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Taking the upside: considering alternative restructuring processes in 2020 and beyond

Australia has posted a record fall in its GDP in 2020. At the same time, following a series of temporary measures introduced due to COVID-19, Australian insolvency filings have hit record lows. 

As temporary support measures are eased, boards and investors will need to grapple with the consequences of short-term economic conditions and longer term structural changes to certain sectors. Combined with higher levels of counter-party financial delinquency, many businesses will need to reposition their capital structures and ongoing commitments in order to survive and prosper. 

Historically, most public companies have favoured attempts at consensual informal restructurings until reaching the point of insolvency and then appointing administrators to limit directors’ liability for insolvent trading. 

While administration has some appealing features, it also has severe limitations, including unpredictability, expense, contractual counter-party termination risk and considerable publicity. Typically, the later an administration is commenced, the more time-constrained and value-destructive the process will be to existing stakeholders. 

There are two processes that offer a potentially superior pathway to administration for large companies, and have the potential to produce economic upside for stakeholders compared with administration or purely consensual approaches. 

1. Australian scheme of arrangement

As an alternative to appointing an administrator, a scheme of arrangement can allow a business to continue trading ‘as usual’, while pursuing a fundamental restructuring of its obligations, including any onerous contracts, rental payments and other arrangements with counter-parties.

A scheme can be tailored for a range of proposals in respect of one or more classes of creditors. It is possible to propose amended and extended payment terms or to reduce debt obligations (e.g. by offering to swap debt for equity), and it can be a way to manage guarantees and other associated liabilities.

A scheme can be proposed while a business is solvent and, subject to the safe harbour relief, there may also be scope to propose a scheme where the business is insolvent or during a period of forbearance from key creditors. A scheme offers:

  • a restructuring process for large corporations where management remains in control;

  • a binary outcome (in the sense that the proposal is either accepted or rejected along the lines proposed);

  • an ability to novate, vary or otherwise reconstruct the corporate structure;

  • an ability to bind secured creditors and shareholders subject to achieving voting thresholds;

  • an ability to obtain releases or other protections for directors and management; and

  • an ability to obtain recognition and protection for subsidiaries or operations in many overseas locations. 

When planning ahead, it is preferable to allow at least six months for the implementation of a scheme process, although it can be possible to shorten the timeframe to around three months. It is also preferable to allow time for pre-engagement with major stakeholders and to generate support among voting creditors. In order to approve the scheme, it will be necessary to obtain approval from a majority by number and 75% by value in each relevant class of creditors.

Two major limitations of the Australian scheme procedure are the potential for hold-out classes of creditor to stifle restructuring attempts and the lack of any clear pathway for new ‘super-senior’ style credit facilities absent existing secured counter-party consent. 

2. Cross-border process

Even where there is limited connection with the relevant overseas jurisdiction, it may be worth considering the availability of a foreign law process, with a view to having those foreign proceedings recognised and protected in Australia. An Australian business with some presence overseas will often be eligible to commence foreign insolvency proceedings which offer enhanced flexibility compared to Australian processes. 

Where there is some barrier to a purely domestic solution, offshore solutions are often worth considering. In particular, there are more flexible procedures available in:

  • England and Wales, under the new Part 26A ‘restructuring plan’ procedure (recently used in the Virgin Atlantic restructuring);[1]

  • the United States, under the Chapter 11 regime; and

  • Singapore, under the scheme procedure as amended in 2017.[2]

FeatureAustralian schemeEnglish new Part 26A schemeUS Chapter 11Singaporean scheme
Board controlYes during scheme approval and, with leave of Court, post-approval for administration of schemeYesYes – management remains in controlYes
Moratorium / stayNo automatic stay but ipso facto stay for contracts since 1 July 2018No – but stand-alone moratorium can be applied for (subject to eligibility). Extension of existing ‘essential supplies’ regime to protection from ipso facto clauses in supply contractsYes – automatic stay against creditor actions upon filingYes – 30 days from application for moratorium
Cross-class cram-downOnly within each creditor class, where majority by number and 75% by value within class
Yes – new Part 26A procedure adds cross-class cram down, subject to court approval, in addition to cram-down within classes (majority by number and 75% by value)
Yes – (within unimpaired classes on 2/3 of vote and acceptance by at least one impaired class)Yes – cram-down available across all creditors if majority by number and 75% by value
Potential for super-priority DIP financingNot without agreement of secured creditorsNoYesPotentially by Court order

 The timeframe for a cross-border approach is, again, likely to be longer than for a voluntary administration appointment – it will vary but is likely to take months rather than weeks. There can also a degree of risk in implementing an offshore approach, because the outcome of the overseas process (in particular US Chapter 11 proceedings) can be open to contest or result in the loss of control to third-parties.

 Even if an offshore approach is not pursued, it can be useful to work out what can be done if needed because the availability of a back-up plan can assist in reaching a negotiated outcome.

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Both of the alternative restructuring processes discussed above have a longer runway than a voluntary administration appointment, but potentially allow for better outcomes.

Businesses should start early in identifying potential pathways to protect viability or transform the capital structure, so that voluntary administration does not become the only back-up plan. Initial contingency planning and option generation is not an expensive exercise in the context of the potential benefits.


[1] Corporate Insolvency and Governance Act 2020, with effect from 26 June 2020, inserting new Part 26A of the Companies Act 2006 (after the existing scheme provisions in Part 26).
[2] Singapore Companies Act (Cap. 50), amendments in force since 23 May 2017. Singapore’s Companies Act requires a 'substantial connection' with Singapore, but now expressly includes carrying on business in Singapore, having substantial assets in Singapore or having finance documents governed by Singapore law.


Authors

CHEETHAM_Cameron_SMALL
Cameron Cheetham

Head of Restructuring, Insolvency and Special Situations


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Restructuring and Insolvency Board Advisory

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