1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
Australia is a federation of states and both federal and state legislation applies to restructuring and insolvency matters, and related secured and unsecured creditor rights. Australia is also a common law jurisdiction.
The term ‘insolvency' in Australia generally refers to companies in financial distress, while the term ‘bankruptcy' generally refers to natural persons in financial distress. The personal bankruptcy system in Australia is governed by the Bankruptcy Act 1966 (Cth) and the Bankruptcy Regulations 1996 (Cth) made under the Bankruptcy Act. The personal bankruptcy regime is not further considered as part of this chapter.
The incorporation, governance, insolvency and restructuring of companies are principally governed by the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth). The Corporations Act contains a ‘cash-flow' test for solvency, which provides that a company is insolvent if it is unable to pay its debts as and when they become due and payable.
Chapter 5 of the Corporations Act contains the legislative framework for schemes of arrangement, receivership, voluntary administration and deeds of company arrangements (DOCAs), and voluntary and compulsory liquidation. Other parts of the Corporations Act contain the statutory rules that govern the conduct of directors and officers, and the rights of shareholders in certain circumstances.
Another important federal piece of legislation to consider – particularly when restructuring and insolvency matters involve a creditor's secured interest in personal property (ie, property that is not real property) – is the Personal Property Securities Act 2009 (Cth). Real property and associated secured interests, such as mortgages and charges, are not governed by national legislation; rather, each state has its own legislation which is broadly similar in nature.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
As a common law jurisdiction, Australia inherited the English concept of a letter of request, incorporating it into Section 581 of the Corporations Act, which permits courts to act in aid of each other. Under Section 581, if a foreign court issues a letter of request to an Australian court, the Australian court may exercise such powers as it could exercise if the matter had originally arisen in the Australian court's jurisdiction. Similarly, an Australian court may request a foreign court that has jurisdiction in external administration matters to act in aid of and be auxiliary to it in an external administration matter.
In addition, Australia has enacted the Cross-Border Insolvency Act 2008 (Cth) which implements the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency. The Model Law provides a process for representatives of foreign restructuring and insolvency proceedings to request and receive assistance so they can essentially exercise the rights and powers available under Australian law. The Model Law applies only to jurisdictions that have ratified it (including the United States, the United Kingdom, Canada, Singapore and New Zealand), however it is not based on reciprocity. Australian courts must assist liquidators and administrators appointed by foreign courts, even if those foreign courts would not assist liquidators and administrators appointed by Australian courts.
1.3 Do any special regimes apply in specific sectors?
No. Specific sectors – whether that be financial services, superannuation or insurance – are all regulated through the same corporate insolvency regime.
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
Australia's restructuring and insolvency regime is largely perceived as protecting the rights and interests of creditors over debtors, and particularly those creditors with security over the whole or substantially the whole of a debtor's property. For instance, this is reflected in the robust rights and priority generally afforded to secured creditors regarding the enforcement and distribution of assets (with some exceptions regarding circulating assets, which give priority to certain remuneration and expenses of voluntary administrators and certain employee entitlements, discussed further in questions 2.2, 3.7(d), 4.6(d) and 4.8). Secured creditors are generally not subject to the stays on enforcement contained in the voluntary administration and liquidation regimes and broadly speaking are not bound by formal insolvency processes. Ordinary unsecured creditors also have an active role in formal restructuring and insolvency processes, and are afforded extensive rights to receive information and participate at meetings that can determine the future of the debtor.
However, small shifts in favour of the debtor have recently been made with the introduction of the ‘safe harbour' regime and the prohibition on the exercise of ‘ipso facto' rights (discussed further in question 1.5) which provide greater protection to a debtor and its directors in situations of financial distress.
1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?
Australia has a very well-established legal regime and infrastructure relevant to insolvency and restructuring, which has broadly been in operation for more than 100 years, with the most recent wholesale legislative changes made over 30 years ago. An extensive body of judge-made or common law supports the comprehensive legislative framework set out in Chapter 5 of the Corporations Act.
The relevant law in Australia is administered by both federal and state courts, who largely have specialist corporations law divisions, although there is no exclusive court system dedicated to insolvency and restructuring matters.
Recent amendments include the Insolvency Law Reform Act 2016 (Cth) which was introduced in February 2016 and had the effect of harmonising the procedures for corporate insolvency and personal bankruptcy in Australia. Importantly, the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) introduced a ‘safe harbour' regime which provides directors of financially distressed companies with greater protection from laws that impose personal liability on the director for the debts incurred by the company while insolvent. It also introduced a moratorium on the ability to rely on ‘ipso-facto' provisions in agreements which give counterparties certain rights (eg, termination rights) where a company is undertaking a formal restructure or is in receivership.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
The form of security interests taken by creditors will depend on the nature of the underlying assets pledged as security. In respect of real property assets in Australia, the Torrens system of title affords ‘indefeasibility of title' to a property owner (effectively meaning that the register, which is separately administered by land titles offices in all states and territories of Australia, is the definitive record of landholding interests). Accordingly, the real property mortgage, which is also registered on the title register, is the preferred method of protecting a creditor's interest in land, as it also attracts ‘indefeasibility of title'. If the interest in real property is not freehold interest in the land, but rather a leasehold interest granted in favour of a party by the landlord or a mining exploration tenement, the form of security taken is a mortgage of lease or a mining mortgage respectively.
The types of security are more variable when dealing with personal property; however, the most common security granted to creditors is a general security deed, as it should give a creditor total control of any enforcement scenario. It is a security interest in all present and after acquired property of a company, including contractual rights, goodwill and capital.
The most common specific assets which are secured include shares (certificated or otherwise), units in trusts, cash in deposit accounts and certain contractual rights. Where a creditor has security over some (but not all) of a company's assets, a featherweight security is occasionally used to purportedly secure the balance of the company's assets.
As a general rule, creditors should assume that any security interest over personal property (that does not arise by operation of law) will need to be appropriately registered under the Personal Property Securities Act 2009 (Cth) (PPSA).
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
Ordinarily, if there is a default under the loan or security agreement, secured creditors can choose a variety of enforcement options without leave of the court, including to appoint a receiver and manager to the secured property, or an administrator to the company. The chosen manner of enforcement under a security agreement is a matter for commercial consideration.
The general rule in Australia is that secured creditors with security over "substantially the whole of a company's property" are not bound by stays or moratoriums against enforcement. Further, restructuring agreements implemented by a deed of company arrangement (which follows a voluntary administration) are not binding on secured creditors.
It is common for a secured creditor to appoint a receiver and manager to the secured property, including non-residential real estate. Receivership is generally considered a private mode of enforcement with the receiver owing his or her primary duty to the secured creditor; whereas voluntary administrators owe duties to a much broader range of creditors, including unsecured creditors.
If enforcement is undertaken in respect of personal property, a secured creditor must consider Chapter 4 of the PPSA, which dictates certain enforcement rules for a creditor seizing or selling collateral. As noted above, it is important that the secured creditor appropriately registers its security interest on the Personal Property Securities Register within the required time period. Usually this is the critical first step required to ‘perfect' the security interest. If the security interest is not perfected, it could result in the secured creditor's security interest vesting in the debtor upon the appointment of a voluntary administrator or liquidator, and prevent a secured creditor from taking enforcement action, leaving it with only an unsecured claim in the debtor's estate.
A secured creditor that does not have security over "substantially the whole of a company's property" is stayed from taking enforcement actions under its security agreement if a voluntary administrator has been appointed to a company (discussed further in question 3.5) without the consent of the voluntary administrator or leave of the court.
Secured creditors always have priority over non-circulating assets. However, in certain circumstances, secured creditors do not have first priority over ‘circulating assets' (sometimes known as floating charge assets), such as stock and inventory. The PPSA provides that some preferred unsecured creditors – such as employees for certain entitlements, and the voluntary administrators for remuneration, costs and expenses – must be paid their debts ahead of the secured creditor.
3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?
Informal workouts are available to companies in Australia and are recognised as a tool to address financial difficulties – although they suffer from the same problem that informal workouts have in many other jurisdictions in that ‘hold-out' creditors cannot be bound. Further, given Australia's strict insolvent trading liability imposed on directors – albeit somewhat lessened by the recent introduction of the ‘safe harbour' regime – it can be difficult for debtors to admit that informal or formal restructuring is needed.
Informal workouts and restructuring processes can be varied and unique, depending on the nature of the business and the underlying cause of the insolvency or lack of liquidity. They work best where there is a relatively small number of creditors that are heavily dependent upon the debtor's services. They typically involve qualified insolvency practitioners, the company and its directors, and other advisers:
- considering the long-term strategic objectives and viability of the company;
- identifying and engaging with key stakeholders and creditors early, to explore options available to renegotiate terms of trade, the repayment of existing debts and other key contracts or refinancing arrangements;
- ensuring that the company's financial and operational information is available in real time to effectively manage its liquidity and solvency throughout the informal workout or restructuring process; and
- developing and documenting a sustainable restructuring plan with short-term measures and long-term goals.
Where undertaken successfully, informal workouts provide companies with an opportunity to continue trading and for management to retain control of the company, while avoiding the destruction of value and interruption that may result from entry into a formal restructuring or insolvency process. The introduction of the ‘safe harbour' regime (discussed further in question 8.1) provides additional comfort for directors when negotiating a workout to avoid personal liability for any potential insolvent trading.
The drawbacks of informal workouts or restructures is that they lack the structure of formal restructuring processes and the certainty and protection from third parties that such processes typically provide. Informal workouts or restructures are generally less transparent; and creditors (unaware of any informal workout) are not restrained from taking legal action or enforcement against a company in relation to debts owing, which may undercut the purpose of any informal workout.
3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
In Australia, the key formal restructuring and insolvency proceedings a company can enter into are voluntary administration, deeds of company arrangements (DOCAs) and schemes of arrangement. Liquidation is not considered a restructuring proceeding and is not further considered.
The directors of a company may appoint a voluntary administrator if they resolve that the company is or is likely to become insolvent. At the conclusion of a voluntary administration, the company will be returned to the control of the directors or wound up, or a DOCA may be entered into.
A range of outcomes are possible through a DOCA, including:
- a debt-for-equity swap;
- a transfer of equity with the consent of existing shareholders; or
- with the leave of the court, a moratorium on secured creditor enforcement.
A DOCA can be proposed by anyone with an interest in the company, but will not bind any secured creditors unless they vote in favour of the DOCA. It need not be approved by the court, but rather by a majority in number and value of creditors that vote. There is only one class of creditor, but secured creditors are not required to vote unless they elect to do so. DOCAs are usually quicker and cheaper to implement than schemes and must protect certain employee entitlements. For example, a DOCA cannot offer employees, without their consent, less than they would receive in a liquidation.
Generally, once a DOCA has achieved its purpose it will be terminated. DOCAs do not affect any rights of future creditors if the company continues to trade, which will occur if the DOCA achieves its aims and the company has been returned to the directors and officers.
Schemes are agreements approved by the court and shareholders of a company, which bind the company's creditors to an arrangement reorganising their existing obligations and rights. Schemes will often be used to facilitate a takeover of a company by a bidder, which will then implement a restructuring of the company. Schemes are generally used only for large restructurings, as they are more expensive, require court approval and take longer to implement than DOCAs. Schemes can bind secured creditors if 50% in number and 75% in value of each class vote in favour of the scheme.
While usually not used as a restructuring process per se, receivership is another formal process that secured creditors usually initiate, which is best used to realise assets without the need for court approval, including via credit bids from secured creditors.
3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
Voluntary administrators can be appointed to a company by its directors if they believe the company is, or is likely to become, insolvent; or by a secured creditor with security over the whole or substantially the whole of the company's property, where the security interest has become enforceable. Once the company is in voluntary administration, a DOCA – which is a plan that can promote a recapitalisation, compromise of debts and/or an operational restructure – may be proposed by any party with an interest in the relevant company, such as directors, secured creditors, unsecured creditors or potential purchasers of the assets or company.
The voluntary administrator must consider the proposed DOCA and compare the likely outcome of the DOCA for creditors (ie, the likely dividend) as against the likely dividend in a hypothetical liquidation. Multiple DOCAs may be proposed by different proponents – there is no exclusivity period. The voluntary administrator must prepare a report to creditors recommending whether each DOCA will likely result in better outcomes for creditors than a liquidation (or any alternate DOCAs).
Schemes are usually proposed by the company. The company will make an application to the court for orders to convene a meeting of creditors to vote upon the proposal. If the creditors vote in favour of the scheme, the matter will again be listed before the court for a hearing to determine whether the scheme should be approved.
The main precondition to success of both DOCAs and schemes is the readiness of secured creditors to work with the company to formulate a plan to restructure and/or recapitalise the company, because secured creditors cannot generally be crammed down in Australia. Whether a secured creditor would be willing to cooperate will largely depend on whether such cooperation is in its best interests. The other main precondition to success is ensuring the directors of the company act early enough to institute a restructuring so as to preserve maximum enterprise value. In the past this proved difficult; but with the recent advent of the safe harbour regime, it is hoped that this will be easier to achieve.
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
Generally, during voluntary administration, the debtor will be under the control of the administrators (directors remain in office, but their powers are suspended). There is no automatic termination of contracts. In fact, the relatively recent prohibition on the enforcement of ipso facto provisions precludes termination of contracts on the basis of debtor insolvency or the appointment of administrators or receivers.
When a company is subject to a DOCA, the deed administrators or the existing or new directors may be in control of the company.
Unsecured creditors will be subject to the moratorium detailed in question 3.5. The effect of voluntary administration on employees and others will depend upon whether the business is continuing to trade. Voluntary administrators are personally liable for the debts incurred as the agent of the company. Unsecured creditors will generally not be able to enforce any security, call on any debts or exercise certain clauses of their contracts during the administration; nor can creditors pursue directors that have provided a personal guarantee for the company's indebtedness.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
During the voluntary administration process, there is a general moratorium which prevents, among other things:
- the enforcement of unsecured creditors' claims;
- repossession of equipment or contract termination by lessors;
- the enforcement of directors' guarantees; and
- the commencement or continuation of litigation against the company.
The moratorium does not apply if the administrator consents or the court grants leave.
If a secured creditor has security over the whole or substantially the whole of the company's property, it may enforce its security without the consent of the administrator or leave of the court within 13 business days of being notified of the administrator's appointment. However, it is common for the 13 business days to be extended by consent.
For contracts entered into from 1 July 2018, a stay applies which prevents counterparties from exercising ‘ipso facto' termination rights because of the company's insolvency or because the company has or proposes to enter into receivership, voluntary administration or a scheme of arrangement, and which lasts for the length of those processes. The stay does not apply to liquidation or DOCAs. While the stay operates to prevent counterparties from terminating contracts, another stay operates in parallel to excuse counterparties from obligations to make further advances of money to the company. There are some exceptions to the stay in favour of the company, including certain types of contracts and contractual rights, such as non-payment or failure to perform, syndicated loans, securities, bonds, promissory notes, financial products, derivatives and certain contracts involving special purpose vehicles.
A company in liquidation is subject to a comprehensive moratorium in respect of enforcement of judgments or the continuation or commencement of litigation against it without the consent of the liquidator or leave of the court, though there is no stay on the enforcement of securities.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
The most common restructuring process is voluntary administration, which generally lasts five to six weeks. The key milestones are the voluntary administrator's report to creditors and the second meeting of creditors, which is generally held around five weeks after the administrator's appointment (although the court can grant leave to extend this period). At the second meeting, the creditors will vote to wind up the company, return the company to the control of the directors or to execute a DOCA. The court does not need to approve the creditors' vote. The administrator's report to creditors sets out the findings from the administrator's investigations into the affairs of the company – in particular, the reasons for its insolvency or likely insolvency, and a recommendation on how the creditors should vote.
If approved, a DOCA must be entered into within 15 business days of the second meeting of creditors or the company will automatically go into liquidation. The flexibility of a DOCA means there is considerable variance in the process once a DOCA is entered into. However, generally a DOCA will involve the creation of a ‘DOCA fund' from which participating creditors will be paid. Secured creditors are not bound by a DOCA unless they vote in favour of it. Employees must receive at least the amount they would receive in a hypothetical liquidation. Control of the company can revert to directors at any time after the DOCA becomes effective.
In a DOCA, participating creditors will submit a proof of debt for the debts owed to them. Once the deed administrators have assessed the claims, the fund will be distributed in accordance with the DOCA (which usually provides for a compromise of creditor claims because the funds available in the DOCA fund will be less than the total claims of participating creditors). Once creditors receive their full entitlement, their claims are generally released in full. It is possible for the company to release third parties under the DOCA such as directors and officers.
Schemes typically take much longer than the voluntary administration and DOCA processes. ASIC is given a minimum 14-day period to review the draft scheme and creditors must be given at least 28 days' notice prior to the meeting of creditors. Following this, the court must be given sufficient time to review the relevant documentation and hold two separate court hearings. In total, schemes generally take between four and six months.
Receivership is not generally considered to be a standalone restructuring process, but rather an enforcement option for secured creditors. Receiverships last until all the secured assets have been realised or the secured debt has been repaid.
3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.
The debtor will be controlled in voluntary administration by the voluntary administrator and in a DOCA by the deed administrator, who act as the agents of the company.
(b) Directors of the debtor
The power of the directors of the debtor will be suspended during a voluntary administration as the administrator will have control of the company. Directors are required to cooperate with the administrators to ensure all necessary books, records and other information are made available to the administrators.
If the company goes from voluntary administration into a DOCA, the effect on directors will depend on the DOCA's terms. When the DOCA is completed, the directors regain full control, unless the DOCA provides for the company to go into liquidation on completion.
(c) Shareholders of the debtor
Administration and DOCAs prioritise creditors over shareholders.
Shareholders cannot vote on the company's future and cannot transfer their shares in the company during the administration without the administrator's or court's consent, though they can inspect the books and records maintained by the administrator.
Similarly, the deed administrator may transfer shares in the company only with the written consent of the shareholder or the court's permission.
(d) Secured creditors
Secured creditors will be bound by a DOCA only if they vote in favour of it. They can submit claims for and vote in relation to their debt and vote at the meetings of creditors. As set out above, creditors with security over the whole or substantially the whole of the property of the company can enforce their security within 13 business days of being notified of the appointment of the administrator. Unless the administrator consents to extending this period, secured creditors cannot enforce their security interest in company assets over the course of the administration.
Secured creditors generally rank ahead of unsecured creditors. However, certain creditors (eg, employees) and the administrators will rank ahead of the secured creditor in respect of circulating assets (eg, cash, inventory and receivables) in circumstances where there would otherwise be insufficient funds to pay those claims in full.
(e) Unsecured creditors
Unsecured creditors can vote on the future of the company, however will be bound by a DOCA regardless of whether they vote in favour of it. They can enforce their debt claims only with the consent of the administrator or court.
Employees are not automatically terminated upon the appointment of an administrator, although the administrator has the power to terminate their employment as agent of the company. The administrator is personally liable for employee wages and salaries accruing subsequent to their appointment.
DOCAs must ensure that employee claims for certain unpaid employee entitlements (in respect of the period prior to the appointment of the administrator) are given priority over other unsecured claims and secured creditors' claims in respect of circulating assets, unless the court approves an exclusion or the employees resolve at a meeting of creditors to accept an exclusion.
(g) Pension creditors
Australia's mandatory pension (referred to as superannuation) system operates independently of the employer, such that employees and employers must contribute a percentage of an employee's salary to a superannuation fund of the employee's choice on a quarterly basis. Employees are entitled to be paid only such amounts from the superannuation fund as have been contributed throughout the course of their employment. Superannuation liabilities are afforded priority over other unsecured liabilities and claims are usually submitted by the Australian Taxation Office or the fund on behalf of the employee. There is generally no ‘final income' pension system in Australia.
(h) Insolvency officeholder (if any)
The role of the voluntary administrator is to take control of the company, investigate the reasons for its failure and make recommendations to creditors as to the future of the company. The administrator's key role is to assess whether any proposed DOCA would result in a better return to creditors than a liquidation.
Following the second meeting of creditors, the voluntary administrators will usually become either the administrators of the DOCA or the liquidator.
Voluntary administration is an out-of-court process. However, the court has a supervisory jurisdiction and may be called upon when there are questions regarding, among other things, the validity of the appointment of the administrators or the voluntary administration process. Similarly, when a DOCA is proposed during a voluntary administration, creditors or other interested parties can commence proceedings before the court to challenge the validity of the DOCA.
The court plays a more central role in schemes, holding at least two court hearings, reviewing and ultimately providing final approval of the proposed scheme.
3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?
Once approved, a DOCA will bind the company, directors, shareholders, unsecured creditors and any secured creditor that has voted in favour of the DOCA. In order for a DOCA to be approved, a bare majority of all creditors, being 50% of creditors in value and number, must vote in favour of the DOCA. There are no separate classes of creditors that vote on the DOCA proposal. If the resolution to creditors proposing the DOCA is not passed by the requisite ‘double majority', the administrator has a casting vote and will usually exercise that vote according to their recommendation in the report to creditors. This voting process allows for dissenting creditors, excluding secured creditors who did not vote in favour of the DOCA, to be bound by the wishes of the majority. ‘Cross-class cramdown' is available to the extent that there is only one class, excluding secured creditors, which did not vote in favour.
Secured creditors that do not vote in favour of the DOCA are not ‘crammed down' by the DOCA vote and cannot be compelled to release their security, although the court can prevent them from enforcing their security. Nonetheless, a common way for non-consenting secured creditors to be defeated is for the first-ranking secured creditor to appoint a receiver, who will often run a sale process. The receiver has the ability to sell through any subsequent ranking security.
Schemes can also facilitate ‘cramdown' of creditors, as approval requires 75% by value and 50% by number in each class. However, unlike in a DOCA which only has one class, schemes can have multiple classes of creditors and the threshold in a scheme must be met within each creditor class.
3.9 Can restructuring proceedings be used to compromise secured debt?
A DOCA can compromise secured debt only with the consent of the secured creditor or by court order (however, see the comments in question 3.8 regarding the ability of the receiver to do so). In contrast, schemes can compromise secured debt if the secured debt is within the minority.
DOCAs are suited to instances where the whole debt matrix, including trade creditors, must be compromised. Further, creditor claims against third parties such as guarantors will not be released.
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
Only in liquidation can contracts and leases (including leases of real property where the company is the landlord) be formally disclaimed or challenged as voidable transactions.
The Corporations Act does not provide for contracts or leases to be disclaimed by a voluntary administrator or deed administrator while a company is in administration or under a DOCA. That said, administrators are generally not obliged to continue performance of pre-existing contracts, including leases; and, being an agent of the company, may repudiate the contracts or lease on behalf of the company without incurring personal liability. Repudiation absolves the administrator from future personal liability in respect of those contracts or leases. Unless the counterparty can obtain an order for specific performance or enjoin any anticipatory repudiation, the remedy for the counterparty is an unsecured claim for damages in the external administration.
Further, with respect to leases, the Corporations Act addresses the personal liability of administrators via a separate statutory regime created by Section 443B of the Corporations Act, which provides that within five business days of the administration commencing, administrators can provide to the landlord a notice stating that the company does not propose to exercise its rights in relation to the property. Where such a notice is issued, the administrators will not be personally liable for rent or other amounts payable under the lease while the notice is in effect. Importantly, and unlike disclaimers, this notice does not affect the company's liability under the lease. A notice under Section 443B ceases to have the effect of alleviating the administrator's personal liability for rent or other amounts due under the leases if the administrator revokes it in writing or where the company exercises or purports to exercise a right in relation to the property (excluding mere occupation/possession of the property without use).
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
Section 444D(1) of the Corporations Act makes a DOCA binding on creditors. However, the High Court of Australia (Australia's highest appellate court) has held that a DOCA purporting to release creditors' claims against entities other than the company under administration are not authorised (Lehman Bros Holdings Inc v City of Swan; Lehman Bros Asia Holdings Ltd (in liq) v City of Swan (2010) 240 CLR 509). Accordingly, a DOCA cannot be used to extinguish claims against non-debtor parties.
However, schemes can be used to release claims against third parties. The Full Court of the Federal Court of Australia has confirmed that there is no reason why rights against third parties cannot be included in a scheme, provided that there is an element of give and take involved (Fowler v Lindholm (2009) 178 FCR 563).
The difference between these two situations is that, unlike Section 444D(1), Section 411(4) – which makes certain compromises or arrangements binding on creditors – does not qualify the extent to which creditors are bound.
While a DOCA may be approved by the creditors of the debtor at a meeting of creditors, a scheme of arrangement requires court approval.
3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?
Part 5.3A of the Corporations Act (which deals with voluntary administration and DOCAs) provides a framework which allows the funding of companies in administration and specifies that administrators will be held personally liable for any funds borrowed. The administrator has a right of indemnity from the company for these funds which is secured by a statutory lien over circulating assets. However, the statutory lien does not take priority over existing secured creditors (unless they consent).
The same position applies to schemes, although there is no statutory framework for the provision of such ‘debtor-in-possession style' lending.
3.13 How do restructuring proceedings conclude?
A voluntary administration will conclude following the second creditors' meeting. At the second meeting, the creditors will vote to wind up the company, return the company to the control of the directors or enter into a DOCA, in all cases ending the voluntary administration.
A DOCA will typically conclude when each creditor has been paid its dividend from the DOCA fund. Once the final payment is made, the company will usually be returned to the control of the directors or, if the purpose of the DOCA was to transfer the assets of the company to another company, it will be wound up.
Schemes will generally conclude shortly after they are implemented, which occurs after the second court hearing in which the court authorises the company to enter into a scheme previously approved by the requisite classes of creditors.
4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
In Australia, where an insolvent company is unable to come to agreement with its creditors through a restructuring process, it can be wound up through a creditors' voluntary liquidation or a compulsory liquidation. These processes are largely identical and are both governed by the Corporations Act, with the key difference being the party initiating the appointment (discussed further in question 4.2). The liquidation process provides an orderly mechanism for the preservation, realisation and distribution of the assets of the debtor in the order prescribed by the Corporations Act. A liquidator is empowered to investigate the conduct of the affairs of the company prior to his or her appointment and set aside certain antecedent transactions to recover assets for the benefit of the debtor's creditors.
Secured creditors of a company in default of their security interest may appoint a receiver to the company if the security agreement between the debtor and the creditor enables it to do so, which is usually the case. The role of the receiver is to realise the assets of the debtor which are subject to the security interest of the secured creditor to enable repayment of the debt owed to the secured creditor. The duties and powers of the receiver are governed by the Corporations Act and the terms of the security agreement between the secured creditor and the company.
While liquidators are required to act in the best interests of the debtor's creditors as a whole, the role of a receiver is to act in the interests of the secured creditor which appointed them.
4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?
A creditors' voluntary liquidation is initiated by a special resolution of the shareholders of a company in circumstances where there is no declaration of solvency made by the directors of the company. Alternatively, a creditors' voluntary liquidation can be initiated by creditors of the company at the second meeting of creditors of a company in voluntary administration.
A compulsory liquidation is initiated upon an application to the court for an order that the debtor be wound up. The court is empowered to make such an order where the debtor is insolvent or on other grounds as set out in Section 461 of the Corporations Act. Where the debtor fails to comply with a creditor's statutory demand for payment, it is presumed to be insolvent. An application for an order that a debtor be wound up can be brought by the company, its shareholders, its creditors and the Australian Securities and Investment Commission (ASIC), among others.
Where a shareholder initiates a creditors' voluntary liquidation, it may select the identity of the liquidator. However, the liquidator may be replaced by creditors of the company at the first meeting of the creditors or by court application.
Where the creditors' voluntary liquidation is initiated by creditors at the second meeting of creditors of a company in administration, the voluntary administrator is appointed as the liquidator of the company unless creditors vote to appoint an alternative person as liquidator at that meeting.
In the case of a compulsory liquidation, the identity of the liquidator is generally selected by the applicant for the order that the debtor be wound up, although each state court procedure may be different.
A secured creditor appointing a receiver can select the identity of the receiver.
4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
Once appointed, a liquidator will ordinarily cease trading the business operations of the debtor. However, where it is necessary for the beneficial disposal or winding up of the business, the liquidator has the power to and may trade the business for a period of time to enable the sale of the debtor's business as a going concern, or the sale of assets.
A secured creditor's ability to enforce security interests against the debtor will be unaffected during a liquidation. However, unsecured creditors will be restricted in their ability to enforce their claims against the company as detailed in question 4.4 below and will instead need to lodge a claim in the liquidation as detailed in question 4.7 below.
Receivers will take control of such portion of the debtor's assets and business which are subject to the security interest of the secured creditor appointing the receiver and may be empowered by the terms of their appointment to operate the business of the debtor.
The appointment of a receiver will not have a direct impact on the debtor's creditors generally other than as specifically noted in question 4.6(e) below.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Where a debtor is wound up, either in insolvency or by the court:
- court proceedings against the debtor cannot be commenced or continued without leave of the court and are subject to such terms as the court considers fit to impose; and
- enforcement processes in relation to the property of the debtor cannot be commenced or continued without leave of the court.
However, the secured creditors retain the right to realise or otherwise deal with their security after the winding up has commenced.
In the case of a creditors' voluntary liquidation, any execution, sequestration or attachment in relation to the property of the debtor is declared void by the Corporations Act.
Where an application has been made for a debtor to be placed into liquidation by the court and that application is yet to be determined, the debtor, a creditor or a contributory (ie, a person that is liable as a member or past member to contribute to the property of the debtor if it is wound up, or a holder of fully paid shares in the debtor) may apply to the court to stay or restrain any further action in a proceeding or action against the debtor.
The appointment of a receiver to a debtor does not in itself give rise to a stay or a moratorium. This is why a secured creditor will often appoint both a receiver and a voluntary administrator.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
The liquidation process usually involves:
- the issue of an initial report to creditors notifying them of the appointment of the liquidator within 10 business days (for a creditors' voluntary liquidation) and 20 business days (for a court liquidation);
- the securing and realisation of assets;
- termination of the employment of employees and winding down of the business of the company;
- identification of creditors;
- investigation of recovery actions and claims available;
- the issue of a detailed report by the liquidator within three months of appointment setting out the financial position of the debtor, the investigations of the liquidator, possible recovery actions or claims available to the company and the dividend position of the company;
- pursuit of claims or recovery actions; and
- a call for formal proofs of debt and distribution of dividends.
The length of the liquidation will depend on:
- the nature of assets to be sold by the liquidator;
- the size and nature of the business operations to be wound up; and
- the recovery actions and claims available to the debtor, and its ability to pursue those.
Key milestones in a receivership are:
- entry into possession or control by the receiver of the assets that are the subject of the security. This should occur shortly after appointment;
- appointment of the receiver over the business of the debtor, and the operation of that business;
- facilitation of an orderly sale process for the assets or business of the debtor; and
- distribution of the proceeds of sale to the secured creditor and to any employee creditors, who will have priority claims (see question 4.8 below for further detail).
The length of a receivership can vary significantly, based on the nature of the business or assets over which the appointment occurred.
4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.
As detailed above in question 4.3.
(b) Directors of the debtor
Upon the appointment of a liquidator, the powers of the directors of the debtor are suspended. However, the directors are not removed from office as a result of the liquidation.
The directors' powers remain in force on the appointment of a receiver; however, they are subject to any restrictions contained in the security agreement between the debtor and the secured creditor and the extent of the assets of the debtor over which the receiver is appointed. Directors are obliged to assist the liquidator or receiver and must not obstruct them in carrying out their duties.
The liquidator is responsible for investigating the conduct of directors of the debtor prior to the liquidator's appointment and reporting breaches of directors' duties in the Corporations Act. A receiver is not obliged to conduct an investigation into the affairs of the debtor; however, the receiver is obliged to report any irregularities or breaches identified over the course of their appointment to ASIC. The Corporations Act empowers the liquidator to make a claim against the directors for orders compensating the company for losses suffered by the company as a result of any breaches.
(c) Shareholders of the debtor
A liquidator can call on shareholders of the debtor to pay any unpaid share capital to the debtor. Once the liquidation of a debtor has commenced, a transfer of shares or alteration of the status of a member is void unless the court makes an order authorising the transfer or alteration, or the liquidator consents to the transfer or alteration (unconditionally or subject to certain conditions which have been met). A creditor, the transferor or transferee may apply to the court for an order authorising the transfer or for any conditions imposed by the liquidator on the transfer to be set aside.
The appointment of a receiver does not have direct impact on the shareholders of the debtor. Receivers are not obliged to report to shareholders as to the conduct of the receivership.
(d) Secured creditors
Liquidation does not prevent secured creditors from enforcing their security interests, unless the security interest has vested in the debtor as a result of the appointment of the liquidator (eg, as a result of the security interest being unperfected or unenforceable at the time of the appointment of the liquidator).
A liquidator cannot deal with or otherwise dispose of an asset that is subject to a security interest without the secured creditor's consent. Where secured property is dealt with or disposed with the consent of the secured creditor, the secured creditor is entitled to be paid out of the proceeds of sale in priority to other creditors; however, the liquidator will likely have a lien over the proceeds of sale for the costs, expenses and remuneration incurred for the care, preservation and realisation of the secured property.
(e) Unsecured creditors
Where a liquidator is appointed to a debtor, all unsecured creditors that have a debt owing from or a claim against the debtor are entitled to submit a claim with the liquidator. If their claim is admitted, they are entitled to receive a proportional distribution of the assets available to meet the claims of creditors in accordance with the priorities in the Corporations Act (detailed below in question 4.8).
Where there are mutual liabilities between a creditor and a debtor in liquidation, the Corporations Act provides for those liabilities to be automatically set off against each other, subject to certain conditions being met, leaving the balance to be a claim against or by the debtor.
As the primary beneficiaries of the liquidation process, once their claim has been admitted by the liquidator, unsecured creditors are entitled to:
- vote on resolutions proposed by the liquidator;
- receive reports and request information or inspect the books of the liquidator;
- approve the liquidator's remuneration;
- replace the liquidator;
- direct that the liquidator call a meeting of creditors; and
- appoint a reviewing liquidator to review the liquidator's remuneration or the costs and expenses of the liquidation.
The Corporations Act also gives unsecured creditors the ability to form and be appointed to a committee of creditors. The role of the committee of creditors is to monitor, assist and advise the liquidator as representatives of the general body of creditors. The committee may direct the liquidator as to the conduct of the liquidation and approve certain actions of the liquidator in place of the general body of creditors.
The appointment of a receiver itself does not have any direct impact on the unsecured creditors of the company. However, a receiver has an obligation to pay the proceeds of certain circulating assets to employees in satisfaction of their outstanding entitlements.
Where a debtor in administration proceeds to liquidation, it is ordinarily the case that the administrator of the debtor takes on the role of the liquidator, unless:
- in the case of a creditors' voluntary liquidation, the creditors resolve that a different individual should be appointed as liquidator; or
- in the case of a compulsory liquidation, the court appoints a different individual as liquidator.
If a receiver is appointed at the same time the debtor is in liquidation, the receiver has priority to deal with its secured assets.
The appointment of a liquidator does not result in the automatic termination of employees of the company. Employees have all the rights of unsecured creditors and, as detailed in question 4.8, have priority over ordinary unsecured creditors for their unpaid wages, superannuation, leave and redundancy entitlements.
The commonwealth government operates a fair entitlements guarantee scheme whereby employees whose employer has been placed into liquidation are, in certain circumstances, entitled to make a claim for payment of their unpaid wages, unpaid leave entitlements and unpaid redundancy entitlements up to a certain statutory limit. The commonwealth subrogates for the employees' claims and is entitled to receive any dividends that would be paid to those employees in the winding up, and is afforded the same priority in respect of its claim as the claims it has paid.
Similarly, the appointment of a receiver does not automatically terminate employment contracts. The receiver has the power to engage or discharge employees on behalf of the debtor. The impact of a receivership on employees will depend on the extent of the security held by the secured creditor appointing the receiver. Where the security is held in respect of specific assets only, the receivership is unlikely to have an impact on employees. However, where the security extends over a substantial part of the business, the receiver may want to continue employing the employees until the business is sold. Where employees remain employed, the receiver will be personally liable under the Corporations Act for the wages of the employee.
(i) Insolvency officeholder
Liquidators and receivers act as agents of the debtor and are officers of the debtor who are subject to the duties imposed on officers of the debtor by the Corporations Act, including:
- a duty of care;
- a duty to act in good faith and in the best interests of the debtor; and
- a duty not to use their position or information gained as a result of their position to obtain a benefit for themselves or someone else while causing a detriment to the debtor.
The liquidator's role is to:
- preserve and realise the assets of the debtor;
- investigate the conduct of the directors;
- identify and pursue any voidable transactions (detailed at question 4.10);
- report to creditors and ASIC; and
- make distributions to creditors in accordance with the priorities in the Corporations Act (detailed at question 4.8).
A receiver owes no direct duties to the general body of the debtor's creditors, other than as set out in question 4.6(e)in respect of employees and certain circulating assets. However, the receiver must not sell the secured assets for less than their market value or, where the security does not have a market value, the best price reasonably obtainable in the circumstances.
The court has a limited role in the conduct of receiverships and liquidations. However, receivers and liquidators are subject to court oversight and can approach the court for directions.
4.7 What is the process for filing claims in the insolvency proceedings?
Creditors can file claims in a liquidation by providing the liquidator with a completed proof of debt form (which will be circulated to creditors together with the liquidator's notice of appointment).
A proof of debt can be submitted for all claims against the company (present or future, certain or contingent, liquidated or unliquidated), which arise out of circumstances that took place before the appointment of the liquidators. Usually, penalties and fines imposed by a court for beaches of law are not provable.
Where a creditor has submitted a proof of debt, the liquidator must assess the claim and the evidence provided in support, and make a decision as to whether to admit or reject the claim. Where a liquidator has rejected a proof of debt, the liquidator must notify the creditor of the grounds of rejection within seven days of the rejection. Where a creditor's proof of debt has been rejected by a liquidator, the creditor can appeal the liquidator's decision to court within 14 days of the notice setting out the grounds of rejection.
A secured creditor is entitled to lodge a proof of debt for, and vote for, any shortfall in the amount of the debt owed to the secured creditor after deducting the amount actually or estimated to be realised from the security held. Where a secured creditor votes in respect of the whole amount of its secured debt, the secured creditor is taken to have surrendered its security.
4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?
In the case of a liquidation, assets of the debtor which are available for distribution to the general body of the debtor's creditors are ordinarily distributed in the following order:
- costs and expenses of the liquidation (including any costs incurred by a creditor in applying to have the debtor wound up);
- claims by employee creditors for unpaid wages, superannuation, leave entitlements, pay in lieu of notice and redundancy pay;
- claims of unsecured creditors; and
- amounts owing to shareholders of the debtor in their capacity as shareholders (for example, unpaid dividends).
Each class of creditor must be paid in full before the next class is paid. If there are insufficient funds to pay a class in full, then the creditors in that class are paid on a pro rata basis and the remaining classes of creditors are paid nothing.
Secured creditors are entitled to be paid ahead of all other creditors from the realisation of the assets over which they hold a valid security. However, where the secured creditor holds security over circulating assets (eg, cash, receivables, inventory and similar assets), the secured creditor is subordinated to the claims of employees (in the case of a liquidation, this applies only where there are insufficient assets available for distribution to the general body of the debtor's creditors to enable employee claims to be paid in full).
There is no concept of equitable subordination in Australia as that concept exists in the United States.
4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
The appointment of a receiver or a liquidator to a debtor does not lead to automatic termination of the contracts entered into by the debtor. However, the contract may include provisions giving the counterparty a right to terminate a contract as a result of the appointment.
For contracts entered into after 1 July 2018, counterparties are restricted from exercising termination, enforcement or other rights, which in substance arise as a result of the appointment of a receiver over the whole or substantially the whole of a debtor's property (subject to certain types of contracts which are excluded). No such restriction applies where the right arises due to the appointment of a liquidator due to the nature of the liquidation process.
Where a contract is brought to an end by a counterparty as a result of the liquidation, any claim for damages arising from the debtor's breach will be a claim that the counterparty will need to submit a proof of debt for in the liquidation. A liquidator also has the power to disclaim unprofitable contracts.
While a receiver does not have the power to disclaim contracts, the receiver may repudiate a contract entered into by the debtor, leaving the counterparty with only a claim against the company for any consequential damages which, if the debtor is in liquidation, will be a claim in the winding-up.
4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?
Certain transactions entered into by a debtor prior to commencing liquidation can be challenged and in some cases set aside by a liquidator, but not by a receiver, voluntary administrator or deed administrator.
The following types of transactions can be set aside if the debtor was insolvent at the time that the transaction was entered into, or the transaction caused the debtor to become insolvent (‘insolvent transaction'):
- Unfair preference: A payment made to a creditor in the six months (four years for a related party) prior to the date the liquidation commenced which has resulted in the creditor receiving more than it would have received if it had proved for the debt in the winding up of the debtor.
- Uncommercial transaction: A transaction that a reasonable person in the debtor's circumstances would not have entered into, having regard to the benefit and detriment of the transaction to the company, the respective benefits to other parties of the transaction and any other relevant matter. The look-back period for such transactions is two years (four years in the case of a related party) prior to the date liquidation commenced.
Further, the following types of transactions are voidable regardless of whether the transaction was an insolvent transaction:
- Unfair loan: A loan with terms relating to interest or other charges which are/were extortionate. Avoidance of such a loan is not limited by any look back period.
- Creditor defeating disposition: A transaction which involves disposition of the debtor's property for the lesser of the market value of the property or the best price reasonably obtainable for the property in the circumstances, and which has the effect of preventing, hindering or delaying that property becoming available for the benefit of a creditor. The look-back period for such transactions is one year prior to the date the liquidation commenced.
- Unreasonable director related transaction: A transaction between the director or a close associate of the director and the debtor which a reasonable person, having regard to the benefit and detriment of the transaction to the debtor, respective benefits to other parties of the transaction and any other relevant matter, would not have entered into the transaction. The look-back period for such transactions is four years prior to the date liquidation commenced.
It is a defence to an unfair preference, uncommercial transaction or creditor defeating disposition claim if the other party to the transaction:
- received the benefit in good faith;
- had no reasonable grounds to suspect, and did not suspect, the insolvency of the debtor; and
- provided valuable consideration for or changed its position in reliance on the transaction.
Where there is an ongoing trading relationship between a debtor and a party subject to an unfair preference claim, such that the level of indebtedness increases and decreases as a result of a series of transactions, that party may be able to rely on the ‘running account defence' to argue that the preference received should be assessed, not by the value of the payments received, but by the net change in indebtedness between the party and the debtor in the six months prior to the date liquidation commenced.
These defences are not available for unfair loans or unreasonable director related transactions.
4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
Liquidation concludes when the debtor is wound up and deregistered. At the end of the liquidation, the debtor ceases to exist and therefore no liabilities of the debtor can survive liquidation.
The receivership will come to an end, via a deed of retirement, once the receivers have collected and realised all of the secured assets over which they were appointed, or enough of the secured assets to repay the secured creditor who appointed them. All other liabilities of the debtor continue once the receivership has concluded.
5 Cross-border / Groups
5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?
Foreign companies that are registered under the Corporations Act or carry on business in Australia fall within the classification of a ‘Part 5.7 body' under the Corporations Act. Such entities may avail themselves of Australian insolvency processes.
Foreign entities may wish to utilise Australian insolvency processes if it is more convenient or if the Australian processes offer more favourable features than other jurisdictions.
Under the Corporations Act, Australian courts also have jurisdiction to order an ancillary liquidation where a foreign company registered in Australia is subject to a contemporaneous foreign liquidation.
5.2 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?
Article 15 of the UNCITRAL Model Law, adopted by the Cross-Border Insolvency Act, sets out the requirements for recognition of a foreign proceeding. These requirements generally relate to the form which an application for recognition should take. For example, it should be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative making the application.
If a foreign proceeding complies with the requirements for recognition, an Australian court must recognise it, unless to do so would be ‘manifestly contrary' to public policy (see Article 6 of the Model Law). The threshold of ‘manifestly contrary' is very high. The Enactment Guide to the Model Law states that the exception should be limited to matters "of fundamental importance for the enacting State".
Section 581 of Corporations Act provides an alternative basis for recognition of foreign proceedings. This section relates to the receipt of a letter of request by Australian courts from the court of a foreign jurisdiction in which insolvency proceedings have been commenced. Australian courts tend to recognise foreign proceedings pursuant to this section, but there have been exceptions. For example, in Yu v STX Pan Ocean Co Ltd  FCA 680 the court was reluctant to grant additional relief in circumstances where the relief sought would adversely affect any rights that other Australian creditors may otherwise have had.
5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
Section 581 of the Corporations Act provides that Australian courts must assist the courts of prescribed countries in all external administration matters. This is supplemented by the discretion to assist courts of countries that are not prescribed. Current prescribed countries include the United States, Malaysia, Singapore and the United Kingdom.
Article 25 of the UNCITRAL Model Law requires courts to cooperate to the maximum extent possible with foreign courts. The Model Law does not operate on a reciprocity basis, meaning that Australian courts must assist liquidators and administrators appointed by foreign courts, even if those foreign courts would not assist liquidators and administrators appointed by Australian courts.
Further, representatives in foreign jurisdictions may approach Australian courts requesting assistance in the recovery of property located in Australia belonging to the foreign company pursuant to both the Model Law and Section 581 of the Corporations Act. The latter was invoked in Re Cow Cho Poon (Private) Limited (2011) 249 FLR 315, in which a Singaporean liquidator was granted authorisation to open, close, redesignate and operate bank accounts held by the company in Australia.
5.4 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?
There are mechanisms in place within the legislation and with regard to the practical aspects of the various insolvency proceedings which are designed to assist in the efficient administration or restructuring of corporate groups. For instance, for voluntary administrations of separate entities within a single corporate group, meetings of creditors in respect of those separate entities may be held concurrently where appropriate in order to reduce the inconvenience and costs associated with repetitive meetings.
As a further example, restructures are often effected in Australia via a deed of company arrangement (DOCA). In appropriate corporate group scenarios, creditors of the various separate entities may approve related companies entering into a ‘pooled DOCA', where the affairs of multiple related entities are dealt with collectively.
Provisions also exist to allow pooling orders in group liquidations where the affairs of a group of companies are treated as if it were a single external administration because it is just and equitable to do so.
With respect to protections afforded to creditors of subsidiaries within a corporate group, there are also legislative provisions which allow a creditor to pursue an entity's parent company for the debts of the subsidiary if certain criteria are met, such as the parent company being in substantive control of the subsidiary and in a position to have sufficient knowledge of its affairs.
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
The Cross-Border Insolvency Act 2008 (Cth) does not define ‘centre of main interests', in accordance with the expectation that Australian courts will be guided by overseas decisions to ensure harmony with other jurisdictions (see [1.7] of the Explanatory Memorandum). International judicial interpretation has clarified the objective nature of the independent determination to be made utilising a fact-based balancing method, with facts which are objectively ascertainable by third parties being particularly relevant. However, there is no general consensus regarding a precise definition and each case will need to be considered on its merits.
In Buccaneer Energy v Buccaneer Energy  FCA 711, Justice Jagot held that although the debtor was registered in Australia and listed on the ASX, the United States was its centre of main operational and business interests. The judge relied on the debtor only having a letterbox as an ‘office' in Australia, business cards identifying Houston as its office address, publicly available taxation records showing that the company was based in the United States and little evidence of activity being carried out in Australia.
In Ackers v Saad Investments Company Ltd (in liq) (2010) 190 FCR 285;  FCA 1221, Rares J held (at ) that the appropriate test for ascertaining a debtor's centre of main interest was the approach taken in the Court of Justice of the European Union's (CJEU) decision Re Eurofood IFSC Limited  Ch 508;  All ER(EC) 1078 at -. In that decision, the CJEU held that the centre of main interest "should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties".
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
Under the UNCITRAL Model Law on Cross-Border Insolvency, enforced under the Corporations Act 2001, foreign creditors have the same rights as domestic creditors in the commencement of, and participation in, court proceedings. This requires compliance by administrators with all substantive and procedural protections afforded to creditors, such as the requirement that foreign representatives be provided the same notification as any creditor afforded in Australia, to the extent that their address is known.
Further, foreign unsecured creditors rank equally with Australian unsecured creditors in the absence of any priority specified under the Corporations Act, other than for claims concerning foreign tax and social security obligations. This effectively excludes foreign revenue claims from recognition in domestic insolvency proceedings altogether.
6 Liability risk
6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?
There is no express positive obligation contained within the legislative provisions requiring that a director of a company commence insolvency proceedings (ordinarily through the appointment of a voluntary administrator) in the event that the company is insolvent or likely to become insolvent. However, in practical terms, that obligation arises out of a combination of the directors' statutory and common law duties, as well as the penalties which may apply in the event that a director allows the company to trade insolvent (see question 6.2).
Directors additionally owe a duty in the zone of insolvency to consider the interests of creditors in discharging their duties to the company, and can expose themselves to personal liability if they act in breach of these duties (see question 6.2).
Accordingly, there is a strong incentive for directors to ensure that insolvency proceedings are commenced upon or prior to the point of insolvency to avoid the potential for personal liability. The potential for directors to incur personal liability in the context of insolvency is discussed further in question 6.2. Importantly, the legislation gives a director the power to appoint a voluntary administrator prior to the actual point of insolvency, as an appointment may be made either when the company is insolvent or if, in the opinion of the director, the company is likely to become insolvent.
6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?
A director may incur personal liability for the post-insolvency debts of a company in the event that a director allows the company to continue to incur debts at a time where the director knew, or acting reasonably ought to have known, that the company was insolvent. This is the ‘insolvent trading' liability which arises from the legislation. Specifically, liability will be imposed for insolvent trading where:
- the company incurs a debt while insolvent (or becomes insolvent by incurring that debt);
- there were reasonable grounds to suspect that the company was insolvent (or would become insolvent) when the debt was incurred; and
- the director was aware of such grounds or a reasonable person in his or her position would be.
Furthermore, a director may be sued for damages in the event that he or she breaches his or her general director's duties which, in broad terms, require a director to act in good faith and with reasonable care and skill, in the best interests of the company. These duties, including fiduciary duties, arise under both the legislation and the common law. In particular, directors in the zone of insolvency owe a duty to consider the interests of creditors in discharging their duties to the company. A failure to act with due diligence and care in relation to the management of a company that prejudices creditors may leave directors personally exposed to claims by the company (either directly, on a derivative basis or by external administrators).
6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?
As set out in question 5.4, a parent company may be held liable for the debts of an insolvent subsidiary in the event that the directors of the holding company were aware, or ought to have been aware, that the subsidiary was insolvent at the time of entering into the relevant transaction. This also requires that the parent company control at least 50% of the shares in the subsidiary.
Generally speaking, shareholder liability is limited to the capital invested into the company by the respective shareholder.
7.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?
While theoretically possible to pre-pack the sale of an insolvent debtor's assets in Australia, there is no legislation that specifically facilitates this, and there are various statutory and practical restrictions which make pre-pack sales in Australia more difficult to effect.
In a receivership, the most significant hurdle to pre-pack sales is the statutory duty imposed on a receiver to take all reasonable care to sell the assets of the debtor in receivership for market value, or to otherwise obtain the best reasonably attainable price in the circumstances. In considering whether this duty has been breached, courts tend to focus on the process employed by the receiver in testing the value of the asset in the market. A pre-pack sale executed by a receiver makes an arm's-length sale process difficult to effect.
It is better to effect a pre-pack in a voluntary administration. That said, in a voluntary administration, the execution of a pre-pack sale is restricted by the requirement that administrators must be independent and as a result cannot be involved in planning or advising the debtor in relation to a pre-pack sale. If a pre-pack sale is proposed by the debtor and an administrator is appointed, the administrator is likely to undertake independent investigation and testing of the market to ensure that the pre-pack sale maximises the value realised for the assets of the debtor. There is a risk that the administrator considers that the sale does not maximise value and is obliged to prevent the pre-pack sale from proceeding. Further, administrators are likely to seek creditor approval of the sale (though there is no legal obligation to do so unless the sale is effected through a deed of company arrangement) which increases the risk of the pre-pack sale not proceeding.
7.2 Is "credit bidding" permitted?
While credit bidding is not formally recognised under any statute in Australia, it is not prohibited and can be employed by a secured creditor.
It can be facilitated through either a consensual debt-for-equity swap, receivership, voluntary administration or a combination of the two processes. In the absence of a consensual debt-for-equity swap, a transfer of the debtor's shares with the consent of the shareholders or a transfer of the business and assets of the debtor, may be facilitated through a receivership alone. However, the statutory duty imposed on a receiver to take all reasonable care to sell the assets of a debtor in receivership for market value, or otherwise to obtain the best reasonably obtainable price in the circumstances, necessitates that the receiver conduct an arm's-length sale process.
The voluntary administration process, either alone or together with a receivership, may be more appropriate to implement a credit bid in certain circumstances. This is primarily where consent of the shareholders is not provided for the transfer of the debtor's shares, or where the statutory moratorium (which applies in the case of a voluntary administration (as detailed in question 3.5)) may be beneficial to help preserve the value of the company as part of the sale process. Here, the proposed bid would be subject to independent evaluation by the voluntary administrator to ensure that the value realised for the unsecured creditors of the company is maximised. The bid will also need to be approved by a majority of the general body of the company's creditors, if the sale is effected through a deed of company arrangement.
8 Trends and predictions
8.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Recent legislative changes have sought to enhance the prospects of successful company restructures. For example, the introduction of the ‘safe harbour' principles provide directors of a debtor nearing insolvency an opportunity to explore whether it may be restructured rather than being immediately obliged to place the company into either administration or liquidation. In summary, the safe harbour provisions allow a director to escape personal liability for debts incurred while a debtor may be insolvent upon certain matters being satisfied, including that the director has started developing a course of action that is reasonably likely to lead to a better outcome for the debtor than insolvency and the debts are incurred in connection with that course of action. As directors become more familiar with the operation of these provisions, it is anticipated that they will seek advice and assistance from qualified insolvency practitioners at a relatively early point, which might facilitate greater restructuring opportunities than would be possible in the absence of the safe harbour provisions.
Otherwise, there has been a trend away from formal appointments by banks and some larger secured lenders, leading to an increasing share for non-bank lenders in the market. For those companies unable to access finance through traditional lenders, the increased cost of capital could lead to increasing numbers of companies requiring assistance with restructuring, though it is not yet clear what effect this will have on the market and whether those lenders will have a greater appetite for formal insolvency appointments.
9 Tips and traps
9.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?
Australia is one of the friendliest jurisdictions in the world for secured creditors. No significant stay or cram-down procedures apply to secured creditors, including related party secured creditors, in any of the formal insolvency or restructuring regimes in Australia. From a debtor's perspective, it is therefore important to keep the secured creditors informed of their restructuring plans and ideally obtain their consent to critical aspects of the plan.
As in many other jurisdictions, delays in implementing a restructuring plan can occur where there is a significant difference in the value attributed by different stakeholders to the debtor and its assets. In Australia, this issue can be somewhat ameliorated by the use of independent insolvency practitioners, who are appointed to review and opine on the best options available to creditors. However, the availability of accurate, counter-factual liquidation valuations should not be overlooked as a means to building early consensus.
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