Australia: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Australia.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Immoveable property
    In Australia, the principal type of security that is taken on ‘immoveable property’, i.e. interests in land or fixtures and buildings attached to land, is a real property mortgage, for which a registration system exists (referred to as the Torrens Title system). Under this system, a mortgagor who has registered a mortgage with the relevant state or territory land title register grants a legal charge over the land as opposed to transferring legal title to the mortgagee. This transfer is subject to the ‘equity of redemption’, that is, the mortgagor’s right to redeem the title to the property once it has satisfied its debt obligations. The mortgagor and the mortgagee thereafter both possess a legal interest in the land. The mortgagor is free to deal with the land (subject to any restrictions in the terms of the mortgage itself) and retains the beneficial and legal interest in the land. The mortgagee holds a legal charge that will confer actionable rights in the event of default by the mortgagor.

    It is also possible under the Australian system for an equitable mortgage over land to exist. This arises in circumstances where the mortgage is not yet registered but the parties have an intention (often a written agreement) to enter into one or, the mortgagor deposits the title deeds with the mortgagee. An equitable mortgage can arise by design or by the failure to prefect the requirements to effect a legal mortgage.

    Moveable property
    Since its inception in 2012, the Personal Properties Securities Act 2012 (PPSA) has established a uniform concept of a ‘security interest’ in Australia. This concept covers all forms of security interests, including mortgages, charges, pledges and liens. It applies primarily to security interests under which an interest in personal property is granted pursuant to a consensual transaction that, in substance, secures payment or performance of an obligation. It also applies to certain deemed security interests such as certain types of lease arrangement for certain terms, retention of title arrangements and transfers of debts, regardless of whether the relevant arrangement secures payment or performance of an obligation. ‘Personal property’ (or moveable property) is broadly defined and essentially includes all property other than land, fixtures and buildings attached to land, water rights and certain statutory licences.

    The PPSA has introduced a new lexicon relating to security in Australia. For instance, the traditional concept of a fixed and floating charge has now been replaced by a ‘general security agreement’ and the concept of a floating charge has now become a ‘circulating asset security agreement’. The concept of crystallisation and the distinction between fixed and floating charges under the PPSA have become irrelevant.

    The concept of ‘security interest’ is broad enough to capture pre-existing forms of security and the documentation creating security has not changed significantly (i.e. charges, debentures, mortgages and pledges may still be used with certain amendments).

    Generally, attachment and perfection of a security interest occurs when the grantor and the secured party execute a security agreement (although the parties can defer attachment) and the security interest is registered on a register known as the Personal Properties Securities Register (PPSR). However, security interests over certain assets can be perfected other than by way of registration, for example, by the security holder controlling the relevant assets in the manner prescribed by the PPSA.

    The rights of a secured creditor to enforce a security interest are subject to a requirement that the security interest be perfected through registration. Unregistered or unperfected security interests vest with the grantor upon insolvency. This includes in relation to retention of title arrangements. If a security interest is not perfected in accordance with the PPSA the security interest will, on liquidation of the grantor, vest in the grantor. This has created a paradigm shift for retention of title arrangements since failure to perfect the retention of title arrangement (by registration on the PPSR) will vest title in the relevant goods to the recipient of the goods, despite the agreement between supplier and recipient that the supplier retains title to those goods until they are paid for.

    Further, registration of a security interest has an important bearing on its priority position with respect to competing security interests. It is therefore essential to register a security interest as soon as possible to provide the secured party with perfection and the best possible claim against the grantor vis-a-vie competing secured parties.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    In a voluntary administration, a statutory moratorium under section 440B of the Corporations Act 2001 (Cth) (Corporations Act) prevents a security interest from being enforced against the company’s assets without the administrators consent or leave of the Court.

    There are exceptions to this general rule, the primary one being where a secured creditor has security over the whole or substantially the whole of the company’s property. Where this occurs the secured creditor may enforce its security and appoint a receiver within 13 business days’ following the date the administrator gave notice of his or her appointment (if notice is required). If a secured creditor does not enforce its security within this time period, the section 440B moratorium will apply preventing enforcement during the period of the administration. Notwithstanding the short window available to secured creditors to enforce their security, there are often practical difficulties associated with being satisfied that the security is ‘over the whole or substantially the whole’ of the company’s assets.

    A similar moratorium on enforcement operates in a liquidation (under section 471B of the Corporations Act), however secured creditors are usually granted immunity from this process (by section 471C), assuming the validity of their security, as they remain entitled to realise their security despite the liquidation.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    In Australia, the definition of insolvency is contained in section 95A of the Corporations Act which states,

    1. A company is solvent if, and only if, the company is able to pay all the company’s debts, as and when they become due and payable.
    2. A company which is not solvent is insolvent.

    Case law in Australia has indicated that the focus of the insolvency test for companies approaching financial distress is the ‘cash flow’ position of the business rather than its balance sheet.

    Company directors are burdened by a positive duty to prevent insolvent trading. This duty prevents directors from incurring any debt on behalf of the company if the company is insolvent or the director has reasonable grounds for suspecting that it is likely to become insolvent. Directors will be personally liable for any debts that are incurred thereafter in these circumstances.

    To guard against the risk of an insolvent trading claim, directors are required to consider the solvency of the company regularly and to place the company into voluntary administration if, in their opinion, the company is, or is likely to become, insolvent.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    There are 3 formal insolvency procedures that operate in:

    1. Voluntary administration
    2. Liquidation (including provisional liquidation)
    3. Receivership

    Each of the formal processes, other than receivership, has a moratorium in place to prevent unsecured creditors (including shareholders) from enforcing their rights. Whilst no such moratorium exists in a receivership, to the extent an unsecured creditor takes action to enforce its rights, it has recourse to the assets which are secured and in the control of the receivers.

    Voluntary administration
    Voluntary administration is a creditor driven process, and whilst designed to be short and temporary, can last for months if not years in complex situations.

    Upon appointment, the administrator takes control of the company’s business, affairs and property. The administrator has extensive powers and is entitled to perform any function and exercise any power the company or its officers would otherwise perform. In performing this function, the administrator will be acting as the company’s agent. Administrators are granted a right of indemnity out of the company’s property (other than retention of title property that is subject to a perfected PPSA security interest).

    The purpose of the voluntary administration process (outlined in Part 5.3A of the Corporations Act) is to either:

    (a) maximise the chances of the company, or as much as possible of its business, continuing into existence; or

    (b) result in a better return for the company’s creditors and members than would result from an immediate winding up, if it is not possible for the company or its business to continue to exist.

    In practice, administrators tend to recommend or adopt one of three strategies; a simple sale of business and assets, a move to liquidation or a recapitalisation plan (effected through a deed of company arrangement). The latter two strategies require the approval of 50% in number and 50% in value of creditors.

    Liquidation
    In Australia, a company may be wound up:

    • if solvent, voluntarily by its members (members’ voluntary liquidation); or
    • if insolvent, by its creditors (creditors’ voluntary liquidation) or compulsory order of the court (provisional and compulsory liquidation).

    Upon appointment, the liquidator will control the affairs of the company and has the power to realise and distribute assets to the exclusion of the directors and shareholders. A provisional liquidator will also control the affairs of the company to the exclusion of the directors and shareholders but cannot realise and distribute assets.

    Court involvement is required in a compulsory winding up, where it will appoint the liquidator. It will also consider applications by the liquidator, pursuant to section 480 of the Corporations Act for an order that the liquidator be released and that the company be deregistered after the liquidator has realised all of the property of the company or so much of that property as can in his or her opinion be realised without needlessly protracting the winding up, has distributed a final dividend (if any) to the creditors, has adjusted the rights of the contributories among themselves and made a final return (if any) to the contributories The court must be satisfied that no creditor will be adversely affected by the order.

    The length of a liquidation process will vary depending on the company and how complex the business and affairs of the company are. Other factors that will affect the length of the liquidation include whether litigation is necessary to recover funds/assets belonging to the company. For a small company, with uncomplicated affairs, the winding up can usually be completed between 12 to 18 months. Where the company has more complicated affairs and is the subject of litigation, the winding up can take some time.

    Receivership
    Upon the appointment of a receiver or receiver and manager the control of the company’s business and affairs is taken over by the receiver. The receiver will also take immediate possession of the company’s assets. Directors of the company maintain their statutory duties during this period and are obliged to assist the receiver if need be, but only have such powers as a receiver allows them to have.

    Receivership is a process driven by secured creditors. Most commonly, receivers are appointed pursuant to the relevant security documents granted in favour of the secured creditor when a company has defaulted and the security has become enforceable. Although it is uncommon, a receiver can also be appointed pursuant to an application to the court. Court appointments are normally done to preserve the assets of the company in circumstances where it may not be possible to otherwise trigger a formal insolvency process.

    Like liquidation, the length of the receivership process is uncertain. A receivership concludes when the secured assets are realised and the secured creditors are repaid (either in full or to the fullest extent possible). When realising assets, receivers are under a statutory obligation to obtain ‘market value’ or, in the absence of a market, the best price obtainable in the circumstances under section 420A of the Corporations Act. The process will depend on the nature and size of the assets to be realised and the relevant market in which they are to be sold.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    When a company is wound up, the statutory distribution waterfall in Australia generally provides that secured creditors are paid first in priority to unsecured creditors. There is an exception to this for employee entitlement claims. During a receivership, winding up (or under a deed of company arrangement), the entitlements of employees have priority over the proceeds available from a realisation of assets subject to a circulating security interest (formerly a floating charge).

    The remuneration, costs and expenses of insolvency practitioners appointed will be afforded priority over all creditors’ claims, including employees.

    There is no concept of equitable subordination under Australian law and shareholder loans generally rank equally with unsecured claims. The only shareholder claims that are subordinated to unsecured claims are:

    • claims for a debt owed to a shareholder in that person‘s capacity as a shareholder; and
    • claims arising from the buying, holding, selling or other dealing in shares of the company.

    Otherwise, the relationship between creditor groups is very much a feature of contract and Australian courts will generally give effect to whatever contractual arrangement and/or structural subordination arrangements a company and its creditors have agreed to, even where doing so leaves whole creditor groups out of the money.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    Under Australian law, antecedent transactions will only be vulnerable to challenge where a company is in liquidation. A liquidator has the power to bring an application to the court to declare the following types of transactions void:

    • insolvent transactions (which includes both unfair preferences and uncommercial transactions) if entered into, in the case of unfair preferences, during the 6 month period ending on the relation-back day (the relation-back day is generally the date of the application to wind up the company or the date of the appointment of a liquidator if the company had previously been in administration) or in the case of uncommercial transactions, during the two-year period ending on the relation-back day;
    • unfair loans, which are voidable if entered into any time before the winding up began;
    • unreasonable director-related transactions, which are voidable if entered into during the 4 years ending on the relation-back day; and
    • transactions entered into for the purpose of defeating, delaying or interfering with creditors’ rights on a company’s winding up, which are voidable if entered into during the 10 years ending on the relation-back day.

    Uncommercial transactions and unfair preferences are voidable if the company was insolvent at the time of the transaction or at a time when an act was done to give effect to the transaction. Australian courts have held that a transaction is ‘uncommercial’ if a reasonable person in the company’s circumstances would not have entered into it. An unfair preference is one where a creditor receives more for an unsecured debt than would have been received if the creditor had to prove for it in the winding up. The other party to the transaction or preference may prevent it being held void if it can be shown that they became a party in good faith, they lacked reasonable grounds for suspecting that the company was insolvent and they provided valuable consideration for, or changed position in reliance on, the transaction.

    Australian courts have also determined that loans to a company will be ‘unfair’ and thus voidable if the interest or charges in relation to the loan were, or are, not commercially reasonable. This is to be distinguished from the loan simply being a bad bargain. Any ‘unreasonable’ payments made to a director or a close associate of a director are also voidable, regardless of whether the payment occurred when the company was insolvent.

    Upon a finding of a voidable transaction, a court may make a number of orders impacting the rights of the third parties to those transactions. Those orders include directions that the offending person pay an amount equal to some or all of the impugned transaction; direct a person to transfer the property back to the company; or direct an individual to pay an amount equal to the benefit obtained.

  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    Restructurings and other informal work outs can be pursued in Australia provided adequate attention is paid to the prohibitions on insolvent trading under Australia’s stringent insolvent trading laws. One way to alleviate directors’ concerns about their insolvent trading obligations is for the company to enter into forbearance or standstill arrangements with its creditors pursuant to which creditors might agree not to enforce any rights that might otherwise arise during the restructuring or work out period. In doing so, the company will have an opportunity to restructure what might otherwise be current debt obligations.

    Outside a fully consensual debt restructuring, there are two ways to effect a restructure of a company’s debts under Australian law:

    • through a deed of company arrangement (DOCA); and
    • through a scheme of arrangement.

    DOCA
    A DOCA is a flexible restructuring tool in terms of outcomes that it can deliver. These include debt-for-equity swaps, a transfer of equity, moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of, outstanding debt. DOCAs also have the benefit of being fast and subject to low voting thresholds (50% in number and value).

    A DOCA takes place in the context of a voluntary administration (i.e. a formal insolvency appointment). It is a creditor approved arrangement governing how a company’s affairs will be restructured. As a voluntary administrator is formally appointed, they take over the management and control of the company’s business and affairs for the term of the appointment. A DOCA is effectively a contract or compromise between the company and its creditors. Whilst it is a feature of voluntary administration, it should in fact be viewed as a distinct regime, where the rights and obligations of the creditors and the company differ to those under voluntary administration.

    Once a company is in voluntary administration, a DOCA can be proposed by anyone with an interest in the company. Creditors are required to vote to resolve that the company should execute the DOCA. Once the terms of the DOCA are approved (by the relevant threshold majorities), the instrument must be executed within 15 business days of such a resolution. A DOCA can be varied by either a subsequent resolution of creditors or by the court.

    A DOCA binds not only creditors (other than secured creditors) but also the company, directors and shareholders. Whilst binding on shareholders, it is recognised in scenarios where a shareholder has limited interest in the company under administration and is not entitled to vote in the DOCA in its capacity as shareholder. The statutory priority afforded to employees in a liquidation scenario must be the equivalent in a DOCA (unless the employees vote otherwise). In this way, employees are afforded a level of protection under a DOCA.

    Upon the execution of the DOCA the voluntary administration ends. The outcome of the DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. The recourse of the court is available to creditors to set aside the DOCA if it does not achieve its goal or is challenged by creditors on grounds that they are unfairly prejudiced in a relative sense.

    Schemes of arrangement
    A scheme of arrangement is a court approved process binding the creditors and/or members to some form of rearrangement or compromise of pre-existing rights and obligations. Schemes may involve the deleveraging of a business or the reduction of outstanding debt in exchange for the issuing of equity. There are two types of schemes of arrangement:

    • a members’ scheme of arrangement (between the company and its members); and
    • a creditors’ scheme of arrangement (between the company and its creditors).

    Schemes of arrangement can be implemented without the commencement of a formal insolvency process. As such, the company and its directors can remain in control of the business during the proposal and approval phase (and, depending on the terms of the scheme, after its implementation).

    The approval process is heavily regulated and involves a number of steps, including the preparation of explanatory statements and scheme booklets, notification to the corporate regulator, the Australian Securities & Investments Commission (ASIC), an application to court to convene scheme meetings, the holding of those meetings, court approval of the scheme and finally, the filing with ASIC of the court approved scheme. The timeline for scheme approval is typically between 3 months (but can often take between 4 to 6 months) from the commencement phase through to the final approval and implementation phase.

    Schemes of arrangement must be approved by a majority of 50% in number and 75% in value of the voting class (of affected members and/or creditors) at the scheme meeting. Classes are determined by reference to commonality of legal rights and only those whose rights will be compromised or affected by the scheme need be included. Unlike a DOCA, a scheme can bind secured creditors who vote against it and release third party claims.

    The key element to the success of a scheme of arrangement is the willingness of creditors (most commonly financial creditors, as opposed to trade and operational creditors) to work with the management of the distressed company as well as other stakeholders. The starting point for the negotiation will often involve an agreement or undertaking on a standstill or forbearance period, during which the company will look to refinance its current debt structure (often through the injection of new capital and/or equity).

  8. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    A debtor can obtain financing and otherwise use its assets as security in a scheme of arrangement and informal voluntary reorganisations. This is solely a matter for agreement between the company and its creditors. There are no special priorities given to new debt as of right and such priorities have to be negotiated and agreed with any existing creditors who already hold some form of priority.

  9. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    None of the formal insolvency processes in Australia result in the automatic termination of contracts between the debtor and third parties. Often, however, contracts will contain ipso facto clauses which allow counterparties to terminate or renegotiate on the occurrence of an insolvency event.

    Part 5.6, division 7A of the Corporations Act gives liquidators the specific ability to disclaim certain property or uncommercial contracts in certain circumstances. A liquidator will usually require the Court’s leave to do so (except in the case of unprofitable contracts or a lease of land) as this is likely to adversely affect third-party interests. There are no specific provisions for disclaimers in a voluntary liquidation, although the court has wide powers to control these reorganisations and application can be made to the court.

    Although receivers and administrators are not given specific powers to disclaim contracts, they may look to ignore contracts with any resulting damages claim being unsecured against the company (and not the receiver or administrator personally). However, any contract a receiver continues with may result in the receiver being held personally liable under the Corporations Act.

    Section 553C of the Corporations Act provides statutory set-off is available in a liquidation scenario where there have been mutual dealings between the distressed company and the relevant creditor. In such circumstances an automatic account is taken of the sum due from one party to the other in respect of those mutual dealings, and the sum due from one is to be set-off against any sum due from the other. Administrations and DOCAs will likely also recognise this statutory set-off as to not to do so would entitle an aggrieved creditor to recourse on the grounds of unfair prejudice.

    The Corporations Act allows a broad range of claims capable of set-off. The rule entitles creditors who are also debtors to have preference over the general body of creditors. Only unsecured creditors and secured creditors who choose not to rely on their security can take advantage of the rule. A creditor is, however, unable to claim the benefit of set-off if he or she had, at the time of the relevant transaction, notice of the insolvency of the company. Further, a creditor cannot off-set any existing claim or debt of the company against new claims or debts that may arise during any period of administration.

    As described above, retention of title provisions will remain enforceable so long as the creditor’s security interest in the property has been perfected and registered on the PPSA register.

  10. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    Voluntary administration
    A voluntary administrator may sell assets, noting, however, it is not permitted to sell assets subject to security without consent (normally, a receiver will be appointed and have control over such assets). Administrators can apply to the court if such consent is not given and the court may make an order if it is satisfied that the secured creditor is adequately protected.

    Liquidation
    Liquidators appointed in the context of either voluntary or compulsory liquidations can sell or otherwise dispose of unencumbered property of the company without needing to seek approval from the court or other parties to the liquidation. The purchaser will acquire the assets unencumbered unless there are debts or liabilities passing to the purchaser as provided for in the sale documentation. If assets are encumbered, consent of the encumbrancer will be required unless a court directs otherwise.

    A liquidator owes fiduciary duties to the company. In realising company property, a liquidator (or administrator) has a duty to obtain the highest possible prices for the assets of the company, keeping in mind that the winding up should not be unnecessarily protracted. Property may be sold in any way the liquidator deems fit, including private contract and, usually, public auction. While creditors may purchase assets of the company, the purchase price will not be able to be set off against the debt owed to the creditor by the company. Instead any funds raised by the sale of company property will be for the benefit for the creditors as a whole, to be distributed according to the relevant distribution rules.

    Receivership
    As previously noted, a receiver is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances pursuant to section 420A of the Corporations Act. Upon a sale, the receiver will transfer the asset free of security interests (a release will be provided by the appointing secured creditor) and often the terms of any intercreditor arrangements will provide for the automatic release of subordinated security. In circumstances where an automatic release mechanism is not provided for, director negotiations will need to take place with the subordinated creditors.

    Schemes of arrangement
    The terms of the scheme itself can provide for the disposal of assets and any associated release of security provided. Such releases will not be automatic (unless specifically provided for in an approved scheme) and will need either agreement from the creditors or the provision of such release in associated finance and security documents.

    Informal reorganisations
    In an informal reorganisation of a company the conditions of the reorganisation and sale or use of assets are as negotiated with the relevant creditors.

    Credit bids
    Credit bids are permissible under Australian law and generally a means of pursuing loan to own strategies, but are rare given the need for a sales process to be conducted and the need for proceeds to flow.

  11. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    Directors owe a number of general and specific law duties to the company, its shareholders and creditors. These include:

    • duties of good faith and due care and diligence;
    • to not improperly use the position, or information obtained by virtue of the position, to gain personal advantage or cause detriment to the company;
    • to keep adequate financial records;
    • to take into account the interests of creditors; and
    • to prevent insolvent trading.

    Compliance with these duties means that directors should place a company into external administration at such time that the company is cash flow insolvent or there exists a less than reasonable prospect that the company will remain cash flow solvent.

    When seeking to pursue an informal restructuring option care must be taken to ensure the duty to prevent insolvent trading is not breached. A breach of this duty exposes the director(s) to serious penalties such as personal liability for future debts incurred, including during any informal work-out period.

    The Corporations Act provides a number of possible defences to an insolvent trading claim, including:

    • if the director had reasonable grounds to expect that the company was solvent; and/or
    • if the director took all reasonable steps to prevent the company from incurring the debt. In this context, the Corporations Act specifically states that matters to be taken into account when considering this defence include any action the director took with a view to appointing a voluntary administrator, when such action was taken and the results of that action.

    Further, directors of a company in financial distress have a duty to the company to take into account the interests of creditors. In circumstances of financial distress, that duty supersedes the duty to shareholders.

  12. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    As described previously, directors can be liable for the debts incurred by a company that is cash flow insolvent or where the director has reasonable grounds for suspecting that it is likely to become cash flow insolvent.

    The Corporations Act also provides that holding companies can liable for the debts of the insolvent subsidiaries in circumstances where the parent failed to prevent the insolvent trading of the subsidiary, so long as the parent had reasonable grounds to suspect that the subsidiary was insolvent.

  13. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    A director or officer of a company may be liable under the Corporations Act for civil and criminal penalties or to compensate the company if the company incurs a debt while insolvent (insolvent trading). Directors and officers may also attract liability for breaching their statutory duties of reasonable care and diligence in the exercise of their powers and to act in good faith and for a proper purpose. Statutory liability may also be imposed where directors or officers improperly use their position to gain an advantage for themselves or cause detriment to the company.

    In some situations directors may become personally liable for unremitted amounts of income tax or GST. The Commissioner of Taxation must give 14 days’ notice to the directors setting out the details of the unpaid amount and the penalty. Directors may avoid a penalty if the company pays the unremitted amount, the company enters into an agreement relating to the unremitted amount, an administrator is appointed or the company goes into liquidation. The courts maintain a general discretion under the Corporations Act to excuse directors from liability in some circumstances if they can be shown to have acted honestly and reasonably.

    The terms of a scheme of arrangement and a DOCA can incorporate releases from liability for directors and other stakeholders.

  14. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    Australian courts act cooperatively with foreign courts and insolvency practitioners, and will recognise the jurisdiction of the relevant court where the ‘centre of main interest’ is located. This approach follows the UNCITRAL ‘Model Laws’ on insolvency with were codified into Australian law through the Cross-Border Insolvency Act 2008 (2008) (Cth).

    To receive recognition, evidence of the existence of the foreign proceedings must be tendered. A court has power to grant both provisional relief pending the determination of a recognition application and, if a finding of recognition is made, a broad power to grant ‘any appropriate relief’ requested by the foreign representative. The types of relief that can be granted included:

    • staying the commencement or continuation of induvial actions or individual proceedings concern the debtor’s assets, rights, liabilities or obligations;
    • staying execution against the debtor’s assets to the extent it has not been stayed; and
    • providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities.

    Whilst conceivable that an Australian company’s centre of main interest could be recognised as being outside Australia, a foreign restructuring that purported not to company with the Australian Corporations Act and the Australian regulatory regime (imposed by ASIC and the ASX) would unlikely be recognised.

    In addition, the Foreign Judgments Act 1991 (Cth) creates a general system of registration of judgments obtained in certain foreign countries. This legislation only extends to judgments pronounced by courts in countries where, in the opinion of the Governor-General, substantial reciprocity of treatment will be accorded by that country in respect of the enforcement in that country of judgments of Australian courts.

    The application to register a foreign judgment must be made by a judgment creditor to the appropriate court (usually the State or Territory Supreme Court) within six years of the date of judgment or, if an appeal has been taken, within six years of the last judgment in the appeal proceedings.

  15. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    Companies registered as foreign corporates in Australia could have receivers, administrators or liquidators appointed to them, but it is rare for this to occur. We are not aware of any foreign corporations having initiated a scheme of arrangement.

  16. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    In insolvency proceedings involving corporate groups, a consolidated group is not considered as a single entity. Where companies operate as a consolidated group, the starting legal position is that the ‘separate legal personality’ principle prevents creditors of an insolvent company from gaining access to the funds of other companies for payment of their debts.

    Having said that, groups of companies often enter into a deed of cross guarantee to afford themselves the benefit of consolidated financial reporting. That deed commits the companies a party to it to pay the liabilities of all the other companies party to it in a liquidation.

    The Corporations Act does provide for a holding company to be liable for the debts of its insolvent subsidiaries in certain circumstances. These provisions enable the subsidiary’s liquidator to recover amounts from the parent company equal to the amount of the new debt incurred by the subsidiary after the subsidiary becomes insolvent, but only where the parent company failed to prevent the subsidiary from incurring the debts and where there were reasonable grounds to suspect that the subsidiary was cash flow insolvent.

    The corporate veil may also be lifted in circumstances where an insolvent subsidiary is deemed to be acting as a mere agent, conduit or partner of its parent company. However, Australian courts have displayed some reluctance to lifting the corporate veil in these circumstances.

    Pooling of group funds may occur in limited circumstances, as prescribed by Division 8 and Part 5.6 of the Corporations Act, being section 5.71 to 5.79L. Generally, those circumstances are where there is a substantial joint business operation between members of the same corporate group and external parties; such members of the group are jointly liable to creditors. The liquidator of the corporate group entity being wound up makes what is called a pooling determination, after which separate meetings of the unsecured creditors of each company must be called to approve or reject the determination. The court may vary or terminate any approved pooling determination.

    Finally, in group insolvencies, office holders tend to be appointed from the same firm. If material conflicts arise, special purpose officeholders tend to be appointed.

  17. Is it a debtor or creditor friendly jurisdiction?

    Australia is widely considered to emphasise the rights of creditors over debtors and as such is recognised as a creditor-friendly jurisdiction. Whilst there are some limitations on the options that might otherwise be available to distressed companies and some inflexibility in certain of the tools available to insolvency practitioners, Australia’s insolvency regime is, for the most part, primarily focussed towards protecting the rights and interests of creditors over the interests of debtors. For example, Australia’s voluntary administration regime is controlled by creditors to the exclusion of management and members and its purpose is designed to maximise creditor returns. Further, unlike the United Kingdom for instance, receivership is alive and well in Australia.

    Creditors are active participants in all insolvency processes in Australia. They can enforce their rights in each process and, whilst there are some timing limitations placed on their enforcement rights in a voluntary administration scenario, enforcement rights over secured assets are otherwise unfettered.

    Secured creditors and employees enjoy a statutory priority in a distribution of assets and, in some circumstances, unsecured creditors can also place themselves in a position of protection. Unlike secured creditors, unsecured creditors are given no legal right to priority, yet due to a particular relationship that may exist with a debtor (for example, as a supplier of essential materials), they can exercise that power to obtain payment and ensure future payments as a practical necessity to maximise value and keep the debtor business running.

  18. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    There is very little state involvement or government intervention for distressed businesses in Australia. However there are certain circumstances where the government has stepped in to guarantee some financial support in formal insolvency proceedings, in particular, in relation to employee entitlements. Whilst employee entitlements (including wages, superannuation, leave entitlements and redundancy payments) are given statutory priority over the payment of other unsecured debts in a distribution of assets, it is sometimes not possible for those debts to be met out of the recoverable assets of the company in a timely manner or indeed, at all.

    Pursuant to the Federal Government’s Fair Entitlement Guarantee (FEG), when a company is placed into liquidation leaving employee entitlements unpaid, the Federal government, through FEG, can make payment to employees of certain levels of unpaid entitlements. The government then becomes the creditor and is afforded the same priority in the distribution as the employee claims it paid. Importantly, the position of directors and management is different, and the priority afforded to them is capped substantially.

  19. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    Perhaps the greatest barrier to efficient and effective restructurings in Australia is its severe insolvent trading laws. The prohibition on directors from incurring a debt where the company is (or there are reasonable grounds to suspect it is likely to become) insolvent and the possible application of personal liability, is a significant impediment to implementing a corporate reorganisation or turnaround. The application of this duty shifts the focus on company directors from trying to manage business distress to managing their own risk and exposure to personal liability.

    Other barriers to efficient and effective restructurings and insolvencies include:

    • ipso facto clauses in contracts which trigger termination rights on counterparties following the appointment of an insolvency professional. This can cause a company irreparable harm particularly in the circumstances of in voluntary administration where a potential restructure could save the business;
    • the statutory duties on receivers and liquidators can render many nervous when considering ‘pre-pack’ asset sale. Pre-packs tend to be used only in limited circumstances, such as where there are limited alternative sale options available to the receiver or liquidator and there is evidence that a delay in sale may be fatal to the underlying business or where a market testing process was conducted prior to appointment.

    Australian insolvency law reform has been the subject of much discussion and debate for a long time and some steps have been taken towards implementing change. For example, the Insolvency Law Reform Act 2016 (Cth) proposes major changes to Australia’s corporate regime insofar as it relates to external administrations, by creating a set of common rules to reduce cost, increase efficiency and stimulate competition.

    It is anticipated that further reform will follow to provide for:

    • the introduction of a ‘safe harbour’ rule protecting directors from personal liability for insolvent trading following the appointment of a restructuring advisor to develop a turnaround plan for a distressed company;
    • the making of ipso facto clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure;
    • amendments that allow for pre-packaged sales; and
    • the introduction of a voluntary administration style moratorium on creditor enforcement during the formation of schemes of arrangement to allow a distressed company the opportunity to restructure without the threat of possible creditor action.