administrators had (as in Virgin) been granted an extension of the five-business-day period in which no personal liability was apportioned under Section 443B(2). The company under administration ultimately proceeded to liquidation. The Court found that the rent payable by the company during the five-business-day period was not merely unsecured debt (for the purposes of the company's liquidation) but was in fact an expense properly incurred in the administration and thus afforded priority in the company's ultimate liquidation, pursuant to Section 556(1)(a) of the Act.
The decisions outlined above are a welcome clarification and extension of the law as it regards personal liability for insolvency practitioners, and show that Australian courts are willing to accommodate the dramatic effects of covid-19 within Australia's insolvency regime.
Significant transactions, key developments and most active industries
i Greensill Capital
Gilbert + Tobin has a major role advising a large creditor in the ongoing saga involving Greensill Capital, the multinational supply chain finance conglomerate that was placed into administration in March 2021.
The Greensill Capital group, which as recently as 2019 was valued at US$6 billion, collapsed after certain insurance policies lapsed in early 2021. Greensill Capital's core business involved supply chain financing whereby supplier businesses were able to receive payment quicker than otherwise possible (under usual payment terms). Greensill Capital subsequently securitised (inter alia) the accounts receivable generated by its supply chain finance that were then offered as securities in large-scale funds to institutional investors.31
In March 2021, the insurance policy for the securitised products offered by Greensill Capital lapsed, following an unsuccessful injunction application in the Federal Court of Australia.32 Within one week, Greensill Capital's UK entity had entered into administration, and receivers were appointed over certain Australian entities of the group.33
The repercussions of Greensill Capital's external administration have also drawn in steel conglomerate GFG Alliance, which had been closely tied with Greensill Capital. GFG Alliance owns several important Australian assets, including the Whyalla Steel Mill in South Australia and Tahmoor coal mine in New South Wales.
The Greensill Capital insolvency involves highly complex, international issues that will have worldwide implications, and it is the belief of the authors that the saga may generate novel and precedent-setting applications of the Australian insolvency framework across a range of industries.
ii Virgin Australia
2020 also saw Virgin Australia enter into voluntary administration and (ultimately) into a deed of company arrangement. The administration of Virgin Australia was the largest insolvency in the Australian aviation industry since the collapse of Ansett Australia in 2001.
The Virgin Australia administration involved highly complex issues and produced several landmark cases that help provide further clarity around the process of complex voluntary administrations.
Ultimately, Virgin's deed of company arrangement (the proponent of which was Bain Capital) was approved by approximately 99 per cent of creditors and was executed in September 2020. Bain Capital is now poised to spearhead the recovery of the airline.
Gilbert + Tobin advised Barry Wight and Bruno Secatore of Cor Cordis in their capacity as receivers and managers of Swedish design and stationery brand Kikki.K on the sale of its Australian business to EC Designs, parent company of Erin Condren. Kikki.K currently has stores across Australia, New Zealand, Singapore, Hong Kong and the UK.
Kikki.K was placed into voluntary administration and receivership in March 2020 after battling difficult retail conditions and other challenges, including the December bushfires and the covid-19 pandemic.
The sale was structured through a deed of company arrangement and involved complex tax and restructuring issues that needed to be resolved in an accelerated timeframe.
Overall, the successful sale provided an opportunity for Kikki.K to return to profitability by strengthening its brand presence across the US market and growing its e-commerce business, as well as allowing Erin Condren to expand internationally across target regions such as Europe and Australia. Significantly, the sale ensured the continued presence of the popular retailer in Australia and the preservation of approximately 256 jobs.
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.
As set out in Section I, 2020 was a tumultuous and transformative year in the insolvency industry of Australia, and was defined by hugely significant interventions by the Commonwealth government into every aspect of the Australian economy. The year 2020 also saw the passage of the most significant reforms to Australia's insolvency legislation in over 30 years, responding in large part to the upheaval brought about by covid-19.
The outbreak of the covid-19 pandemic prompted the Commonwealth to focus on further simplifying and streamlining Australia's insolvency framework to support businesses in distress.
In the 2021–2022 budget, the Commonwealth government announced that it would consult with stakeholders as to the treatment of trusts and corporate trustees under Australia's insolvency law. In addition, the Commonwealth indicated that it would consult with industry regarding changes to the current scheme of arrangement model, including the potential for an introduction of a moratorium on creditor enforcement while a scheme is being negotiated.
The Commonwealth government has also proposed that the minimum threshold at which creditors can issue a statutory demand be increased from A$2,000 to A$4,000, and the commencement of a review of the insolvent safe harbour provisions. While the Commonwealth government has only provided limited details of these further reforms as at the date of this publication, it is clear that further reform to Australia's insolvency framework is a priority for the federal government and is intended to play an integral part in Australia's economic recovery post-covid-19.34
The authors are of the view that the ongoing stimulus into the Australian economy will continue to drive top-level economic growth in the immediate term in Australia. However, while the chances of the oft-forecasted 'wave' of insolvencies have decreased in line with recent economic growth, the authors believe that the possibility of higher-than-average insolvency brought about by the disruption of covid-19 in the medium to long-term still exists.
1 Peter Bowden is a partner, Anna Ryan is a senior lawyer and Christopher Ashen is a lawyer at
Gilbert + Tobin.
2 Australian Government Department of Health, 'Coronavirus (COVID-19) current situation and case numbers' https://www.health.gov.au/news/health-alerts/novel-coronavirus-2019-ncov-health-alert/coronavirus-covid-19-current-situation-and-case-numbers (Accessed 25 May 2021).
3 Dr Steven Kennedy PSM, 'Opening statement – Economics Legislation Committee', 24 March 2021 https://treasury.gov.au/speech/opening-statement-economics-legislation-committee-2021 (Accessed 25 May 2021).
4 Australian Bureau of Statistics, 'Australian National Accounts: National Income, Expenditure and Product' https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-
national-income-expenditure-and-product/latest-release (Accessed 25 May 2021).
5 Australian Bureau of Statistics, 'Labour Force, Australia' https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release (Accessed 25 May 2021).
6 Australian Securities and Investments Commission, 'Insolvency Statistics' https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/ (Accessed 25 May 2021).
7 Australian Prudential Regulation Authority, 'Temporary loan repayment deferrals due to COVID-19, November 2020' https://www.apra.gov.au/temporary-loan-repayment-deferrals-due-to-covid-19-november-2020 (Accessed 28 May 2021).
8 Australian Securities and Investments Commission, above op cit.
9 For the purposes of this chapter, the terms 'receiver' and 'receiver and manager' will be used interchangeably.
10 This stay does not affect contracts originally entered into prior to 1 July 2018 or (amongst others) certain derivatives or underwriting contracts.
11 Often referred to as a 'pre-pack', this is where a restructuring 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.
12 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.
13 Section 435A of the Act.
14 Section 436B of the Act.
15 Section 436C of the Act.
16 This stay does not affect contracts originally entered into prior to 1 July 2018 or (among others) certain derivatives or underwriting contracts.
17 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).
18 See e.g., Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No. 2)  FCA 555 and Strawbridge, in the matter of Virgin Australia Holdings Ltd (Administrators Appointed)  FCA 571.
19 For example, the administrators of the Sargon Group obtained a Section 442C order and were therefore able to complete a sale of its business and assets despite various unsecured creditors claiming ownership and/or security rights over the subject of the sale. See McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed)  FCA 666.
20 Section 439C of the Act.
21 Section 444GA of the Act.
22 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.
23 The new provisions form the new Part 5.3B of the Act.
24 Re Dessco Pty Ltd  VSC 94 and Re DST Project Management and Construction Pty Ltd (ACN 623 076 031)  VSC 108.
25 See First Pacific Advisors LLC v. Boart Longyear Ltd  NSWCA 116; (2017) 320 FLR 78.
26 This stay does not affect contracts originally entered into prior to 1 July 2018 or (among others) certain derivatives or underwriting contracts.
28  WASCA 157; (2012) 270 FLR 1.
29 Spies v. the Queen  HCA 43.
30 Westpac Banking Corporation v. The Bell Group Limited (In Liq) (No. 3)  WASCA 157; (2017) 270 FLR 1 at .
31 Hans Van Leeuwen and Jenny Wiggins, 'How the Greensill Empire Was Brought Down' (Australian Financial Review, 5 March 2021) https://www.afr.com/companies/financial-services/how-
the-greensill-empire-was-brought-down-20210305-p57803 (Accessed 26 May 2021).
32 Greensill Capital Pty Ltd & Ors v. BCC Trade Credit Pty Ltd & Ors  NSWSC 167.
33 Sarah Thompson, Anthony Macdonald and Tim Boyd, 'Credit Suisse Taps McGrathNicol for Greensill Role' (Australian Financial Review, 9 March 2021) https://www.afr.com/street-talk/credit-
suisse-taps-mcgrathnicol-for-greensill-role-20210309-p57915 (Accessed 26 May 2021).
34 Treasury (Cth), 'Further insolvency reforms to support business dynamism' (Media Release, 3 May 2021); Australian Federal Government, 'Budget Paper No. 2 - Part 2: Payment Measures' p. 188 (Budget 2021-22, 11 May 2021).