Comparative Guides

Welcome to Mondaq Comparative Guides - your comparative global Q&A guide.

Our Comparative Guides provide an overview of some of the key points of law and practice and allow you to compare regulatory environments and laws across multiple jurisdictions.

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4. Results: Answers
Restructuring & Insolvency
3.
Restructuring
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?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.2
What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.3
How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.4
What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.5
Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.6
What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
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.
Australia

Answer ... (a) Debtor

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.

(f) Employees

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.

(i) Court

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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
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?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.9
Can restructuring proceedings be used to compromise secured debt?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.10
Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
Australia

Answer ... 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).

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.11
Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
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)?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
3.13
How do restructuring proceedings conclude?
Australia

Answer ... 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.

For more information about this answer please contact: Cameron Cheetham from Corrs Chambers Westgarth
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Restructuring & Insolvency