Australia: Special report on the Productivity Commission review of restructuring practices in Australia: Part three

This article is the third in our series focussed on the business restructuring recommendations set out in the Productivity Commission's Business Set-up, Transfer and Closure draft report. Our earlier articles may be accessed here.

This week, we consider the proposal to legislate a framework around pre-positioned sales, being the sale of a company's business or assets which is organised in the period immediately prior to a formal insolvency appointment.

Draft recommendation 15.3, pre-positioned sales

• Increasingly in Australia, insolvency practitioners are being appointed as voluntary administrators to companies which have entered into a sale of their business or assets in the days prior to the appointment. The Productivity Commission refers to a sale which is organised prior to appointment as a 'pre-positioned sale'.
• In the UK, such transactions have tended to be entered into immediately after the appointment of a voluntary administrator, by the administrator. This practice is known as a 'pre-pack sale'. Pre-pack sales have been criticized in the UK as lacking transparency, which has become a particular concern where the sale is to a related party. This is notwithstanding the express obligation on a UK administrator to secure the best price reasonably obtainable for the assets.
• There are strong competing views as to the desirability of such sales.
• • There is positive experience of the process, where it has delivered a better value for the assets than would have been obtained if the transaction was negotiated within an insolvency administration, resulting in a better return to creditors overall. In some cases, this will be a smaller deficit to the secured creditor.
  • There is negative experience of the process, where there is a real concern that the process is open to abuse and provides too readily for phoenix activity.
• Acknowledging these views, the Productivity Commission's draft recommendation suggests that a framework be introduced as follows:
• • a pre-positioned sale may be entered into (or organised) during a safe harbour period
  • if that pre-positioned sale is for reasonable market value to an unrelated party, any subsequently appointed insolvency practitioner is unable to overturn the sale
  • if that pre-positioned sale involves a related party, any subsequently appointed insolvency practitioner is expected to examine the sale in the usual way, and their review must include checks that the sale meets all regulatory requirements for related party transactions.
• Generally, submissions support pre-positioned sales and pre-pack sales being subject to a legislative framework which mitigates the risk of abuse.
• DibbsBarker submits that key elements of such a framework should include:
• • transparency around the terms of the sale and reasons given why it was necessary to dispose of the assets in this way
  • whether appropriate marketing efforts were undertaken (or reasons given for not doing so)
  • evidence that the purchase price is market value or the best price reasonably obtainable.
• DibbsBarker is concerned however that any reform which binds an administrator or liquidator to a sale entered into immediately prior to their appointment, be given further and careful consideration. There may be reasons why a sale ought to be overturned even where it is for reasonable market value. For example, the consideration might be deferred, non-cash or subject to conditions, which in all of the circumstances, may or may not be viable and in the best interests of creditors.
• The cost and time involved in reviewing the sale, and the review process itself, is a matter of concern raised in a number of submissions. ARITA proposes amendment to section 439A of the Corporations Act 2001 (Cth) to include a statutory obligation on any subsequently appointed voluntary administrator, to review and report on a pre-positioned or pre-pack sale when reporting to creditors. The concept of a panel of experts is also proposed, for example by PPB Advisory, which panel would be empowered to review a pre-positioned or pre-pack sale. This is a concept under consideration in the UK.
• The Productivity Commission's recommendation is expressed to be limited to any sale organised during a safe harbour period, and so appears to be interdependent on its safe harbour reform (see our second article) being implemented in the manner outlined in its draft report.
• This approach potentially raises challenges and complications, including as each recommendation is refined in the Productivity Commission's final report. In terms of pre-positioned and pre-pack sales, if the sale on its face delivers the best outcome for creditors, and the criteria submitted by DibbsBarker (summarised above) are satisfied, then whether it can be established that it was organised during a safe harbour period ought not to matter.

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