David Walter is a partner in the Sydney office of Baker McKenzie, specialising in insolvency. Since 2012, David has been recognised as a leading lawyer in Chambers Asia-Pacific, Australian Financial Review – Best Lawyers, Doyle’s Guide and The Legal 500 – Asia-Pacific. He publishes and speaks regularly on current issues and emerging trends in the Australian insolvency market.
David’s practice focuses on contentious and non-contentious financial restructuring and insolvency. He has advised a wide array of stakeholders in both informal restructures and formal insolvencies, and is particularly experienced in the real estate, mining and resources, energy, finance, retail, manufacturing and transport sectors.
David regularly contributes articles for publication in Butterworths Corporation Law Bulletin, Australian Insolvency Journal, Insolvency Law Journal, Corporate Rescue International and the Insolvency Law Bulletin dealing with developments in insolvency law and practice. He is the Sydney chair of the Law Council’s Insolvency and Restructuring Committee.
Maria O’Brien is the head of Baker McKenzie’s Australian restructuring and insolvency practice, a member of the firm’s global restructuring and insolvency steering committee and leads the firm’s Asia-Pacific restructuring and insolvency initiative.
Maria is a restructuring and insolvency professional with a strong background in commercial litigation. She has considerable experience acting for distressed or insolvent companies, their external administrators and creditors in respect of a wide range of insolvency issues, both contentious and non-contentious, including workouts, with a particular focus on cross-border restructuring and insolvency.
Maria has been ranked as a leading individual in restructuring and insolvency by Chambers Asia Pacific every year since 2011 and in the peer-assessed Australian Financial Review – Best Lawyers for Insolvency and Reorganisations every year since 2009. She is also a leading individual for restructuring and insolvency in The Legal 500 and has been nominated in the restructuring and insolvency category of the Euromoney Asia Women in Business Law Awards in 2013, 2015 and 2017.
Maria is a fellow of INSOL International. She was co-chair of INSOL HK held in November 2018, and is technical co-chair for the INSOL Singapore conference to be held in April 2019.
GTDT: In the last year, have you seen any developments or trends in the nature and volume of insolvency filings?
David Walter and Maria O’Brien: The number of formal insolvency proceedings in Australia have been in decline in 2017 and 2018. According to Australian Securities and Investments Commission (ASIC) statistics, in the 12 months to June 2018, 7,747 companies entered administration – a 5 per cent reduction on the prior period in 2016–2017 (noting that 2016–2017 substantially decreased from 2015–2016). So, a downward trend.
However, because of the breadth of the sizes and industries of company insolvencies included in the ASIC statistics, it is difficult to hazard an educated guess as to the reason for this decline.
As confirmed by the ASIC statistics, construction industry insolvencies continue to be the largest contributor, on an industry basis, to formal insolvencies. In the 12 months to 30 June 2018 alone, the construction industry accounted for 17.5 per cent of all insolvency appointments for the period according to ASIC figures. Over the past decade, it has been estimated that the construction industry has accounted for between one-fifth and one-quarter of all corporate insolvencies in Australia. That said, the numbers of construction industry insolvencies have not been increasing in absolute terms, in recent years – so, it would be a little difficult to say that the industry is facing increased stress.
Anecdotally, the retail industry is under increasing stress, as suggested by some recent high-profile brick and mortar insolvencies, such as the administration of Roger David group (a men’s clothing brand) and Max Brenner (a food and beverage retailer, operated under licence). With those insolvencies, and similar developments in jurisdictions such as the United Kingdom, United States and Canada, there continues to be some doomsday talk about Australian bricks and mortar retail, also prompted by the recent entry of Amazon to the market. Those predictions might be a little extreme.
One area of continued growth – albeit very small in overall numbers – has been the appointment of scheme of arrangement administrators, up from one in 2016 to six in 2017 and around 10 in 2018. We see this growth as arising from a clear trend in the market of executing corporate control transactions – for large stressed or distressed companies – through secondary market debt trading, and the use of schemes of arrangement to then restructure that debt (and deleverage the company) into equity control of the target company. Transactions such as the restructuring of Emeco Holdings Ltd (discussed below) are an example of that trend.
“Australia was a very early adopter of the UNCITRAL Model Law on Cross-Border Insolvency, having brought the Model Law into effect in 2008.”
GTDT: Describe the one or two most notable insolvency filings in your jurisdiction in the past year.
DW & MO: We have been fortunate to have been company-side on two of the leading and most high-profile restructuring filings of the past year: the scheme of arrangement for Emeco Holdings Ltd (in the mining services industry), and the voluntary administration (and deed of company arrangement) for Ten Network Holdings Ltd and 13 of its subsidiaries (a free-to-air television network).
While perhaps not receiving the same level of attention in the press, the Emeco scheme of arrangement was a landmark restructuring in Australia. In the one series of transactions, Emeco successfully:
- restructured, through a creditors’ scheme of arrangement, its own US high yield bonds;
- acquired two of its competitors;
- restructured the bank loans of its two competitors; and
- raised new money from its existing shareholders.
We are not aware of this having been achieved before in this market. The transaction saw a solid outcome for both shareholders and bondholders in Emeco, with significant value achieved for those stakeholders (in terms of increased share value and realisation on the bonds).
In addition to those Australian restructuring steps, the Emeco scheme was also the first instance of an Australian creditors’ scheme of arrangement being recognised in the US through orders made by the US Bankruptcy Court under Chapter 15 of the US Bankruptcy Code.
Turning to Ten, the administration received very significant media attention, with the involvement of several high-profile Australian businesspeople as both significant shareholders and secured creditors of the company. The relatively tight regulation of media ownership in Australia introduced complexity in the effort to sell or recapitalise the company, given that several trade buyers – including two of the existing major shareholders and secured creditors – were constrained in their participation in the sale process.
Ultimately, CBS – the US media conglomerate – itself a major unsecured creditor of Ten, through various content supply deals, submitted a proposal to acquire Ten. This was done through a combination of CBS refinancing the secured debt and providing cash consideration to pay unsecured creditor claims via a deed of company arrangement that was conditional on court orders, allowing CBS to take ownership of the listed shares in the parent entity (thereby preserving the group as a whole) for nil consideration. Many unsecured creditors will receive 100 cents of their claims.
Again, very good outcomes achieved for creditors and employees, with the group successfully restructured as a going concern.
GTDT: Have there been any recent legislative reforms? Is there a perceived need for reform?
DW & MO: After much hand-wringing and many government inquiries, there have been two significant reforms implemented recently, relevant to the restructuring landscape.
First, in a pre-insolvency context, is the ‘safe harbour’ reform to the infamous Australian duty of directors to prevent their companies trading while insolvent. This reform commenced in around September 2017. The duty of Australian directors to prevent their company trading while insolvent – an onerous obligation by international standards – has been softened to aid restructuring efforts. This softening has been achieved through the enactment of a safe harbour from the insolvent trading duty – in essence, there is a carve-out from liability where the directors are diligently working to develop and implement a work-out plan for the company, with a view to getting a better outcome than an immediate formal insolvency. Key to taking advantage of the safe harbour will be early involvement of experienced professional advisors – legal and financial or accounting – to guide the directors in developing and then rolling out their work-out plan. While we do not see the safe harbour reform as being a game changer for this market, it is nonetheless a welcome additional defence for company directors, particularly non-executive directors with less ‘skin in the game’ than their executive counterparts. Anecdotally, there is clear evidence of the safe harbour being used in restructuring situations.
Second, in the formal insolvency context, comes the ‘ipso facto clause reform’, which commenced in around July 2018. These reforms – to the voluntary administration, scheme of arrangement and receivership procedures – restrict the ability of solvent contract counterparties to terminate contracts with the insolvent company, relying solely on ipso facto clause rights; as in, a right to terminate simply because of the company entering into an insolvency procedure. This reform follows similar provisions to the Chapter 11 of the United States Code – the idea being to help protect the insolvent company as a going concern while it is restructured, through reducing the loss of valuable contracts held by the company. There are, of course, some exceptions to the ‘moratorium’ – particularly in relation to financial products such as derivatives – but (once the transitional regime for the reform has been worked through) the reform will have a wide-ranging impact on counterparties like suppliers of goods, landlords and equipment lessors.
We see the ipso facto reform as being of considerable value in a restructuring context, especially in contract-intensive businesses like retail, mining services, construction and manufacturing.
Looking beyond those immediate reforms, there is an appetite in the Australian market for further reforms. In particular, we look to what has recently been achieved in Singapore with reforms to the scheme of arrangement procedure in that jurisdiction, and we see that similar reforms in Australia should be seriously considered. For instance, two reforms come to mind. First, the addition of a cross-class cramdown to the scheme of arrangement procedure (like that available in the US and, now, Singapore). Second, an ability to have super-senior status granted to a new money rescue finance package provided in voluntary administration or a scheme of arrangement, by court order. In larger restructuring cases, those reforms – already implemented in Singapore – would be powerful additions to the toolkit available to restructuring professionals.
“Australia was a very early adopter of the UNCITRAL Model Law on Cross-Border Insolvency, having brought the Model Law into effect in 2008.”
GTDT: In the international insolvency field, have there been any legislative or case law developments in terms of coordination of cross-border cases? What jurisdictions are you most likely to have contact with?
DW & MO: On the legislative front, there has not been any major change – Australia was a very early adopter of the UNCITRAL Model Law on Cross-Border Insolvency, having brought the Model Law into effect in 2008.
In the market, however, there have been two major case law developments over the past couple of years. First, the restructuring of Buccaneer Energy Ltd – an Australian-listed oil player – through an US Chapter 11 bankruptcy then recognised in Australia under the Model Law as a foreign main proceeding – was a major step in this jurisdiction. Buccaneer Energy was an Australian incorporated and Australian-listed company, but with operations and assets in the United States. Obviously, for a foreign company like Buccaneer Energy to enter into US Chapter 11 bankruptcy was not of itself groundbreaking. However, what was groundbreaking in this market was the Australian Courts then recognising – under the Model Law – the US Chapter 11 bankruptcy plan for Buccaneer Energy as a foreign main proceeding, in circumstances where the company was Australian incorporated and listed company.
That recognition – the first of its kind in Australia – shows an openness of the Australian courts to recognising that centre of main interests (under the Model Law) need not be where a company is incorporated, in order to achieve effective cross-border cooperation between courts in achieving restructuring outcomes for international companies and corporate groups.
The second key cross-border development arose in implementing the scheme of arrangement for Emeco Holdings Ltd (discussed above). An important feature of the transaction was recognition in the United States – under Chapter 15 of the Bankruptcy Code – of the Australian scheme of arrangement that restructured Emeco’s US high yield bonds; the recognition was a condition precedent to the scheme being implemented.
This was the first attempt at obtaining Chapter 15 recognition of an Australian law scheme of arrangement. Like Buccaneer Energy, in a display of the cross-border cooperation between courts that is now possible under the Model Law, the scheme of arrangement was recognised almost instantaneously in the US Bankruptcy Court following the making of the Australian court orders approving the scheme. That outcome – both in the substance of the US recognition of the Australian scheme, and in the efficiency and timeliness of that recognition – is really valuable for restructuring professionals.
Finally on law reform developments, two items on the horizon:
- UNCITRAL has recently published its Model Law on Insolvency-Related Judgments. This new model law is intended to deal with judgment enforcement issues, which have been confronted particularly in transatlantic cases between the United States and United Kingdom, but which have also come up in situations involving Australia (see Rubin v Eurofinance). That model law has not yet been adopted by Australia, and we are not currently aware of any proposal that the model law be adopted – consideration of the policy issues thrown up by the model law will take some time and resources, but we expect that Australia will closely consider adopting the model law in order to continue to take a lead in cross-border insolvency legal development and innovation.
- The Australian government is in the process of finalising a suite of reforms intended to discourage illegal ‘phoenix’ activity – phoenix activity being the liquidation of the legacy entity and recommencement of a business in a new entity, with creditors (particularly employees and revenue authorities) left behind with the legacy entity. Strong clawback and penalty provisions are proposed to apply to this kind of activity, with directors and affiliates (eg, parent companies), and also potentially external advisors, able to be pursued. These will likely come into effect in the near future, following a period of industry consultation – keep an eye out for the reforms later in 2019.
Turning to jurisdictions where we have most contact, historically and currently we have most contact with the United States. In Australia, this is primarily driven by the frequency over the past decade or so of Australian companies accessing US debt capital markets for capital – the presence of US bond holders in a capital structure then drives the involvement of US laws, courts and practices in any restructuring.
Increasingly, however, we are looking to Asia as a market for opportunities to deploy our expertise. We now see much more cross-border activity by both corporates and lenders around the region. Chinese and Indian corporates and banks have been particularly active across the region in the resources sector, including in Australia, and restructuring their investments is now clearly on our radar.
“The Australian government is in the process of finalising a suite of reforms intended to discourage illegal ‘phoenix’ activity.”
GTDT: In your country, is there a particular court or jurisdiction that sees a higher concentration of insolvency filings? What is the attraction of that forum?
DW & MO: The two key jurisdictions in our experience are the Federal Court and the Supreme Court of New South Wales, for slightly different reasons.
The Federal Court sees a very high volume of more routine liquidation cases, driven by the use of that jurisdiction by the Australian Taxation Office. Our guess is that the Australian Taxation Office, in enforcing unpaid taxes due by corporate taxpayers, must be the single biggest user of the liquidation procedure in Australia. In the more complex segment of the market, the Federal Court also has strong expertise in dealing with complex schemes of arrangement (both creditor and member schemes) – for instance, we successfully ran the Emeco scheme before the Federal Court. Also, the Federal Court has very strong experience in dealing with cross-border cases under the Model Law – the Buccaneer Energy recognition was run in that court.
The Supreme Court of New South Wales has deep judicial knowledge and experience with schemes of arrangement and also voluntary administration cases. Many of our voluntary administration applications are run in that jurisdiction before a group of judges with deep practical insolvency and corporations experience. For instance, the more contentious of the Ten court applications in the Supreme Court, which were handled expeditiously and capably by Justice Black.
GTDT: Is it fair to describe your jurisdiction as either ‘debtor-friendly’ or ‘creditor-friendly’ in terms of how insolvency filings proceed?
DW & MO: Internationally, Australia is considered a creditor-friendly jurisdiction for restructuring – protection of the interests of creditors is, generally speaking, given much greater emphasis than the interests of the debtor and its shareholders.
Traditionally, this creditor-friendly reputation manifested itself through the relatively free reign that bank creditors with wide security had to enforce their security by privately appointing receivers to a debtor’s entire undertaking – this could be done ‘over the top’ of the debtor’s own appointment of a voluntary administrator.
More recently, however, the creditor-friendly attitude of Australian restructuring law has emerged in tools such as those used in the Emeco and Ten cases. In Emeco, the debtor and bondholders took advantage of a procedure that enabled any litigation claims held by shareholders against the debtor to be compromised without any separate vote by the shareholders. Turning to Ten, the deed of company arrangement approved by creditors was subject to and took advantage of the court power to effectively ‘drag’ the shares held by the debtor’s existing shareholders across to the buyer of the business (CBS), for nil consideration. Both of those procedures are powerful tools for giving effect to creditor-driven restructuring transactions.
That said, the recent ipso facto and safe harbour reforms (as mentioned above) do see a softening of the creditor focus in Australia – in our view, both of those reforms do point toward a policy of encouraging debtors to restructure outside of insolvency, or, if an insolvency procedure is needed, enabling debtors to keep their business whole through the insolvency process.
GTDT: What opportunities exist for businesses wanting to purchase assets out of an insolvency, and how efficient is the process? What are the best ways to take advantage of opportunities in this area?
DW & MO: We see plenty of opportunities, across the large and small segments of the market. In all segments, the process for acquiring assets or businesses is efficient and reliable – the out-of-court procedures are well-established and generally well-run by the insolvency professionals, with little opportunity for real interference by third parties, and the court procedures are relatively efficient and predictable.
In an asset purchase scenario, the continuing development of the warranty and indemnity insurance market has been an additional incentive to acquire distressed assets in Australia. That product – whereby a buyer can obtain at least some coverage for customary ‘solvent sale’ warranties as to an asset’s condition (not normally available in an insolvency sale) – has really broadened the field of potential buyers for distressed assets.
Turning to a corporate control scenario, since the Alinta Energy restructuring in 2011 (where TPG and others acquired control of Alinta Energy’s electricity generation and gas distribution assets through interdependent schemes of arrangement), there has been a rapid development of an US-style corporate control transaction market through secondary market debt trading – secured loans are restructured into equity ownership of the debtor. These types of transactions involving change of control in more sophisticated enterprises have become much more frequent in all manner of industries; from our own experience, we have been involved in Alinta Energy, Emeco, Billabong and RCL Group, to name a few.
In our experience, the common thread for interested bidders in distressed scenarios is the appointment of legal and financial advisors with solid local experience in this market – while the procedures are efficient, the speed at which these opportunities unfold typically demands strong familiarity with those procedures in order for a bidder to succeed.
The Inside Track
What two things should a client consider when choosing counsel for a complex insolvency filing in this jurisdiction?
Further to our comments above, we see two key considerations: connectivity and expertise in the local market, but also real cross-border experience and connectivity with those cross-border markets and professionals. Obviously, local expertise is a must – but it is just the starting point.
From our experience, the ability to then add to that local expertise a strong understanding of and connection with professionals in key cross-border jurisdictions, makes a real difference to the successful execution of the deal. For instance, in the Emeco transaction, we had our US colleagues – who had existing deep experience with US Chapter 15 filings – working with us on the US Chapter 15 filing in real time, as we were finalising the Australian court application. That seamlessness across borders delivered a sound and most importantly timely result for Emeco and its creditors – we see that seamlessness as invaluable to our clients.
What are the most important factors for a client to consider and address to successfully implement a complex insolvency filing in your jurisdiction?
This will always depend on the industry and debtor in question, but we can think of a couple of essentials.
Further to our remarks above about the creditor-friendly environment in Australia, carefully considering the strength of creditor and contract counterparty rights in Australia needs is a consistent theme – developing a strategy for minimising value loss through loss of profitable key contracts, and enforcement of security by secured creditors against the debtor’s assets (thereby interrupting the going concern), is key. The ipso facto reforms that we mentioned earlier in the interview will help in this regard.
The other consistent theme is the protection of employee rights – both the Australian government and the trade unions are increasingly aggressive in protecting employees’ entitlements in a restructuring, and so having a clear plan for engaging with employees and their unions at a very early stage is critical.
What was the most noteworthy filing that you have worked on recently?
As we mentioned earlier, the Ten administration certainly received a lot of media attention, represented a great outcome for stakeholders and did have its interesting features.
The scheme of arrangement for Emeco, however, takes the prize for the past year or so – as we explained above, that transaction was remarkable for its audaciousness in rolling up an industry consolidation into a bond restructuring and the restructuring of the bank loans held by the two M&A targets. The first-ever recognition of an Australian scheme of arrangement in the United States under a Chapter 15 filing was just the icing on the cake!
David Walter and Maria O’Brien