Restructuring & Insolvency

Insolvency law in Australia is largely statute based, governed by the Corporations Act 2001 (Cth). The relevant corporate insolvency provisions are prescribed in Chapter 5 of the act. Further, there are specific insolvency-related provisions in the Insolvency Practice Schedule (Corporations) in Schedule 2 of the act, along with the Insolvency Practice Rules (Corporations) 2016 detailing specific procedures in the event of external administrations.

Pursuant to the Corporations Act, an Australian company is taken to be ‘insolvent’ if it cannot pay its debts when they are due and payable. In the assessment of insolvency, there are generally two accepted tests: the cash-flow test and the balance-sheet test. The cash-flow test, which is the primary test, examines whether a company has sufficient resources available to pay all liabilities when they become due and payable. The balance-sheet test acts as a secondary measure assessing whether a company’s total assets exceed its total liabilities.

If a company falls within the above definition and is insolvent, the Corporations Act provides it with a range of options via Chapter 5. These insolvency procedures can include:

• voluntary administration;
• a deed of company arrangement;
• a scheme of arrangement;
• receivership; and
• liquidation.

In addition, insolvency practitioners in Australia must be cognisant of the Personal Property Securities Act 2009 (Cth) (and its associated Personal Property Securities Register), which governs the Australian security interest regime.

To assist insolvency practitioners with recognition, cooperation and relief in cross-border insolvency matters, the Australian government introduced the Cross-Border Insolvency Act 2008 (Cth). The Cross-Border Insolvency Act prescribes the UNCITRAL Model Law on Cross-Border Insolvency by giving it the force of law in relation to bankruptcy, along with corporate insolvencies pursuant to Chapter 5 of the Corporations Act (except for receiverships and winding-up procedures not involving insolvency law).

The UNCITRAL Model Law has been adopted in a broad range of countries, including Australia, New Zealand, Canada, the United States, Singapore, South Korea and the United Kingdom. Within the jurisdictions to which it applies, the Model Law provides a process for creditors and their representatives to request and receive assistance from foreign courts in relation to foreign insolvency proceedings.

In addition to the above protocols, in Australia, the Corporations Act specifically provides for:

• the winding-up of foreign companies pursuant to Section 583 of the act, whereby an Australian court can wind up a foreign entity. In addition, pursuant to Section 601CL(14) of the Corporations Act, an Australian court may make an order for a local (ancillary) winding up of a registered foreign company that is currently being wound up in its home jurisdiction/place of incorporation; and
• the provision of court-to-court assistance in cross-border insolvency matters pursuant to Section 581 of the act. This provides that an Australian court may request a foreign court to aid an Australian liquidator in respect of an external administration matter involving an Australian company. An Australian court may also issue a letter of request to foreign courts under Section 581(4) of the act. In addition, pursuant to Sections 581(2) and 581(3) of the act, Australian courts must assist in respect of ‘prescribed countries’ (or may assist for non-prescribed jurisdictions) certain foreign courts in respect of external administration matters.

While there are no specific regimes that apply to certain sectors or industries, legislative changes in Australia in December 2020 introduced provisions to simplify the restructuring and liquidation process for small to medium-sized enterprises (SMEs) – that is, entities with debts of less than A$1 million. The simplified business restructuring (SBR) process that was introduced aims to streamline the formal legislative regime and the associated procedural requirements involved to preserve value for SMEs.

This SBR process is debtor driven, with the directors of SMEs appointing a restructuring professional to assist with preparing a restructuring plan for the company. Any plan will involve the proposed compromise of creditor claims (which must be voted on by creditors), to allow the SME a chance to continue to trade profitably into the future. The directors/business owners also remain in control of the company throughout the SBR process (in contrast to a voluntary administration). In addition, during this process:

• there is a moratorium on the enforcement of creditor claims as against the SME; and
• the investigations programme and creditor distribution process are truncated (in comparison to the standard formal liquidation procedures prescribed by the Corporations Act).

The general belief is that Australia’s insolvency framework is very creditor friendly, as opposed to the US Chapter 11 bankruptcy process, which is a ‘debtor-in-possession’ model.

This is evident through the strong rights and priority generally afforded to secured creditors in the event of an insolvency (please see questions 2.1 and 2.2), with certain exceptions in place for employee entitlements and circulating security interests. In addition, both secured and unsecured creditors can play a very active role in the external administration process, including voting to determine a company’s future. These decisions are also often made with little to no court involvement or consultation.

An important characteristic with respect to the external administration process in Australia is that the powers of a company’s directors are suspended while an administration process is conducted, with the control of the insolvent entity and its operations passing to an independent insolvency practitioner (ie, a registered liquidator).

The general belief for removing the insolvent debtor’s director(s) is that it allows a company breathing space while the independent appointee works to achieve the best outcome for all stakeholders of the insolvent entity (eg, employees, creditors, investors, regulators, statutory bodies) – whether that be through:

• facilitating the continued operation and restructuring of the business; or
• working to achieve the best financial return to secured and unsecured creditors of the company from the sale of its assets.

Australian insolvency law is based on the English model of insolvency, which utilises the external administration process. In this regard, the legal framework is well established and the external administration options available under the Corporations Act are frequently utilised by:

• company directors when they anticipate that their company is or may become insolvent;
• secured lenders in enforcing their security; and/or
• unsecured creditors taking steps to wind up a company with respect to unpaid debts.

Changes were made to the Australian insolvency legislation in 2017 via the Insolvency Law Reform Act 2016 (Cth). These changes featured the insertion of the Insolvency Practice Schedule (Corporations) into Schedule 2 of the Act and the Insolvency Practice Rules (Corporations). Most of these reforms amended certain statutory reporting requirements and further empowered creditors in an external administration, including in relation to making information requests and removing an insolvency practitioner from office.

Further significant legislative reforms introduced two additional amendments to the Australian insolvency landscape in 2017 and 2018:

• a new ‘safe harbour’ regime for company directors providing a defence against liability from insolvent trading (see question 6.2); and
• ‘ipso facto’ protection for companies that appoint an administrator, receiver and manager or commence a creditors’ scheme of arrangement against ipso facto clauses in contracts that allow for the immediate termination or a variation of rights if an insolvency event occurs. The ipso facto regime is discussed further in question 3.5.

Except for real property, security interests are governed by the Personal Property Securities Act 2009 (Cth), with a secured party registering its security interest on the Personal Property Securities Register (PPSR). The PPSR is an official government register, being a public noticeboard of security interests in personal property and collateral. It is important for secured parties (eg, lenders, equipment financiers, stock suppliers) to ensure that their interests as against a grantor entity are registered/perfected on the PPSR to have effect.

When dealing with personal property, the types of security interests registered are varied. However, the most common is a security interest over all present and after acquired property (ALLPAAP) arising from a general security agreement (GSA) between a grantor and a secured party. For example, a first-ranking mortgagee which has lent funds to a company is entitled to take ALLPAAP security over the grantor.

Another common security interest is a purchased money security interest (PMSI), which is granted a ‘super priority’, even over the interests of an ALLPAAP security holder. PMSI arrangements have strict registration timeframes and most commonly appear in four scenarios:

• Asset finance: Where funds are provided specifically for the purchase of an asset (eg, a motor vehicle, excavator, truck, trailer).
• Retention of title: Where a supplier has supplied goods to a company and all or part of the purchase price remains outstanding (eg, materials, consumables, inventory).
• Personal property security lease: A lease for at least two years or an indefinite period, but not until the lessee’s possession extends for more than two years.
• Consignment arrangements: Where goods are provided on a consignment basis to a customer.

With respect to real property assets, a real property mortgage is the main form of security interest, being separately registered in each state’s Land Titles Register.

A secured party can enforce its security only if it has a valid security interest. To be valid, the security interest must have ‘attached’ and been ‘perfected’ in accordance with the Personal Property Securities Act 2009:

• For ‘attachment’ to occur, there must be a written security agreement executed between the grantor and the secured party – usually by way of a GSA.
• ‘Perfection’ of a security interest can occur by way of registration on the PPSR, possession or control.

In the case of a secured party with an ALLPAAP security interest (generally a first-ranking mortgagee), the terms of the GSA will stipulate the events of default (usually non-payment), which will entitle the secured party to enforce – whether that be the appointment of a receiver and manager, receiver, agent for the mortgagee (AMIP) or voluntary administrator.

In most circumstances, to enforce its security, an ALLPAAP security holder will appoint a receiver and manager to the grantor company. However, in the case of passive non-trading assets such as real estate, the secured creditor may appoint an AMIP. Both a receiver and manager and AMIP are forms of controllership – a private enforcement method where the primary duty is to the secured creditor. In some cases, a secured creditor may appoint a voluntary administrator to extend its toolbox of restructuring options to obtain the benefit of statutory moratorium and restructuring optionality (ie, deed of company arrangement). However, in the case of voluntary administration, the administrator owes a duty to all creditors – that is, both secured and unsecured creditors.

Any company in Australia can seek to restructure its financial difficulties informally. This involves deep stakeholder engagement and usually the assistance of any combination of investment banks, restructuring professionals and lawyers. Informal workouts generally focus on the capital structure and major cost base items, and therefore are usually reserved for dealing with:

• the company’s major secured creditors;
• landlords;
• regulatory bodies (eg, the Australian Taxation Office); and
• major trade creditors.

The reason why major secured debt is typically the focus is that corralling one or two secured lenders (even a syndicate) that have priority in the capital structure is much easier than managing a large number of unsecured trade creditors and will likely result in a more demonstrable improvement to the financial viability and position of the company. Further, refinancing dates, missed amortisation payments and covenant breaches of lending facilities are generally the impetus to start informal restructuring in the first instance. Therefore, it makes sense that this is where to focus attention.

The process will usually involve the debtor providing transparency to its books and creating a revised business plan/forecast to convince stakeholders that any write-off or revision to repayment dates, agreements or debt is in their best interests.

The benefit of an informal restructure is that it can avoid the inevitable stigma and damage associated with a formal restructuring process. Assets/businesses can also be sold as going concerns, for good value, without the association of a ‘fire sale’. The process itself is generally not public and can be implemented quickly, avoiding the need to pay significant formal enforcement costs.

The drawbacks to informal restructurings include:

• difficulties in obtaining binding commitment from all stakeholders;
• greenmail or blackmail by holdout creditors; and
• actions commenced by other parties which have not agreed to the informal restructuring process.

Further, debtors cannot avail of the useful tools that the Corporations Act provides in formal restructurings, such as a moratorium on claims/enforcement action and the ability to terminate unprofitable contracts.

The main formal restructuring proceedings in Australia are:

• voluntary administrations;
• deed of company arrangements (DOCAs);
• receiverships; and
• schemes of arrangement.

Voluntary administration:

DOCA:

Scheme of arrangement:

Receivership:

Voluntary administrators are typically appointed by written resolution of the company’s directors who are of the opinion that the company is insolvent or likely to become insolvent. Although less common, a voluntary administrator can also be appointed by:

• a company liquidator or provisional liquidator that is of the opinion that the company is insolvent or likely to become insolvent (Section 436B of the Corporations Act); or
• a secured creditor, with an enforceable security interest, which has security over the whole or substantially the whole of the company’s assets (Section 436C of the Corporations Act).

During a voluntary administration, a DOCA can be proposed by any number of interested parties (typically a potential purchaser, secured creditor or director(s)). The voluntary administrator, in its administrators’ report tabled and voted on at the second creditors’ meeting, must compare the likely outcome of the proposed DOCA versus a liquidation scenario, in order to provide a recommendation to creditors as to whether a DOCA or a liquidation would be in the best interests of creditors.

At the second creditors’ meeting, if the company’s creditors resolve by way of double majority, voting as one class, that the company should enter into a DOCA, the deed administrators and the company will then have 15 business days (or such further period as the court allows) to execute the DOCA.

Schemes of arrangements are initiated by the company. The company will make an application to the court to convene and hold scheme meetings. A scheme booklet will be provided to parties to inform them about the conditions of the scheme. The resolutions are put to each class requiring a special majority (75% in value, 50% in number). If the scheme vote is successful, the matter will be listed before the court to ratify the scheme.

The main impact on the debtor in the context of a voluntary administration or receivership is that control of its affairs rests with the external administrator. The powers of directors are suspended and the external administrator is personally liable for post-appointment debts incurred by the debtor.

For creditors, any debts incurred prior to the appointment of an external administrator are frozen and represent claims in the administration. The timing and quantum of any dividends relating to these claims will depend on the outcome of the external administration.

In the case of voluntary administration, there is a moratorium on claims and the commencement of proceedings by creditors. Further, owners and lessors of third-party property in the control/possession of the debtor cannot be seized.

In the case of creditors with a valid security interest pursuant to the Personal Property Securities Act 2009 and registered in the Personal Property Securities Register, these interests can be dealt with; however, the proceeds from the realisation of these assets must first be accounted to the Personal Property Securities Act creditor.

During a voluntary administration, there is a general moratorium or stay on the enforcement of creditors’ claims and court proceedings, unless the voluntary administrators’ consent or leave of the court is obtained. In addition, creditors holding personal guarantees against the directors cannot enforce them during the voluntary administration.

The main exceptions to the statutory moratorium are:

• claims relating to perishable goods;
• enforcement of the security interest of a secured creditor (ie, appointment of a receiver) within the decision period (13 business days); and
• enforcement actions that commenced prior to the appointment of the voluntary administrators.

With respect to contracts entered after 1 July 2018, the ipso facto regime is a relevant consideration. Essentially, the standard ipso facto clauses in contracts which allow a party to terminate the contract as a consequence of the debtor’s insolvency (excluding liquidation or DOCA) does not apply. Therefore, these contracts remain in place, which can be an important mechanism in terms of preserving value and the status quo while the debtor proceeds through a restructuring process. However, all other relevant standard termination provisions in contracts still apply – including payment and performance defaults. Further, certain types of contracts with respect to financial products, bonds, shares and derivatives are excluded from the ipso facto regime.

The voluntary administration process, which is the most common restructuring proceeding, generally lasts between 20 and 25 business days. The court can extend the convening period on an application made by the voluntary administrator if the court considers extending it to be in the best interests of all creditors. Further, the voluntary administrator has the option of adjourning the second meeting (decision meeting) for a period of 45 business days.

The key milestones are:

• the voluntary administrator’s report to creditors; and
• two meetings of creditors:
• • the initial meeting of creditors, which occurs within eight business days of the appointment: and
  • the second meeting of creditors to decide the company’s future, which is held between 20 and 25 business days after the appointment, unless adjourned or extended by court approval.

The voluntary administrator’s report tabled at the second meeting details the voluntary administrator’s investigations into the company’s affairs and its opinion as to the future of the company. At this meeting, it is decided whether:

• the company will be handed back to the directors;
• the company will execute a DOCA; or
• the company will go into liquidation.

If the creditors resolve for the company to enter a DOCA, the administrator has 15 business days to execute the DOCA or the company goes into liquidation. The terms of a DOCA can be wide and varied, and typically involve the creation of a deed fund where proceeds from sale of assets or deed contribution by a deed proponent can be placed. Creditors’ claims are then adjudicated on through the normal statutory process and distributions are made.

Schemes take longer than voluntary administration, primarily due to the involvement of the court and the requirement to hold scheme meetings. Also, as the debtor is still in control of its affairs, there is less impetus to transact or agree quickly – unlike in a voluntary administration, whereby the longer the process goes on, the more value is typically eroded.

(a) Debtor

Control of the debtor’s affairs passes to the external administrator. The external administrator becomes the officer and agent of the debtor.

(b) Directors of the debtor

The directors’ powers are suspended when an external administrator is appointed; however, they still have obligations to:

• deliver to the external administrator:
• • the company’s books and records; and
  • a report on company activities and property; and
• assist the external administrator with reasonable information requests.

During a DOCA, the roles, rights and responsibilities of the directors are subject to the terms of the DOCA. When the DOCA is effectuated, control of the company returns to the directors, unless the DOCA states otherwise, and the company goes into liquidation.

(c) Shareholders of the debtor

In both a DOCA and voluntary administration, shareholders cannot alter or transfer their shares without the written consent of the administrator or leave of the court. Shareholders also have no voting rights as to the future of the company, although they are permitted to inspect the books and records.

A deed administrator cannot transfer shares without shareholder consent or making an application to court pursuant to Section 444GA of the Corporations Act.

(d) Secured creditors

If a voluntary administrator is appointed, a secured creditor with a security interest over all present and after acquired property (ALLPAAP) has a period of 13 business days to decide whether it wants to exercise the rights under its security (ie, appoint a receiver); otherwise, it will need to wait on the outcome of the voluntary administration process.

A DOCA will not bind a secured creditor unless it has voted in favour of it. A secured creditor with an ALLPAAP will rank in priority to all creditors, with the exception of employees with respect to the realisation of circulating assets (ie, debtors, cash and inventory).

Purchased money security interest (PMSI) creditors (retention of title, asset finance) will have super priority to both secured and employee creditors with respect to valid PMSI claims.

(e) Unsecured creditors

Unsecured creditors can vote on the future of the company and will be bound by the terms of any DOCA regardless of whether they voted in favour of it. Importantly, unsecured creditors are bound by the moratorium referred to in question 3.5, so are unable to commence or continue enforcement action of their claims without the written consent of the administrator or leave of the court.

(f) Employees

Employees have a similar role to unsecured creditors, albeit that employee creditors have priority with respect to any circulating asset realisations. Employees are not automatically terminated because of an external administration; the external administrator must take proactive steps for termination to occur.

The terms of any DOCA should ensure that employee creditors receive what they would have if the company went into liquidation. This is a curious position, as in the event of the liquidation of the company, Australia has a fair entitlements guarantee scheme which ensures that employees get paid in full with respect to their entitlements. There is an earnings cap and superannuation is not paid under the scheme.

(g) Pension creditors

Australia has a mandatory pension (superannuation) regime. Employers must contribute a percentage (currently 10.5%) into an employee’s nominated superannuation account. Superannuation is a priority entitlement in an external administration with respect to the proceeds realised from circulating assets.

(h) Insolvency officeholder (if any)

An insolvency officeholder is an officer and agent of the company and is personally liable for debts incurred during his or her appointment. The insolvency officeholder is primarily responsible for the restructuring proceedings.

(i) Court

The voluntary administration and DOCA process do not require court involvement or court approval, unless the voluntary administrator elects to make applications to the court to assist it with the discharge of its duties.

In contrast, schemes rely on the court heavily, with two court hearings and the court ultimately reviewing and ratifying the scheme.

Both DOCAs and schemes of arrangement can ‘cram down’ and bind dissentient creditors; however, only in the case of schemes can this occur with respect to a secured creditor’s rights.

A DOCA, once approved by way of double majority (50% in number and value), will bind all unsecured creditors, regardless of whether they voted in favour. It will also bind any secured creditors that voted in favour. In a DOCA, there is no partitioning of voting classes and all creditors vote as a single class.

While a secured creditor that did not vote in favour of the DOCA cannot be ‘crammed down’, the court can make orders preventing it from enforcing its rights under its security.

In the case of schemes of arrangement, a special resolution (75% in value, 50% in number) of each eligible class is required and can cram down the rights of creditors.

In recent times, in the case of schemes of arrangement, certain creditors have sought to persuade the court that they belong in their own ‘special class’ in order to obtain a blocking/greenmail vote.

The restructuring regime in Australia is secured creditor friendly. A DOCA can compromise a secured creditor’s claim, but only with its consent. Most secured debt compromises are agreed outside formal restructuring proceedings – either by consent or alternatively with the secured lender selling its debt interest to a secondary debt market participant.

Schemes of arrangement can also compromise a secured lender’s debt only if its debt is in the minority. Resolutions in a scheme are voted upon at each class by way of a special resolution requiring 75% by value and 50% in number of participants in the class voting in favour of the resolution.

The nature of the appointment will govern whether contracts/leases can be disclaimed. For example, in the case of a voluntary administration or a DOCA, an administrator cannot disclaim or repudiate a contract/lease. It can, however, issue a notice not to exercise property rights pursuant to Section 443B of the Corporations Act within the first five business days of its appointment, absolving itself from personal liability under that lease/contract. A Section 443B notice does not affect the company’s liability under the lease. In recent times, administrators have sought leave of the court to extend the decision timeframe under Section 443B if the rights of the owner/lessee were not prejudiced as a consequence.

Only in the case of a scheme of arrangement can liabilities of third parties be released.

A DOCA, while binding on all creditors (except secured creditors) regardless of whether they voted in favour of the DOCA, cannot extinguish the claims of third parties/guarantors. It is reliant on the company, while in administration/DOCA or post restructuring, to negotiate deeds of release with respect to these third parties. Therefore, the existence of significant third-party claims can be a significant impediment to a successful restructuring.

A voluntary administrator can borrow money for funding administration liabilities and will be personally liable for those amounts.

An administrator seeking administration funding is a common occurrence. In recent times, administrators have made applications to the court to absolve themselves from personal liability for any borrowed funds, with the lender to the administrator relying solely on the administrator’s statutory lien and indemnity from the assets of the company. An administrator’s statutory lien does not have priority to that of a secured creditor unless it consents.

In the case of a receivership, the existing lender can provide funding to a receiver. The loaned funds form part of the lender’s existing security and are therefore afforded the same priority.

For schemes of arrangement, funding can be obtained; but it will not take priority without the existing secured creditors’ consent.

It is common in secured creditor-led restructurings involving more than one syndicate member for the lenders to consensually agree that any lenders which participate in contributing new money will be afforded ‘super senior’ priority to that of the existing facilities.

In summary, there is no legal framework for DIP financing in Australia.

Voluntary administration will conclude after the second creditors’ meeting is held at the end of the convening period, which is typically 20 to 25 business days post appointment, unless:

• the meeting is adjourned (statutory 45 business days); or
• the administrator makes an application to the court to extend the convening period.

A DOCA will conclude when its terms have been met/effectuated – usually on the creditors receiving a distribution from the deed fund or on the creation of a creditors’ trust. A creditors’ trust is a tool used by practitioners to expediently transition the company out of the DOCA and usually occurs very shortly after the DOCA commences.

A scheme of arrangement will end shortly after the second court hearing when each class of creditors approves by special resolution (75% in value, 50% in number) the scheme and the court ratifies it.

The four main types of insolvency proceedings in Australia are as follows.

Creditors’ voluntary liquidation:

Court liquidation:

Receivership:

Agent for the mortgagee in possession:

Creditors’ voluntary liquidation: This is initiated by special resolution of shareholders or at the second meeting of creditors in a voluntary administration if no deed of company arrangement is proposed.

Court liquidation: This is initiated by way of an application for winding up to the court by a creditor, debtor, shareholder or the Australian Securities & Investments Commission (ASIC). It is usually initiated by a creditor which:

• has a judgment in its favour; or
• has served a statutory demand on the debtor, but the debtor has failed to set the demand aside or pay the demand.

Receivership: This is initiated by a secured creditor which has an ALLPAAP security interest over all or substantially all assets of the debtor.

Agent for the mortgagee: Like receivership, this can be initiated by a secured creditor which has an ALLPAAP security interest over all or substantially all assets of the debtor. However, the appointment is over a specific asset, not the company. Consequently, it can also be initiated by a secured creditor which has security over the whole of a specific asset (eg, land, motor vehicles, equipment).

A distinguishing characteristic of a debtor entering a formal insolvency proceeding in Australia is that the powers of its directors are suspended, with control of the insolvent entity and its operations passing to an independent insolvency practitioner. From this point, all employees and suppliers of the debtor are to take instruction from the external administrator, with strict trading protocols being implemented to affect this.

In the event of liquidation, the insolvent debtor’s operations will typically cease (if they have not already), with a liquidator then taking steps to sell any residual assets (eg, stock, plant and equipment not subject to retention or encumbrance) for the benefit of creditors. Further, the liquidator will conduct detailed investigations into the affairs of the debtor and report to creditors with respect to same. Should there be choses in action available for the liquidator to pursue, it can utilise any combination of available funds, creditor funding or litigation funding to pursue these claims.

In the case of a receivership/agent for the mortgagee (AMIP), the appointee will realise assets subject to the secured creditor’s security and account to them with respect to same.

Where a debtor is placed into liquidation, court proceedings against the debtor and enforcement processes in relation to property of the debtor cannot be commenced or continued without leave of the court. Exceptions to this are any rights that a secured creditor has to deal with the property that is subject to its security, including the appointment of a receiver and manager or AMIP.

One of the drawbacks to the appointment of a receiver and manager by a secured creditor is that it will not obtain the benefit of the statutory moratorium that is afforded to a voluntary administrator. Consequently, it is common in the Australian market for both a receiver and manager and a voluntary administrator to be appointed at the same time.

Insolvency proceedings in Australia are broken down as follows.

Creditors’ voluntary liquidation:

• Key milestones:
• • The liquidator must prepare an initial report to creditors within 10 business days of the appointment:
  • • advising on the appointment; and
    • notifying creditors of their rights and the expected length and cost of the process.
  • Within three months of the appointment, a more detailed report is provided to the creditors, advising on:
  • • the liquidator’s findings to date;
    • the asset and liability position of the company;
    • a fee proposal in relation to the liquidator’s remuneration for voting by creditors; and
    • the potential for a return to be paid to creditors from asset realisations (if available).
• Process:
• • The purpose of the appointment is to arrange for a liquidator – being an experienced independent party acting in accordance with the act – to:
  • • conduct an orderly wind-down of operations;
    • realise the company’s available assets;
    • investigate the affairs of the company prior to it being placed into liquidation;
    • seek recoveries of preferential payments, voidable and antecedent transactions; and
    • where funds permit, prepare a distribution of net proceeds to creditors in accordance with the priorities legislated in the Corporations Act.
• Length of process:
• • The liquidation should be completed as quickly as possible, ideally once all assets have been realised, investigations concluded and any distributions made to creditors.
  • The liquidator is prohibited from entering into agreements for longer than three months without the approval of creditors, the court or a committee of inspection.
  • It is a legislative requirement to ensure that the orderly wind-down of the company is conducted expeditiously.
  • Once all assets have been realised, investigations into the affairs of the company have been completed and any distribution of proceeds has been made to unsecured creditors, the liquidation may be completed, which will ultimately lead to the deregistration of the company by ASIC.

Official (court) liquidation:

• Key milestones:
• • A creditor of a company may serve a statutory demand for payment on the company. The statutory demand must:
  • • be for an amount that is at least A$2,000;
    • specify the debt(s);
    • require the amount to be repaid;
    • be in writing;
    • be in the prescribed form; and
    • be signed.
  • Within 21 days of receipt of the statutory demand, the debtor must:
  • • pay the debt;
    • secure or compound the debt; or
    • make application to the court to have the statutory demand set aside.
• Failure to do one of the above will result in the company being deemed to be insolvent.
• • Within three months of the expiry of the statutory demand, the creditor can make an application to court to have the debtor wound up in insolvency, relying on the ‘deemed insolvency’ of the debtor.
  • Process:
  • • The liquidator must submit a consent to act to court in advance of accepting the appointment as liquidator.
    • On expiry of the statutory demand, a creditor may make an application to court to have the company wound up in insolvency.
    • Once an application to the court is made, the court can appoint the insolvency practitioner as official liquidator to the company through the making of a winding-up order.
    • On appointment, the liquidator takes control of the company’s assets and commences the orderly wind-down of the company’s affairs, including the gathering in and realisation of assets on behalf of creditors.
  • Length of process:
  • • The circumstances of the respective company will dictate the length of the process. However, the actions that must be undertaken by the insolvency practitioner are broadly in line with the processes undertaken during a creditors’ voluntary liquidation.

  Receivership and AMIP:

  • Key milestones and process:
  • • Obtaining and entering into possession of the assets that are subject to the secured creditor’s security.
    • Organising an orderly sale process for the business and/or assets of the debtor.
    • Distributing the proceeds from the sale of the business or assets of the debtor to the secured creditor.
  • Length of process:
  • • This varies depending on whether the assets subject to the secured creditors security are:
    • • passive (eg, real property/equipment); or
      • active (eg, trading business).

(a) Debtor

The role of the debtor is passive, as all assets, liabilities, contracts and responsibilities of the company become subject to the control of the insolvency practitioner on appointment, who will assume responsibility for the affairs of the company.

(b) Directors of the debtor

The powers of the directors in relation to the affairs of the company are suspended on the appointment of the insolvency practitioner. However, the directors do have a positive responsibility to:

• provide the insolvency practitioner with assistance in relation to the appointment; and
• ensure that books and records are made available to the insolvency practitioner for investigations into the affairs of the company to be conducted.

(c) Shareholders of the debtor

Shareholders of the debtor have no active role in insolvency proceedings. The practical reality is that, on the conclusion of the insolvency event, the shares are nearly always deemed to be worthless.

(d) Secured creditors

To be recognised as a secured creditor by the insolvency practitioner, the security holder

must have validly registered and perfected its security interest on the Personal Property Securities Register operated by the Australian Financial Security Authority.

A valid security interest provides the secured party with:

• a priority over all or some assets of the company (all present and after acquired property); or
• security over the specific asset over which it holds a registration, usually by way of serial numbered goods.

The appointment of a liquidator does not preclude a secured creditor from dealing with the assets which are subject to its security.

(e) Unsecured creditors

Unsecured creditors have the lowest priority in any return to creditors.

Unsecured creditors are entitled to:

• receive reports from a liquidator as to the results of their investigations;
• vote at meetings of creditors; and
• participate in claiming for amounts outstanding prior to the appointment of an external administrator.

All debts prior to the appointment of an external administrator represent unsecured claims in the external administration.

(f) Administrator

The role of the administrator is to act as a suitably qualified, independent party with a view to putting in place a restructuring plan that will allow:

• the business to be restructured; or
• if that is not possible, a better return to creditors than would result from liquidation.

If the administrator is unable to effect a restructuring plan by way of a deed of company arrangement, the company will be placed into liquidation.

(g) Employees

The role of employees during an insolvency event is to assist the insolvency practitioner. All employee entitlements are recorded and ‘quarantined’ as at the date of appointment of the insolvency practitioner. Provided that an employee’s services are still needed during the insolvency event, his or her employment contract will remain ongoing, with wages and entitlements paid by the company under the control of the liquidator.

If an employment contract is terminated during the insolvency event, the employee’s entitlement amount is afforded a priority from circulating security interests in the event of a distribution to creditors by the insolvency practitioner.

(h) Pension creditors

Most employees in Australia are covered by the Superannuation Guarantee Act, which requires employers to pay a set component (currently 10.5%) of an employee’s wage into a superannuation account (retirement fund) that is to be preserved until a condition of release is met – in most circumstances, the age of retirement, which is currently 67. Employers must make payment of their employees’ superannuation on a quarterly basis.

Outstanding wage and superannuation payments are paid in priority to other creditors from the realisation of circulating security interests.

(i) Insolvency officeholder

The insolvency officeholder has a duty to all creditors in an insolvency event, noting that certain classes of creditors – that is, those with perfected security agreements and employees by virtue of the order of priorities – may require a greater focus than unsecured creditors in the event of an insolvency.

(j) Court

In addition to the court’s role in adjudicating on commercial litigation, the court is available to be approached by the insolvency practitioner to provide clarification on a point of insolvency law.

It is a well-established tradition that the court will not adjudicate on commercial decisions on behalf of the insolvency practitioner, but rather confines itself to interpretation and adjudication of the relevant legislation.

Creditors submit their claim to a liquidator by completing a formal proof of debt form (Form 535).

A liquidator will usually request this form prior to meetings of creditors, but will admit the claims for voting purposes only.

When assets have been realised and there are sufficient funds to pay a dividend, a liquidator will formally call for proof of debts by giving notice of intention to declare a dividend not more than two months before the intended date. Creditors then have a minimum of 21 days to submit their formal claims, together with documentation in support. A creditor that fails to submit a formal proof of debt before the date stipulated in the notice is excluded from participating in the distribution to which the notice relates. The liquidator then adjudicates on the proofs received by either admitting/partially admitting or rejecting the creditor’s claim.

If assets are available for distribution, the order of priority is as follows:

• the costs and expenses of the winding up;
• the remuneration and disbursements of the appointed liquidator;
• claims of employees for wages and superannuation;
• claims of employees for leave entitlement;
• claims of employees for redundancy pay;
• unsecured creditors’ claims; and
• amounts owed to shareholders.

Each class must be paid in full before the funds cascade down to the next creditor class. If there are insufficient funds to satisfy a class in full, each member in that class receives a pro rata entitlement with reference to the value of its claim.

Valid purchased money security interest creditors (retention of title, asset finance) are afforded a ‘super priority’ with respect to their claims.

Secured creditors are entitled to be paid from assets that are subject to their security – usually after enforcement costs and trading expenses incurred by a duly appointed receiver (if appointed) or costs reasonably incurred by a liquidator in the care, preservation and realisation of assets subject to their security. As discussed, a secured creditor is subordinated to employee creditors with respect to the proceeds of circulating assets (stock, debtors and cash).

There is no concept of equitable subordination in Australia.

The ‘ipso facto’ regime (see question 3.5) is not available if a company is in liquidation and contract counterparties are within their rights to terminate as a consequence of insolvency. Contracts can only be disclaimed by a liquidator.

Any claim that a contract counterparty has with respect to damages is a claimable debt in the liquidation and can be lodged in the usual manner.

The ipso facto regime (see question 3.5) is available to a receiver and a voluntary administrator, meaning that – subject to certain provisions – contracts cannot be immediately terminated as a consequence of an external appointment. Both do not have the power to disclaim contracts, but can issue a notice not exercising property rights, leaving the contract counterparty with a claim against the debtor for damages.

Transactions entered into by the debtor prior to insolvency that are deemed voidable may be challenged and set aside. A voidable transaction results in the transfer of the company’s assets or an increase in the company’s liabilities to a third party.

Relevant grounds and look-back periods*

*To be uncommercial or a preference transaction, it must also be an insolvent transaction – that is, entered into at a time when the company was insolvent.

** The ‘relation-back date’ differs depending on the appointment type, but is usually either:

• the date on which the administrator is appointed; or
• the date on which the application is filed in the courts.

Defences: Several defences are available, as follows:

• There was no benefit or the benefit was received in good faith without grounds to suspect insolvency; or
• The transaction was entered into for valuable consideration in good faith without grounds to suspect insolvency.

A liquidation ends when the liquidator has:

• realised all assets;
• paid any distribution to creditors; and
• concluded the investigations.

The liquidator will lodge a notice of cessation with ASIC and the company will be deregistered thereafter. Once the company has been deregistered, no liabilities can survive.

The process is the same for receivership as it is for liquidation; however, in addition, a deed of retirement is entered into between the receiver and the secured creditor. All other liabilities of the debtor survive once the receivership is concluded and the onus is on any unsecured creditor to take steps to liquidate the company. There is usually little incentive to do this as all available assets will have been realised.

The Corporations Act provides for a mechanism for the winding-up of foreign debtors via Section 583. Pursuant to this section, an Australian court may wind up a foreign company (known as a ‘Part 5.7 body’). A Part 5.7 body can be wound up under the act irrespective of it being wound up or having been dissolved, deregistered or otherwise having ceased to exist in the jurisdiction in which it was incorporated.

Similar to insolvent Australian entities, a Part 5.7 body may be wound up if it is taken to be unable to pay its debts when they fall due. In addition, a creditor owed more than the statutory minimum (ie, A$4,000) by the Part 5.7 body can serve a demand on the foreign debtor for payment within three weeks (Section 585 of the Corporations Act). If the foreign debtor fails to pay the debt owed, the Part 5.7 body will be taken to be insolvent and an application to wind up the company can be made to an Australian court.

In addition, pursuant to Section 601CL(14) of the Corporations Act, an Australian court may also make an order for a local (ancillary) winding-up of a registered foreign company that is currently being wound up in its home jurisdiction/place of incorporation.

The Australian federal government gave effect to the UNCITRAL Model Law on Cross-Border Insolvency to assist insolvency practitioners with recognition, cooperation and relief in cross-border insolvency matters pursuant to the Cross-Border Insolvency Act, which was enacted in 2008. In this regard, the Model Law theoretically has the force of law in Australia in respect of bankruptcy and corporate insolvency matters.

The UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) is a relatively new framework introduced to provide a process for the recognition and enforcement of a judgment by way of direct application under the MLIJ or in conjunction with any defence to a claim in respect of insolvency-related legal proceedings. Introduced in 2018, the MLIJ has not yet been adopted in Australia (or any other country globally), with the consultation and legislative process(es) anticipated to take a number of years before the MLIJ has any legal effect.

Notwithstanding the above, it is highly likely that Australia will adopt the MLIJ (whether in full or with certain modifications to protect local interests) to provide assistance and conformity in respect of large cross-border insolvency matters.

The Corporations Act sets out certain provisions for recognition and cooperation between Australian and foreign courts in relation to external administration matters. In this regard, Section 581 of the act specifies that an Australian court must act in aid of a prescribed country (defined to include jurisdictions such as Canada, Malaysia, New Zealand, Singapore, the United Kingdom and the United States). If the specific overseas foreign jurisdiction is not defined as a ‘prescribed country’, the Australian courts may provide assistance in circumstances where a judicial request is made in the event of an external administration.

In addition to the Corporations Act, the MLIJ provides a mechanism for a foreign representative to apply for recognition of a foreign proceeding in which a representative has been appointed. Article 15 also sets out certain information requirements for the relevant recognition application, including appointment documents and evidence of the foreign decisions commencing the foreign proceedings. Considering this, the Australian courts will typically recognise foreign insolvency practitioners and/or proceedings (notwithstanding a foreign state having not adopted the MLIJ). An exception to this rule may involve a court refusing to take action if this would be contrary to public policy in Australia (or the relevant jurisdiction hearing the application) (per Article 6).

The Australian courts can provide court-to-court assistance in cross-border insolvency matters pursuant to Section 581 of the Cross-Border Insolvency Act. This allows an Australian court to request a foreign court to provide assistance to an Australian administrator or liquidator in respect of an external administration matter involving an Australian company – for example, in order to recover overseas property for the benefit of an insolvent debtor’s estate. In addition:

• an Australian court can issue a letter of request to foreign courts under Section 581(4) of the act; and
• pursuant to Sections 581(2) and 581(3) of the act, the Australian courts must (or may) assist certain foreign courts in relation to external administration matters if a request is received.

Further to the above mechanisms under the Cross-Border Insolvency Act, the adopted MLIJ (which has the force of law in Australia under the act) also specifies that courts must cooperate to the maximum extent possible with foreign courts and representatives pursuant to Article 25. Example forms of cooperation are detailed in Article 27 of the MLIJ (again, enacted under the Cross-Border Insolvency Act) and may include:

• the coordination of concurrent proceedings in respect of the same debtor; or
• the appointment of a person or relevant body to act at the direction of the court.

Insolvency practitioners should also be aware that while the Australian courts may (or must) cooperate with prescribed countries such as the United Kingdom, Singapore and the United States under the Cross-Border Insolvency Act, the cooperation and coordination may not be returned by foreign jurisdictions in circumstances where:

• the MLIJ has not been adopted or ratified; and/or
• the local insolvency laws do not prescribe foreign court cooperation.

The Cross-Border Insolvency Act contains provisions in Part 5.6, Division 8 to enable the pooling of liabilities between entities within a group. This can occur either through a voluntary pooling determination or through court-ordered pooling.

Section 571 of the act allows a liquidator of a group of entities to make a pooling determination. For this to occur:

• each group entity must be a related body corporate;
• the group entities must be jointly liable for one or more debts or claims;
• the group companies must jointly own or operate property that is or was used by the business; and/or
• one or more of the group entities must own particular property that was used by any or all group companies in connection with their business operations.

If a voluntary pooling determination is made, the act specifies certain consequences, in that each group entity is taken to be jointly and severally liable for each debt payable and intercompany claims become extinguished. Per Section 571(9) of the act, any debts payable to a secured creditor by a group entity or entities are excluded from this – unless the relevant debt is payable to any other entity or entities within the group. In addition, the priority of payments pursuant to Section 556 of the act is not altered – with eligible employee creditors remaining entitled to at least equal what they would have been entitled to if the determination was not made (per Section 571(10) of the act).

A court can make a pooling order upon the application of a liquidator(s) of companies within a group that is being wound up pursuant to Section 579E of the act – with similar requirements and consequences to those noted above.

Similar to the UNCITRAL MLIJ, the UNCITRAL Model Law on Enterprise Group Insolvency (MLEGI) is another relatively new framework with a focus on dealing with the domestic and cross-border insolvency proceedings of enterprise groups with entities based in multiple global jurisdictions. Ideally, the MLEGI aims to provide a clear framework for the coordination and recognition of group insolvency proceedings.

Given that the MLEGI has only recently been introduced, it has not yet been adopted in Australia or any other jurisdiction internationally. While Australia is yet to consider the MLEGI, it is likely that Australia may move to consider adoption to provide further assistance and conformity in dealing with large cross-border insolvency and restructuring matters.

Article 2 of the UNCITRAL Model Law distinguishes between:

• ‘foreign main proceedings’ – that is, foreign proceedings taking place in a state where the debtor has its centre of main interests (COMI); and
• ‘foreign non-main proceedings’ – that is, foreign proceedings taking place in a state where the debtor has an establishment (ie, certain business operations).

In addition, Article 16 of the MLIJ provides a rebuttable presumption (ie, one which the debtor must disprove) that the location of the debtor’s registered office is presumed to be the debtor’s COMI.

In determining the relevant COMI, there are several factors that courts will assess objectively if this presumption is to be rebutted. This position was upheld in Re Eurofood IFSC Ltd [2006] Ch 508, in which the court stated that the COMI “must be identified by reference to criteria that are both objective and ascertainable by third parties”. For the COMI to change, “it can only do so by reference to main interests which it still has and facts within the public domain or so apparent at the time of their occurrence” (Re Stanford International Bank Ltd [2010] EWCA Civ 137).

In addition, in Kapila, Re Edelsten [2014] FCA 1112, the Federal Court of Australia noted certain factors that may rebut the registered office presumption in respect of the COMI. These factors are numerous and can include:

• the location of the debtor’s books and records, principal assets or operations;
• the location of employees or agents, or a principal bank or lender; and
• the location of the majority of a debtor’s creditors.

In Australia, Section 12 of the Cross-Border Insolvency Act implements Article 13 of the MLIJ, in that foreign creditors have the same rights regarding the commencement of and participation in Australian external administration proceedings. Further to this, Article 14 of the MLIJ is also enforced via the Cross-Border Insolvency Act, with foreign creditors receiving the same notifications, access to participate in creditors’ meetings and reporting disclosures in accordance with the act from external administrators as are provided to local Australian-based creditors.

In this regard, unsecured foreign creditors will rank on a pari passu basis in relation to outstanding debts or claims owed by an insolvent debtor. In light of this (and in the absence of a relevant instrument agreeing a method to convert a company’s liability regarding a debt or claim into Australian currency), typically the claims of foreign currency creditors must be converted into Australian dollars as at the date on which an insolvent debtor entered into external administration to be admissible to prove in the local debtor’s estate in accordance with Section 554C of the Cross-Border Insolvency Act.

Directors have a duty to act in good faith and for a proper purpose with respect to the interests of a corporation. When in the ‘zone of insolvency’, directors also owe additional duties to the creditors of the company and can be personally liable for breach of these duties (see question 6.2).

When a company is in the zone of insolvency, the concern usually changes from that of concern for the company to a personal concern, as the directors can be held personally liable for trading while insolvent (see question 6.2).

There is no positive obligation for directors to commence insolvency proceedings at a particular time. However, the legislative penalty for directors for trading while insolvent generally turns directors’ mind to commencing insolvency proceedings when the company cannot pay its debts as and when they fall due.

One situation creates a somewhat positive obligation to appoint a voluntary administrator: where there are outstanding taxation liabilities and the Australian Taxation Office has issued a director penalty notice (DPN). The DPN usually states that a company has 21 days to repay its outstanding tax debts. If it cannot, it must appoint a voluntary administrator prior to the expiration of the DPN; otherwise, the directors will be deemed to be personally liable for the tax debts of the company.

A director can be held liable for debts of a corporation if they continued to incur liabilities at a time when they knew, or reasonably should have known, that the company was insolvent. A director will be liable for debts while trading insolvent in the following circumstances:

• They were a director of the company when it incurred the debt;
• The debt was incurred while the company was insolvent (or it became insolvent in incurring the debt or debts);
• At the time, there were reasonable grounds to suspect that the company was insolvent (or would become insolvent) when the debt was incurred; and
• A reasonable director in their position should have been aware that the company was or would become insolvent.

In September 2017, safe harbour provisions were inserted in the Corporations Act 2001 (Cth). Subject to certain eligibility conditions, the safe harbour offers a director a defence to an insolvent trading action.

Directors can also be sued for damages in the context of a debtor’s insolvency with respect to:

• breach of the duties of care and diligence;
• breach of good faith;
• abuse of position;
• abuse of information;
• related-party loans;
• unreasonable director-related transactions;
• preference payments; and
• creditor-defeating dispositions

A holding company can be held liable for insolvent trading of a subsidiary pursuant to Section 588V of the Corporations Act if the holding company directors were aware that the subsidiary was insolvent or would become insolvent in incurring the debt.

A shareholder is also liable for any unpaid capital.

Other parties that can be held liable in the context of a debtor’s insolvency include the following:

• Preference payments: Creditors of a company can be held liable in a debtor’s insolvency pursuant to Section 588FA of the Corporations Act if they received from the company, in respect of an unsecured debt, more than they would have done if the debt were set aside and they were to prove for the debt in the winding-up of the company. For liability to apply:
• • the transaction must have occurred when the company was insolvent; and
  • the creditor must have had reasonable grounds to suspect that the company was insolvent.
• Uncommercial transactions (Section 588FB): A director, creditor or company may be liable for damages if a reasonable person would not have entered into a transaction having regard to the benefits and detriment to the company and the respective benefits to the other parties from entering into the transaction. For liability to apply:
• • the transaction must have occurred when the company was insolvent; and
  • the creditor must have had reasonable grounds to suspect that the company was insolvent.
• Unfair loan (Section 588FD): A lender may be liable for damages if it provides an unfair loan where the interest and/or charges on the loan are extortionate balanced with the lender’s risk, value of security, terms, repayment mechanics and the amount.
• Creditor defeating disposition (Section 588FDB): Liability may arise where:
• • property of a company was disposed of for less than market value or the best price obtainable at the time; and
  • the disposal had the effect of preventing the property from becoming available or hindering/delaying the process of making the property available for the benefit of the company’s creditors.

In response to the impact of the COVID-19 pandemic, Australian federal and state governments introduced a number of legislative changes aimed at providing temporary relief for financially distressed organisations and individuals. This relief included certain amendments to Australian insolvency law and was introduced on 25 March 2020 via Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth). The temporary changes included the following:

• A director’s duty to prevent insolvent trading and any associated personal liability no longer applied to debts that were incurred in the ordinary course of the company’s business. This temporary ‘safe harbour’ style regime applied to debts incurred from 25 March 2020 until 31 December 2020.
• The relief available to directors related only to those debts that were incurred in the ordinary course of a company’s business and not in circumstances where dishonesty and fraud might be involved. The temporary reform was aimed at providing company directors with confidence to continue trading, to the extent practically possible, during the COVID-19 pandemic.
• The relevant threshold for the issue of creditor statutory demands (against a corporation) was increased from A$2,000 to A$20,000. In addition, the relevant timeframe within which a company had to comply with any demand was extended from 21 days to six months. This relief measure was also in place from 25 March until 31 December 2020.

Consistent with the relief detailed above, as a result of COVID-19, the Australian Taxation Office (ATO) indicated that it would also defer enforcement action, including issuing director penalty notices and winding-up actions, during the pandemic. This informal moratorium in enforcement action by the ATO came to an end in approximately May 2022.

At this time, any temporary legislative changes as a consequence of COVID-19 have ceased and Australia’s insolvency regime operates as it did prior to the COVID-19 pandemic.

While there is no formal regime for ‘pre-packs’ in Australia, they are possible – albeit not without difficulty.

The primary issue arises due to:

• the legislative requirements of, say, Section 420A of the Corporations Act to take reasonable care and sell assets for market value in the case of receivership; and
• the general duties that an administrator owes under the act, which place a high standard on the conduct of such parties in attempting to consummate a pre-pack sale.

As an administrator must be independent, a ‘pre-packed’ voluntary administration would likely call this into question if the outcome were arranged prior to the administrator’s appointment. That said, a financial adviser could plan what a pre-pack could look like and the voluntary administrator, on assessment of the proposal after its appointment, could make a judgement that the arrangement is in the best interests of creditors. In some instances, a binding heads of agreement could be entered into for the sale of the business prior to the administrator’s appointment – in which case the administrator should consider whether proceeding with the pre-pack would result in the best outcome for creditors in weighing up the circumstances.

Naturally, a pre-packed external administration will attract significantly more scrutiny from the various stakeholders involved – not to mention the various regulators – which adds to the difficulty.

While no formal regime or recognition exists, a secured lender is within its right to ‘credit bid’ its debt and this strategy is regularly implemented – particularly in cases where a secondary debt player may have purchased the senior debt of a company either at or below par.

A credit bid can be implemented informally through a consensual debt-for-equity swap or via an external administration process (receivership/voluntary administration). In the case of a receivership, the rights of the secured creditor will generally extend over the shares in the company; however, the legislative requirement under Section 420A of the Corporations Act to take all reasonable care and sell for market value will require the sale to be marketed and sold at arm’s length.

In the case of a voluntary administration, the credit bid will be assessed by the administrator as to whether it provides the best outcome for unsecured creditors compared to any other bids, a deed proposal or the immediate liquidation of the company. If the credit bidder requires the shares in the entity, it will require the unanimous consent of the shareholder(s). Failing that, an independent expert report written by someone other than the voluntary administrator will need to be prepared; and an application under Section 444GA of the Corporations Act will need to be made whereby the court orders the shares to be transferred to the bidder. The court will grant approval only if it is convinced that:

• the transfer is in the best interests of creditors; and
• the value breaks below the shareholders’ entitlement.

The number of restructuring and insolvency appointments climbed throughout 2024 to some of their highest levels since before the COVID-19 pandemic.

The Australian Taxation Office is actively initiating winding-up proceedings to recover tax liabilities where certain protection was previously afforded on account of the pandemic. Government support of business has all but disappeared and, coupled with high interest rates and inflationary environments, this has placed significant strain on Australian businesses. Further, financiers are now looking to take enforcement action to recover loans, with the number of receivership/controller appointments also increasing.

One specific callout is that in 2024, the construction industry faced the highest rate of insolvency appointments (compared to other industries) across the Australian economy since COVID-19. High interest rates, labour shortages and material supply constraints have reshaped the industry, which has seen a significant increase in the number of insolvent or financially vulnerable companies since the pandemic.

More and more companies are taking advantage of the simplified business restructuring (SBR) regime which allows directors to remain in control of the company for those with liabilities under A$1 million. Since July 2021, SBR appointments have increased at a monthly compound annual growth rate of over 150%. We expect this trend to continue throughout 2025.

• Communicate early and transparently with all key stakeholders, especially financiers: While businesses regularly fall into financial difficulties, early, open and transparent communications will help to reduce stakeholder concern and ultimately aid the restructuring process.
• Provide accurate and timely information: There needs to be a balance between time and accuracy. Little trust can be placed in a cash flow that is error ridden and/or that has changed substantially several times within a short timeframe.
• Communicate more often than not: If it is 50/50 as to whether you think a stakeholder would want to receive certain information, always err on the side of communicating it.
• Take government departments, unions/associations and other significant players that are unfamiliar with the restructuring process along with you on the journey: Bring parties such as the following into the tent early and often:
• • the Australian Securities & Investments Commission;
  • the Australian Competition and Consumer Commission;
  • the Foreign Investment Review Board;
  • the Australian Taxation Office;
  • unions;
  • licensing/regulatory approval bodies; and
  • overseas creditors.
• Getting to the right person within these organisations at the end of a restructuring and having to debrief everything you have done can delay or end a successful restructuring.
• Utilise all the arrows in your quiver: The legislation has many tools available to facilitate restructuring. Do not be afraid of going to court on multiple occasions and have contingencies in play if the intended path is no longer an option.
• Engage the right experts: Whether they be lawyers, sales advisers, auctioneers/sales agents or industry specialists, engage the right people to complement the skills of your existing team to help you identify pitfalls and opportunities that naturally arise in restructuring engagements.