In recent years, there has been a decrease in receiverships and bank-led insolvency appointments. This is partly due to the impact of the Royal Commission into the Banking, Superannuation and Financial Services Industry which caused banks and financial institutions (who are more sensitive to reputational damage) to limit formal appointments.
Despite this, the Australian Securities Investment Commission (“ASIC”) has reported a 15.3% increase in the number of external administration appointments (administration, liquidation and receivership) in the quarter ending June 2019 when compared to the previous quarter.
This is likely attributable to the retail, property, construction, mining and mining services sectors continuing to experience elevated levels of distress. In particular, the construction sector has been affected by a decrease in house prices and market conditions and tighter credit and the retail sector has been affected by a decrease in household spending activity and an increase in competition.
Of each of the formal appointments other than creditor or court led windings-up, director led appointments of voluntary administrators continue to be the most common.
Despite record-low interest rates, the Australian economy has experienced only moderate growth. Tightened prudential requirements have resulted in the Australian banks limiting their exposure to certain high-risk industries, with non-traditional players such as investment banks and alternate capital providers providing liquidity. Secondary debt market activity has also decreased due to the banks’ lower risk appetite.
In Australia, the Corporations Act 2001 (Cth) (“Corporations Act”) governs corporate insolvency and restructuring. The Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) regulates personal insolvency. The general aim of both regimes is to balance the interests of creditors and debtors.
Under the Corporations Act, there are various formal insolvency procedures available to Australian companies including receivership (private/Court-ordered); voluntary administration; a deed of company arrangement (“DOCA”); provisional liquidation; liquidation (voluntary/involuntary and solvent/insolvent); and creditors’ schemes of arrangement (Court-sanctioned). Solvent liquidations and schemes of arrangement are commonly used as "solvent" restructuring tools.
Although companies are not obligated to initiate a formal insolvency process, directors usually do so to avoid personal liability for insolvent trading. A director may face civil or criminal liability where they knew, or had reasonable grounds for suspecting, that the company was insolvent or would become insolvent at the time the debts were incurred.
Sections 588H(2) and (5) of the Corporations Act, however, provide that a director will not be liable if it is proved that, at the time the relevant debt was incurred, they had reasonable grounds to expect (and did expect) that the company was solvent (and would remain solvent even if it incurred that debt) and took all reasonable steps to prevent incurring the debt.
Directors may also rely on the "safe harbour" defence. Under Section 588GA, 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”. The safe harbour, however, will not apply in certain circumstances, including where at the time the debt is incurred employee entitlements and tax reporting requirements are not up to date (Section 588GA(4) of the Corporations Act).
A board of directors may resolve to appoint an administrator. Once the voluntary administration commences, the creditors are in control of the company’s fate and may vote for one of three outcomes: ending the administration; winding up the company; or that the company enter a DOCA. Any restructure or reorganisation will be dependent on a majority (by number and dollar value) of creditors voting in favour of it. The effects of this procedure are referred to in 6.1 Statutory Process for a Financial Restructuring/Reorganisation and 6.2 Position of the Company.
A Liquidator or provisional liquidator of a company may also appoint an administrator if they are of the opinion that the company is insolvent or likely to become insolvent.
A company may be wound up voluntarily by its members if solvent or, alternatively, if it is insolvent, by its creditors. A winding up by creditors may occur in a number of circumstances including in situations where a liquidator appointed by the members forms the opinion that the company is insolvent.
Creditors may also resolve at a meeting of creditors to wind up the company and appoint a liquidator (at the second meeting of creditors during an administration).
A creditor can seek to initiate a winding up of a company (an involuntary liquidation) by Court order. A creditor (or other eligible applicant) must demonstrate that the company is insolvent (for further commentary on the Australian test for insolvency, see 2.6 Requirement for Insolvency).
The court can presume insolvency in certain circumstances including where a company has not paid a claim exceeding AUD2,000 following a written statutory demand in accordance with the Corporations Act. Where a debtor does not comply with the demand, or seek to set it aside within 21 days, insolvency is presumed for the purpose of the winding up application.
Other grounds for winding-up orders include where it is "just and equitable" to do so or where a deadlock at a shareholder or director level affects the ability to manage the company.
Certain other stakeholders (including shareholders, the company and ASIC) may also submit a winding up application with the Court.
Where the Court appoints a liquidator, directors will no longer have any management powers and the company will generally cease to be a going concern. The liquidator will assume control of the company and will realise the company’s assets for the benefit of the creditors.
There are no material differences between a Court-ordered liquidation and a creditors’ voluntary liquidation once the liquidator is in control of the assets and affairs of the company. The effects of compulsory (involuntary) liquidations are referred to in 6.8 Asset Disposition and Related Procedures.
Receivership is an option available to secured creditors. A receiver and manager may be appointed pursuant to the relevant security document granted in favour of the secured creditor, where a company has defaulted and the security is enforceable. Far less common is a court appointed receiver, where the appointment is made to preserve the company’s assets where it may not otherwise be possible to trigger a formal insolvency process.
The appointment of a receiver to the whole or substantially the whole of the company’s assets will often lead to, or closely follow, the appointment of an administrator by the directors. Both processes will proceed in tandem.
For further commentary on the effects of this procedure, see 7.1 Types of Voluntary/Involuntary Proceedings.
Secured creditors with security over the whole or substantially the whole of a company’s assets may appoint an administrator as an alternative to receivership in order to effect a reorganisation.
In respect of involuntary appointments, insolvency:
Directors can only appoint an administrator if, in the opinion of the directors, the company is insolvent or likely to become insolvent.
The solvency test in Australia is the "cash flow" test. A person is solvent if they are able to pay all their debts as and when they become due and payable. A person who is not solvent is insolvent (Section 95A of the Corporations Act).
Courts apply Section 95A liberally and will consider the operative commercial circumstances. A "balance sheet" analysis, while not paramount, is often relevant in providing commercial context.
There are no specific restructuring or insolvency regimes applicable to certain companies or institutions. However, the Australian Prudential Regulation Authority has certain powers in respect of authorised deposit-taking institutions (“ADIs”) and insurance companies under the Insurance Act 1973 (Cth), the Life Insurance Act 1995 (Cth) and the Banking Act 1959 (Cth). These powers include the ability to appoint a statutory manager to an ADI or to apply to the Court for a judicial manager to a distressed or insolvent insurer. ADIs and insurance companies can also be wound up under the usual insolvency provisions of the Corporations Act in certain circumstances.
Consensual and out-of-Court workouts are common in the Australian restructuring market but are generally only useful in dealing with one class of debt (eg, secured debt) because of their inability to bind large groups of creditors. Despite this, the Australian banks’ reluctance to take enforcement action has allowed opportunities for borrowers to deal with their lenders, contributing to a growing turnaround market. These workouts will often involve the lenders(s) entering a compromise to enable the company to trade on.
Section 588GA of the Corporations Act (safe harbour) attempts to provide directors with some protection from insolvent trading liability and aims to enable them to trade out of their difficulties (provided a viable plan is in place at the relevant time). This aims to promote informal and consensual workouts.
Consensual restructuring arrangements are generally implemented between lenders and obligor groups, and include forbearance/standstill and waivers or "amend and extend" arrangements. Lenders may agree to defer or forgo amortisation during a period and agree not to take enforcement action subject to the obligors complying with reporting and other requirements. Consensual restructuring arrangements often include the sale of assets, capitalisation of interest and, in some cases, debt forgiveness. Despite this, these arrangements will usually preserve existing breaches. If successful, consensual restructuring arrangements can give the company, and the directors, breathing space and the ability to trade out of difficulty.
There is no debtor-in-possession financing regime in Australia. Normally, new money is provided by the existing lender group or by a third-party financier with the consent of the existing lenders such that it receives super senior priority. Both receivers and administrators are personally liable for monies borrowed (although will be indemnified out of the assets of the company for the new funds) so lenders often will get comfortable lending to these persons, assuming "existing" lenders consent.
Australia’s restructuring and insolvency laws do not impose general duties on creditors to each other, a company or third parties in the context of informal workouts and restructurings.
In the absence of a formal insolvency administration or the agreement of each party, parties to a consensual arrangement are unable to bind minority creditors or shareholders. However, facility documents or inter-creditor arrangements may enable majority lenders to bind the minority lenders. For example, syndicated facility documents usually allow lenders with a two-thirds majority to amend non-essential terms, however, amendments to essential terms, such as repayment dates, require unanimous consent.
The principal type of security taken over "immovable property", being land or fixtures and buildings attached to land, is a real property mortgage. The mortgagor is free to deal with the land (subject to any restrictions in the mortgage itself) and retains the beneficial and legal interest in the land. The mortgagee holds a legal charge that will confer actionable rights in the event of default. The registration requirements for mortgages are prescribed in the conveyancing and property law legislation of each state/territory in Australia.
Secured parties will also often require a general security agreement to be provided by the company (which will charge all present and after acquired personal property of the company).
The Personal Property Securities Act 2009 (Cth) (“PPSA”) regulates security interests in personal property that, in substance, secure payment or performance of an obligation. It also applies to certain deemed security interests such as specific lease arrangements, retention of title arrangements and transfers of debt, regardless of whether the relevant arrangement secures payment or performance of an obligation. "Personal property" is broadly defined and includes all property other than land, fixtures and buildings attached to land, water rights and certain statutory licences.
Generally, attachment and perfection of a security interest occurs when the grantor and the secured party execute a security agreement and the security interest is registered on a register known as the Personal Property Securities Register. However, security interests over certain assets can be perfected other than by way of registration, for example, by control or possession.
The rights of a secured creditor to enforce a security interest (ie, appoint a receiver or voluntary administrator if the secured creditor has security over the whole or substantially the whole of the company’s property) are subject to a requirement that the security interest be perfected as prescribed by the PPSA and is enforceable. Unregistered or unperfected security interests vest with the grantor upon insolvency.
The Corporations Act provides for an "Automatic Stay" on the enforceability of ipso facto provisions (contractual clauses that allow 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) that allow a contract to be terminated/amended due to:
A Court has the power to lift the Automatic Stay if 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. "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 by the relevant external administrator.
Neither the Automatic Stay nor Stay Orders will prevent secured creditors from appointing a receiver over the top of an administrator during the decision period under Section 441A of the Corporations Act or enforcing security interests over perishable goods.
Secured creditors may enforce their rights in each formal insolvency process under Australian law.
If a company is not in voluntary administration, a secured creditor (with enforceable security) following a default, is able to appoint a receiver to a company.
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 commences enforcement before the voluntary administration, within 13 business days of receiving notice of appointment of the voluntary administration (being the "decision period") or with leave of the Court or consent of the administrator.
Where a DOCA proposal is put forward for creditor approval and the company executes a DOCA, a secured creditor who did not vote in favour of the proposal will have the ability to enforce its security interests once the DOCA becomes effective (see 6.7 Restrictions on the Company's Use of or Sale of Its Assets).
Under the Cross-Border Insolvency Act 2008 (Cth) (“Cross-Border Act”), foreign creditors, save for tax and penal debts, have the same rights regarding the commencement of, and participation in, insolvency processes as an Australian creditor.
Secured creditors who have enforced their security interests generally stand outside formal insolvency processes. If a controller (such as a receiver and manager) is appointed to the secured property of a company, the controller’s power will be exercised to the exclusion of another external administrator appointed to the company (such as a liquidator or administrator) (note our comments in 4.2 Rights and Remedies and 4.3 Typical Timelines regarding the exercise of a secured party’s rights during the decision period).
See our comments in 4.3 Typical Timelines regarding a secured creditors rights in respect of a DOCA.
Secured creditors stand outside the insolvency process and their priority is determined by the Corporations Act, the PPSA and any contractual intercreditor arrangements. Employees enjoy a priority over ordinary unsecured creditors for certain unpaid amounts and, in the ordinary course, external administrators have priority over all unsecured creditors (including employees) for their approved fees and expenses. Employee claims also have priority over assets subject to a charge over circulating (floating) assets.
While there is no legal basis, often key suppliers will be kept whole (or close thereto) in a restructure (particularly through a DOCA or a scheme of arrangement) if there are commercial drivers for doing so.
A creditor may commence proceedings (and obtain default judgment) through the Courts to recover outstanding amounts owing by a recalcitrant debtor. The Court has extensive powers to order a range of remedies including seizure of assets, diversion of a debtor company’s income and orders for the winding-up of the company.
However, once a company is placed into administration, a statutory moratorium will apply to any proceedings commenced, including any enforcement proceedings (unless administrator consent or leave of the court is obtained). Criminal proceedings are an exception.
After the commencement of a winding-up of a company, or after appointment of a provisional liquidator, legal proceedings are not to be commenced or continued against a company without leave of the Court (Section 471B of the Corporations Act).
A Court may grant leave for a claimant to proceed against the company if there is a public interest aspect to the claim (eg, claims brought by regulators for statutory breaches).
During a receivership no moratorium exists, and creditors may take action against the company including initiating Court proceedings, but any actions are treated as unsecured claims (subordinated to the claims of the secured creditor who appointed the receiver). The receiver is likely to be in control of the company’s material assets and is permitted to realise the assets for the benefit of the secured creditor only (any surplus is provided to the company and would be available for distribution to unsecured creditors).
In certain circumstances, freezing orders will be granted by the Court to prevent a company from dealing/disposing with assets to both ensure that a company would have assets capable of satisfying any judgment. These orders will only be granted where, there exists a real possibility of the company concealing or disposing of or removing from the Court’s jurisdiction its assets, in order to avoid satisfying an adverse judgment against it. For further commentary, see 5.3 Rights and Remedies for Unsecured Creditors.
The most common way an unsecured debt is enforced is through the statutory demand procedure described in 2.5 Commencing Involuntary Proceedings.
A landlord will be bound by the statutory moratorium in a voluntary administration. However, pursuant to Section 443B of the Corporations Act, an administrator is personally liable for rent and other amounts payable by the company under the lease from the period commencing five business days after the administration begins and throughout the administration period (while the company occupies the property).
Foreign creditors may be required to provide security for costs (ie, a payment to the Court or providing bank guarantees) when bringing proceedings or enforcing judgments in Australia. Pursuant to Section 12 of the Cross-Border Act, the claims of foreign creditors, excluding those concerning tax or social security obligations, must not rank lower than claims of unsecured creditors solely because the creditor is a foreign creditor.
Distributions only occur through a DOCA or if the company enters into liquidation following an administration. The pari passu principle (Section 555 of the Corporations Act) provides that all debts and claims which are admissible to proof rank equally. A DOCA will normally mirror the distribution waterfall in a liquidation (Section 556 of the Corporations Act), and is summarised as follows:
For commentary on priority claims under Section 556 of the Corporations Act, see 5.8 Statutory Waterfall of Claims.
Commonwealth government debts (including tax debt) do not receive any special priority.
Employment-related Liabilities (Including Superannuation)
Outstanding employees’ wages, superannuation, leave entitlements and redundancy payments are given priority over payment of ordinary unsecured creditors in the distribution of assets in a winding up. Pursuant to the Commonwealth’s Fair Entitlement Guarantee, when a company is placed into liquidation, the Commonwealth government, through the Fair Entitlements Guarantee, can make payments to employees of certain levels of unpaid wages, leave and other entitlements. The Commonwealth then becomes a creditor of the company and is afforded the same priority in the distribution as the employee claims it paid.
Certain employee entitlement claims will have priority over secured debts (which are secured by a security interest over circulating assets).
The Corporations Act also affords a level of protection to employee entitlements following the company and its creditors entering into a DOCA, that is, those priorities to be at least equal to what they would receive if the company were being wound up.
Deed of Company Arrangement
A DOCA is essentially a contract or compromise between the company and its creditors. Although it is an outcome of a voluntary administration (one of three possible outcomes), it should be viewed as a distinct regime as the rights and obligations of the creditors and company differ.
DOCAs are flexible. The terms may provide for: a moratorium of debt repayments, a reduction in outstanding debt, and the forgiveness of all or a portion of the outstanding debt. DOCAs may be used to achieve a debt-for-equity swap through the transfer of shares either by consent or pursuant to a share transfer under Section 444GA of the Corporations Act (without the consent of the shareholders) with Court approval. Court approval will be granted where it is accepted that the shares have no "economic" value.
Entering into a DOCA requires the approval of a bare majority of creditors, both in value and in number, voting at the second creditors’ meeting. A voting deadlock can be resolved by the chairperson (usually the administrator) exercising a casting vote. A DOCA will bind the company, its shareholders, directors and unsecured creditors. Secured creditors are not obliged 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.
Upon execution of a DOCA, the voluntary administration ends. Once a DOCA has achieved its stated aims it will terminate. If a DOCA does not achieve its objectives, or is challenged by creditors, it may be terminated by the Court or in accordance with the DOCA, following which the company will be wound up.
Scheme of Arrangement
A scheme of arrangement is a restructuring tool that can sit outside formal insolvency; that is, either while the company 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.
A scheme of arrangement must be approved by at least 50% in number and 75% in value of creditors in each class of creditors and by the Court. The test for identifying classes of creditors 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, the recent decision in In the matter of Boart Longyear Limited (No 2)  NSWSC 1105 suggests that Courts may agree to put creditors in classes even where the creditors within the class appear to have objectively distinct interests (also see First Pacific Advisors LLC v Boart Longyear Ltd  NSWCA 116).
The outcome of a scheme of arrangement is dependent on the terms of the arrangement agreed with the creditors but, most commonly, a company is returned to its normal state upon implementation as a going concern but with the relevant compromises having taken effect. The scheme of arrangement process does, however, have a number of limiting factors associated with it including cost, complexity, uncertainty of implementation, timing issues (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 unfair). These factors explain why schemes of arrangement tend only to be undertaken in large corporate restructures.
Voluntary administration, unlike receivership, is entirely a creature of statute (see Part 5.3A of the Corporations Act), with the creditors controlling the final outcome to the exclusion of management and members.
An administrator has wide management powers (to the exclusion of the existing directors). Once an administrator is appointed, a statutory moratorium applies, which restricts the enforcement rights of third parties and litigation claims. There is, however, an exception for a secured creditor that has security over the whole or substantially the whole of the assets of the company and these rights are exercised within the "decision period" (being 13 business days after the appointment of the administrator).
There are two meetings over the course of an administration. At the first meeting of creditors (within eight business days), the administrators are confirmed, remuneration is approved and a committee of creditors may be established. At the second creditors’ meeting (within 20 business days after the commencement of the administration unless extended by Court), the administrator provides a report on the affairs of the company to the creditors and outlines the best option available for the future of the company to maximise returns to creditors. There are three possible outcomes: entry into a DOCA; winding up the company; or terminating the administration (Section 439C of the Corporations Act).
The administration will terminate according to the outcome of the second meeting. When the voluntary administration terminates, a secured creditor 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.
A DOCA is a contractual arrangement between the company and its creditors (binding these parties) and the contractual terms normally mirror many of the elements of an administration (such as a moratorium etc).
Scheme of Arrangement
There is no statutory moratorium implemented when a scheme of arrangement is proposed (other than the ipso facto stay referred to above). However, the applicant may apply to the Court to restrain further legal proceedings against the company (effectively implementing a stay).
Unlike voluntary administration, directors and officers of a scheme company maintain their powers during the scheme process.
See also our comments in 4.2 Rights and Remedies in relation to the new ipso facto regime that applies to administrations and schemes implemented to avoid a liquidation (as well as receiverships over the whole or substantially the whole of the assets of the company).
Further to our comments at 6.2 Position of the Company, in an administration, the creditors decide the outcome of the company at the second meeting. In some cases, a committee of creditors will be formed to assist and advise the administrator, to monitor the conduct of the administrator and to give them advice. The committee also has the power to approve the administrators’ remuneration.
Creditors’ Scheme of Arrangement
Creditors are involved in schemes and they must vote according to the class that they have been placed in. Broader than that, they have no formal role in the scheme process but will ordinarily remain informed of the scheme by way of the disclosure materials that must be provided to creditors.
Provided that a DOCA is approved by the relevant majorities, the claims of unsecured creditors may be modified without consent (effectively crammed down). An unsecured creditor could attempt set a DOCA aside if the cramdown would result in it receiving less than it would receive in a liquidation. In the ordinary course, claims of secured creditors cannot be modified under a DOCA unless the secured creditors voted in favour of the DOCA (and the DOCA provided for the secured creditors’ rights to be affected) or with Court approval.
There has, however, been some divergence from 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, the Court separately 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.
Claims of classes of creditors (including secured and unsecured creditors) can be compromised under a creditors’ scheme of arrangement without consent if the requisite majority of each class of creditors is achieved (75%). However, a scheme must be approved by each class of creditors so that an inter-class cramdown is not possible.
There is no specific prohibition on trading claims during the period of a liquidation, administration, deed administration or receivership. Often, the secured creditor group involved in a scheme will enter into a form of "lock-up agreement" whereby debt trading amongst the group will be prohibited or unless purchasers agree also to be locked up.
As DOCAs succeed an administration, they are technically only implemented where the company is insolvent or likely to become insolvent and are therefore not necessarily conducive to a reorganisation for administrative efficiency, in the absence of insolvency.
A members’ scheme of arrangement (rather than a creditors’ scheme of arrangement) is a more appropriate vehicle for a solvent restructure or reorganisation.
A corporate group in a liquidation can be "pooled" to achieve winding up efficiencies in certain circumstances.
Where a company is in administration, transactions affecting its property are void unless effected by the administrator, the administrator provides consent or Court approval is obtained. The position is less clear with DOCAs as it will be dependent on the terms of the DOCA itself.
There are no specific statutory restrictions on the use or sale of property of a company that has proposed a scheme of arrangement, although the documents that give effect to the scheme (for example, any implementation agreement) entered into by the company may impose restrictions.
A receiver can sell the assets of the company but is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances, under Section 420A of the Corporations Act. Upon a sale, the receiver will transfer the assets free of the security pursuant to which the receiver was appointed and often the terms of any inter-creditor arrangements will provide for the automatic release of subordinated security. If not, direct negotiations must occur with the secured subordinated creditors.
An administrator may sell assets noting, however, it is not permitted to sell assets subject to security without the consent of the secured party (or receiver appointed) or unless a Court directs otherwise.
Liquidators appointed in the context of either voluntary or compulsory liquidations can sell or otherwise dispose of unencumbered property of the company without approval from the Court or other parties to the liquidation. If assets are encumbered, consent of the encumbrancer will be required unless a Court directs otherwise.
A liquidator owes fiduciary duties to the company. In realising company property, a liquidator has a duty to obtain the highest possible price for the assets of the company.
While creditors may purchase assets of the company, the purchase price cannot be set off against the debt owed to the creditor by the company. Instead, any funds raised by the sale of company property will be for the benefit of the creditors as a whole.
Schemes of Arrangement
The terms of the scheme itself will provide for the disposal of assets and any associated release of security required. These releases will need either agreement from the creditors.
Please see our comments in 6.4 Claims of Dissenting Creditors regarding the rights of secured creditors in the context of a DOCA.
If the requisite majority of secured creditors in the relevant class (75%) vote in favour of the scheme and the scheme involves a release of property, then the release will be effected.
An administrator can borrow funds on behalf of a company and, pursuant to Sections 443A(1)(d), 443A(1)(e) and 443A(1)(f) of the Corporations Act, is personally liable for these debts (and any associated interest and borrowing costs) but will be indemnified out of the assets of the insolvent company. The administrator has a lien over the assets of the company to secure any liability (see Sections 443D and 443F of the Corporations Act). To the extent that this funding was to be secured, consent of any already existing secured party over the assets would need to be obtained.
Creditors’ Scheme of Arrangement
Subject to the terms of the incumbent financing arrangements, and in the context of the directors maintaining control over the company, there is no prohibition on the company obtaining new money.
DOCAs and schemes of arrangement must include a process whereby claims against the company are determined and quantified. Often, these processes will mirror the processes in the Corporations Act and Corporations Regulations 2001 (Cth) that apply in a liquidation.
A DOCA is approved by the creditors only (subject to the voting thresholds referred to above).
A Court must consider a number of factors in deciding if it is to approve a scheme including if the scheme is fair.
The Australian Courts have clearly determined that a DOCA cannot release third parties from liabilities without the express agreement of each relevant creditor. A creditors’ scheme of arrangement, however, is more flexible, and can extinguish claims against third parties in certain circumstances (such as the creditors receiving consideration in return for the release).
There is no statutory right of set-off in any external administration (including a scheme) other than liquidation which includes an automatic statutory set-off (Section 553C of the Corporations Act). It is common, however, for a DOCA to give creditors the right to set off.
DOCAs and schemes of arrangement are contracts between the relevant company and its creditors. The relevant deed or scheme administrator has the power to enforce the "contract" against a recalcitrant creditor including, seeking Court orders restraining the creditor from taking further steps.
If a DOCA is not complied with it will usually be terminated in accordance with its terms, or the deed administrator may go back to the creditors to vote upon whether it should be terminated, and the company placed into liquidation.
A DOCA or a scheme could effect a debt for equity swap in whole or in part (either on a consensual or non-consensual basis) and, therefore, these equity holders would lose some or all of their equity interests (sometimes for consideration and sometimes not). Alternatively, a DOCA may implement a sale of assets which would mean the equity holder retains its shares, but they may be in a shell company only.
Further to our commentary in 2.5 Commencing Involuntary Proceedings, the main role of a receiver is to take control of the assets subject to the security pursuant to which they are appointed and hold and/or realise those assets for the benefit of the secured creditor(s). Receivers do not have an active obligation to unsecured creditors, although they have a range of duties under statute/common law. A receiver is not necessarily obliged to act on the instructions of the secured creditors but must, act in their best interests. This will invariably lead a receiver to seek the views of secured creditors on issues that are material to the receivership.
The security document itself will entitle a secured party to privately appoint a receiver, and will also outline the powers available (supplemented by the statutory powers in Section 420 of the Act). Generally, a receiver has wide-ranging powers, including the ability to operate the business, and sell or borrow against the secured assets. The receiver will, by operation of the security instrument, be the agent of the debtor company, not the appointing secured party (although this changes if a liquidator is appointed to the debtor company, whereby the receiver will become the agent of the secured party).
Once in control of the assets, the receiver may run the business if it is appointed over the whole or substantially the whole of the assets of a company. Alternatively, a receiver may engage in a sale process immediately. While engaging in a sale process, a receiver must obtain market value or, in the absence of a market, the best price reasonably obtainable (see 6.8 Asset Disposition and Related Procedures).
Voluntary Administration/Deed of Company Arrangement
See 6.2 Position of the Company for our comments on voluntary administration and DOCAs.
A provisional liquidator may be appointed by the Court in certain circumstances, with common grounds being:
A creditor, a shareholder or the company has standing to apply. A provisional liquidator will normally only be appointed if there is a risk to the assets of a company prior to a company entering liquidation. A provisional liquidator is therefore normally only given very limited powers with its main role being preserving the status quo.
A Court determines the outcome of a provisional liquidation; either that the company move to a winding up, 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. If not, or if the company is later found to be insolvent, the creditors take control of the process.
Compulsory (Involuntary) Liquidation
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 challenging voidable transactions and taking control of assets. Generally, a liquidator will not run the business as a going concern. 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.
Any administrator, liquidator or receiver that has been appointed has the power to sell property that is not subject to a security interest. There are limited instances where security subject to a security interest can be sold (without consent), although this is rare in practice.
Liquidation of an insolvent company does not generally utilise any plan of this sort.
In order to obtain priority, the consent of the secured party would need to be obtained. That is, there is no ability to prime existing liens in a liquidation.
In insolvency proceedings, a consolidated group is not considered as a single entity. The starting legal position is that the "separate legal personality" principle prevents creditors of an insolvent company from gaining access to the funds of other companies for payment of their debts. It is not unusual, however, for wholly owned subsidiaries in a group to enter into a deed of cross-guarantee for consolidated financial reporting. Deeds of cross-guarantee commit one party to it to pay the liabilities of all the other companies that are party to it in a liquidation.
The Corporations Act provides for a holding company to be liable for the debts of its insolvent subsidiaries in certain circumstances. A subsidiary’s liquidator may recover amounts from the parent company equal to the amount of the debt incurred by the subsidiary after it becomes insolvent, but only where the parent company failed to prevent the subsidiary from incurring the debts and where there were reasonable grounds to suspect that the subsidiary was cash flow insolvent.
The corporate veil may also be lifted where an insolvent subsidiary is deemed to be acting as a mere agent, conduit or partner of its parent company. However, Australian Courts have displayed some reluctance towards lifting the corporate veil in these circumstances.
Pooling of group funds may occur in limited circumstances, being where there is a substantial joint business operation between members of the same corporate group and external parties; the members of the group are jointly liable to creditors. The liquidator of the corporate group entity being wound up makes a pooling determination, after which separate meetings of the unsecured creditors of each company are called to approve/reject the determination. The Court may vary or terminate any approved pooling determination.
In both an administration and liquidation, the creditors of the company may request that a committee of inspection be appointed. In a liquidation, the liquidator must call meetings of creditors for the purpose of determining whether a committee of inspection should be appointed. In a voluntary administration, a committee of inspection may be formed at the first creditors’ meeting.
The role of the committee of inspection is to supervise and assist the administrator or liquidator. Examples of the types of decisions/direction the committee may make include approving the remuneration of the administrator or liquidator, approving the institution of legal proceedings on behalf of the company, and directions as to the compromise of debts owing to the company.
The committee must have at least two members, drawn from the body of creditors and members. A company can be a member, acting through an authorised agent. Generally, the members of the committee of inspection will comprise those with a substantial interest in the winding up of the company. The administrator or liquidator of the company must have regard to the directions of the committee but is not required to comply with the directions. Members of the committee of inspection owe the general body of creditors and members fiduciary duties and therefore must act in the best interests of the creditors and members rather than for their own benefit.
There is no statutory provision governing the remuneration of the committee of inspection. Except with leave of the Court, a committee member cannot derive any income from their position. They also must not become the purchaser of any property of the company.
See 6.8 Asset Disposition and Related Procedures.
See 6.8 Asset Disposition and Related Procedures.
The Cross-Border Act provides for the recognition of foreign proceedings and codifies the UNCITRAL Model Law on insolvency (“Model Law”) into Australian law. The Court’s power to grant relief also extends to the enforcement of foreign judgments. Australian Courts recognise the jurisdiction of the relevant foreign Court in which the "centre of main interest" (“COMI”) is located and generally cooperate with foreign Courts and insolvency practitioners. The Foreign Judgments Act 1991 (Cth) (“FJA”) creates a general mechanism for the registration of judgments obtained in foreign countries. However, the FJA will only apply to judgments from jurisdictions where, in the opinion of the Governor-General, substantial reciprocity of treatment will be afforded to Australian judgments.
Typically, Australian Courts have recognised foreign proceedings under Section 581 of the Corporations Act when requested to do so. However, Australian Courts may be reluctant to enforce foreign judgments where, for example, the relief sought would adversely affect pre-existing rights of Australian creditors. There are no reported cases of an Australian Court refusing to recognise foreign proceedings or grant relief sought under the Cross-Border Act in relation to a corporate insolvency.
Section 581 of the Corporations Act sets out a duty for Australian Courts to render assistance to a foreign insolvency Court when required; that is, an Australian Court must assist bankruptcy Courts of prescribed countries and has a discretion to assist Courts of other countries. The prescribed countries are Canada, Jersey, Malaysia, New Zealand, Papua New Guinea, Singapore, Switzerland, the United Kingdom and the United States. The Model Law provides an alternative procedure, whereby a representative in a foreign jurisdiction may approach an Australian Court requesting assistance in the recovery of property located in Australia belonging to the foreign company.
Many of the cases involving cross-border elements heard in Australian Courts involve the protection of assets and the issuance of injunctions or stay orders.
A debtor’s COMI will determine whether a foreign proceeding will be recognised as a "foreign main proceeding" or a "foreign non-main proceeding". Where a foreign proceeding is recognised as a "foreign main proceeding", creditor actions and enforcement proceedings against the assets of the debtor will be stayed in all non-main jurisdictions (this is not necessarily the case for a "foreign non-main proceeding"). The Model Law is deliberately silent on how to determine COMI. The Cross-Border Act provides for a rebuttable presumption that a debtor’s COMI is its registered office.
The Courts will apply a general test to determine whether the statutory presumption has been rebutted. The general test is that the COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties (Re Eurofood IFSC Ltd  Ch 508). Where a debtor is part of a corporate group, the Court will consider the location of: the debtor’s headquarters; those who manage the debtor; the debtor’s primary assets; the majority of the debtor’s creditors or a majority of creditors affected; and the jurisdiction whose law applies to most disputes.
Foreign creditors have the same rights as other unsecured creditors in formal insolvency processes.
For the most part, the qualifications and registration requirements to act in the roles of administrator, liquidator, deed administrator or receiver are the same, however, each has a distinct set of powers and obligations.
The liquidator’s role is to realise the company’s assets, to investigate the conduct of directors/officers and any pre-appointment transactions (which may give rise to claims by the liquidator) and to adjudicate on creditors’ claims and ultimately distribute the assets realised to creditors pursuant to the provisions in the Corporations Act. Liquidators have broad powers by the Corporations Act and have all powers as are necessary to enable them to wind up the affairs of the company.
An administrator’s primary duty is to operate consistently with the objects of Part 5.3A of the Corporations Act. In this respect, an administrator must investigate the affairs of a company and provide an opinion on the future of the company. The administrator controls the company’s business, property and affairs, and has broad powers including power to borrow money and to carry on, terminate or dispose of the business or any property of the company.
A deed administrators' role is to administer the DOCA to which they have been appointed. Their powers are set out in the DOCA itself (which often mirror administrator powers).
Receivers will usually, as a matter of law, act as agents for a company. Practically, however, a receiver acts in the interests of the secured party that has appointed the receiver, as the receivership is the means by which the secured party is repaid. The powers of receivers are contained in both the Corporations Act and the security pursuant to which they were appointed.
Administrators, liquidators, receivers and scheme administrators are each required to be registered liquidators. Individuals may apply for registration with ASIC and will be assessed on their relevant qualifications, conduct and fitness to act.
In a compulsory liquidation, a liquidator will normally be nominated by the creditor bringing the application to the Court to wind up a company, and will be appointed by the Court. In a creditors’ voluntary liquidation, creditors of the company will resolve to appoint the liquidator (who will ordinarily, and in advance of the meeting, provide a consent to act).
An administrator will most commonly be appointed by way of written instrument by a company where the company’s board resolves that the company is, or is likely to become, insolvent. Less frequently, a liquidator, provisional liquidator or a secured creditor who has an enforceable security interest in the whole, or substantially the whole, of a company’s property may appoint an administrator (however, secured creditors will typically prefer to appoint a receiver in these circumstances).
External administrators may be removed by the Court or by creditors in certain circumstances. For example, the creditors of a company in external administration may resolve in a general meeting to remove and replace the external administrator.
Almost always, the administrator of a company that enters into a deed of company arrangement will become the administrator of the DOCA.
A security agreement will typically grant the secured party the right to appoint a receiver in respect of the secured property once the security becomes enforceable (that is, following an “event of default”). The appointment is made by way of a deed of appointment (and corresponding indemnity).
In a complex restructure, often the debtor and major secured creditor (or syndicate) will have their own lawyers, advisors and accountants. If there is a sale involved, the debtor company (through its appointed external administrator) will often appoint financial advisors and investment banks. If a company is in distress but before the commencement of a formal insolvency process, it may appoint management consultants, restructuring professionals and all of the above to assist through the difficult times.
Generally, these professionals are compensated by the company pursuant to contractual arrangements.
Generally, no authorisations or judicial approvals are required for these employments.
Lawyers owe a fiduciary duty to their clients. Insolvency practitioners have a duty to abide by the Australian Restructuring Insolvency & Turnaround Association Code of Professional Practice.
As noted in 10.1 Typical Advisors Employed, these roles are varied. It is not uncommon for a company in distress to have a team of advisers (including lawyers, accountants, financial advisers and investment banks) seek to assist them in formulating and implementing a restructure. Following appointment, it would be unusual for an external administrator to not at least have a lawyer to provide advice as required.
There is no particular legal impediment to using an arbitration or a mediation to facilitate a restructure.
Often a bank will use an informal mediation to seek to negotiate terms with its borrower(s) (such as a standstill or forbearance arrangement). Although these arrangements cannot bind the whole creditor group, they are useful for reaching agreement between the lender group and borrowers where a debt reduction was negotiated.
An arbitration of disputes or mediation in the course of a restructuring would be unusual. However, mediations are a useful tool for settling the various disputes that may occur during the course of an external administration.
This is not common, but Courts do have the power to order mandatory mediation or arbitration. In the recent Boart Longyear case involving two creditors’ schemes to effect a restructure (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation), the Judge referred the parties to mediation to try and resolve a dispute over, the fairness of the scheme, which the parties ultimately resolved.
Generally speaking,these agreements (to the extent they are set out in a pre-insolvency agreement such as in a dispute resolution clause) would not be enforceable or binding on the insolvent company (with the external administrator in control).
International arbitrations in Australia are governed by the International Arbitration Act 1974 (Cth). Each state and territory in Australia has also enacted legislation regulating arbitration in Australia. Court rules empower Courts to refer matters to mediation and arbitration in certain circumstances and often proceedings are first directed to mediation.
Mediators and arbitrators may be appointed by the parties to a proceeding pursuant to pre-existing contractual arrangements. In a Court-ordered mediation or arbitration the Court may also make the appointment.
Typically, legal professionals who have fulfilled the relevant requirements for registration serve as arbitrators/mediators.
Directors owe a number of general and specific law duties to the company, its shareholders and creditors, including:
To ensure compliance directors should appoint an administrator or liquidator when the company is cash flow insolvent or the company may become cash flow insolvent.
In some situations, directors may become personally liable for unremitted amounts of income tax or GST. The Courts maintain a general discretion under the Corporations Act to excuse directors from liability in some circumstances if they can be shown to have acted honestly and reasonably.
When a company is insolvent or nearing insolvency, the directors’ duty to act in the company’s best interests includes a duty to consider the interests of creditors. In The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)  WASC 239, Owen J held that the directors had breached their duty to have regard to the interests of creditors by entering into refinancing arrangements that improved the secured creditor’s security, to the detriment of other creditors. This was upheld on appeal.
Chief restructuring officers are not widely used in Australia (due to the risk that a party may possibly be deemed to be a “shadow director”). Insolvency practitioners are typically engaged by directors for external advice or to serve an executive function. As alternative capital providers enter the market the use of chief restructuring officers may increase.
The definition of director includes a person not validly appointed but acting in the position of a director and a person whose instructions or wishes, the valid directors or body are accustomed to act in accordance with (known as a "shadow director"). Shadow directors (which may include a creditor) therefore undertake the same duties and liabilities that validly appointed directors would.
In this jurisdiction, shareholders’ liability is limited to any unpaid amounts on a shareholders’ shares.
Part 5.7B Division 2 of the Corporations Act contains what are commonly known as the “clawback” or “avoidance” provisions, for pre-liquidation transactions which may be voidable on application of the liquidator. Transactions may include: unfair preferences; uncommercial transactions; transactions with the purpose of obstructing creditors’ rights; unfair loans; and unreasonable director-related transactions. For the first three of these types of transactions, it must also be shown that the company was insolvent at the time of the transaction or became insolvent as a result of that transaction (Section 588FC of the Corporations Act).
Uncommercial transactions and unfair preferences are voidable if the company was insolvent at the time of the transaction or at a time when an act was done to give effect to the transaction. Australian Courts have held that a transaction is “uncommercial” if a reasonable person in the company’s circumstances would not have entered into it. An unfair preference is one where a creditor receives more for an unsecured debt than would have been received if the creditor had to prove the winding up. The other party to the transaction or preference may prevent it being held void if it can be shown that they became a party in good faith, they lacked reasonable grounds for suspecting that the company was insolvent, and they provided valuable consideration for, or changed position in reliance on, the transaction.
Australian Courts have also determined that loans to a company will be “unfair” and thus voidable if the interest or charges in relation to the loan were, or are, not commercially reasonable. This is to be distinguished from the loan simply being a bad bargain. Any “unreasonable” payments made to a director or a close associate of a director are also voidable, regardless of whether the payment occurred when the company was insolvent.
Upon a finding of a voidable transaction, a Court may make a number of orders impacting the rights of third parties to those transactions. Those orders include: directions that the offending person pay an amount equal to some or all of the impugned transaction; directing a person to transfer the property back to the company; or directing an individual to pay an amount equal to the benefit obtained.
Insolvent transactions (which include both unfair preferences and uncommercial transactions) are voidable if entered into, in the case of unfair preferences, during the six-month period ending on the relation-back day (the “relation-back day” is generally the date of the application to wind up the company or the date of the appointment of a liquidator, or if the company had previously been in administration, the date of the appointment of the administrator), or in the case of uncommercial transactions, during the two-year period ending on the relation-back day.
Unfair loans are voidable if entered into any time before the winding up began.
Unreasonable director-related transactions are voidable if entered into during the four years ending on the relation-back day.
Transactions entered into for the purpose of defeating, delaying or interfering with creditors’ rights on a company’s winding up are voidable if entered into during the ten years ending on the relation-back day.
A liquidator (in a liquidation only) has the standing to bring an application to the Court on behalf of the company and, in certain circumstances, creditors.
Valuations play a key role in many restructuring and insolvency situations. Often the valuation obtained is critical in effecting a restructure and determining the strategy that is implemented. Some examples of the role that valuations can play are as follows:
See 14.1 Role of Valuations.
There are no specific Court processes that dictate who must undertake valuations and/or the relevant valuation methodology to be applied.