Australia: Special report on the Productivity Commission's review of restructuring practices in Australia

Submissions to the Productivity Commission's Business Set-up, Transfer and Closure draft report have now closed, with the final report due in August 2015. DibbsBarker made a submission on those aspects concerning corporate restructuring processes, a copy of which is available on the Productivity Commission's website.

The draft report raises a number of interesting business restructuring recommendations, canvassing topics being considered also by Treasury in the context of the Financial System Inquiry's final report. In the coming weeks, we will issue a series of brief alerts to shine a spotlight on what we think are the most important restructuring issues for the Productivity Commission to consider.

We begin this week with the first of those issues, which relates to the breadth of section 436A of the Corporations Act 2001 (Cth). Future alerts will comment on the proposal for a safe harbour, pre-packs and pre-positioning, the enforceability of ipso facto clauses, and finally, the role that culture plays in delivering more effective restructurings.

Draft recommendation 15.1, voluntary administration available to solvent companies only

• Section 436A of the Corporations Act 2001 (Cth) provides that a company may appoint an administrator if the board has resolved that, in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time.
• Draft report recommendation 15.1 proposes that the option to appoint an administrator to restructure via voluntary administration when the company is insolvent should be removed. Voluntary administration would only be available to solvent companies which may become insolvent at some future time.
• The Productivity Commission suggests that the amendment will create a clear delineation between a restructuring process (available to solvent companies via voluntary administration) and liquidation (a regime to deal with insolvent companies). This amendment will also prompt directors to take action sooner, when the company has greater restructuring options available. The Productivity Commission notes however, that in practice, insolvency can be difficult and imprecise to ascertain.
• This draft recommendation does not appear to have broad support. A number of submissions, including ours, raise concerns with this recommendation. See also the submissions of the AICD, ARITA, Chartered Accountants (Australia & NZ) and PPB Advisory. Broadly, reasons given in opposition to this recommendation include:
• • Voluntary administration provides a beneficial restructuring option to companies that should not be limited
  • Insolvency is difficult to determine
  • An insolvent company may have a restructuring plan that is best implemented via a deed of company arrangement, for example where it is desirable to take advantage of a share transfer under section 444GA of the Corporations Act 2001 (Cth) or to implement an aspect of a broader pre-pack (or pre-positioned) sale
  • An insolvent company may have a proposal to sell assets or otherwise achieve a better outcome for creditors via a deed of company arrangement than would be available if the company were wound up.
• DibbsBarker does accept that where there is no plan for the future of an insolvent company, voluntary administration can result in a delayed liquidation and increased costs of administration, to the detriment of the company's creditors.
• Given the concerns raised, we would be surprised if the Productivity Commission did not reconsider this recommendation in its final report.

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