Corporate Insolvency 101* Presented by: Doug Hayter 3 May 2011Morgan Lewis Pty Limited ACN 110 539 243Liability limited by a scheme approved under Professional Standards LegislaHonLegal pracHHoners employed by Morgan Lewis Pty Limited are members of the scheme*By helicopter
OverviewThis presentaHon will cover the following topics:1. Meaning of insolvency2. Principles of insolvency law.3. What happens when a company is, or is likely to become insolvent? – Voluntary administraHon – LiquidaHon – Receivership4. What does restructuring mean?
Biggest corporate failures• Lehman Brothers • Shortly before 1 a.m. 15 September 2008 (New York Hme), Lehman Brothers Holdings announced it would ﬁle for Chapter 11 bankruptcy protecHon ciHng bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion (leaving a hole of $129B).• It further announced that its subsidiaries would conHnue to operate as normal. A group of Wall Street ﬁrms agreed to provide capital and ﬁnancial assistance for the banks orderly liquidaHon and the Federal Reserve, in turn, agreed to a swap of lower‐quality assets in exchange for loans and other assistance from the government. • On March 16, 2011 Lehman Brothers Holdings Inc announced it would seek creditor approval of its reorganizaHon plan by October 14 followed by a conﬁrmaHon hearing to follow on November 17.
• HIH• It was placed into provisional liquidaHon on 15 March 2001. • Largest corporate collapse in Australias history, with liquidators esHmaHng that HIHs losses totalled up to $5.3 billion. • InvesHgaHons into the cause of the collapse have led to convicHon and imprisonment of a handful of members of HIH management on various charges relaHng to fraud. 7
• Enron• Enron Corporation was an American energy, commodities, and services company based in Houston, Texas.• Before its bankruptcy in late 2001, Enron employed approximately 22,000 staff and was one of the worlds leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.• Enron filed for bankruptcy protection in the Southern District of New York in late 2001. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal".• It emerged from bankruptcy in November 2004, pursuant to a court-approved plan of reorganization, after one of the biggest and most complex bankruptcy cases in U.S. history.• A new board of directors changed the name of Enron to Enron Creditors Recovery Corp., and focused on reorganizing and liquidating certain 9
Meaning of insolvency• The statutory deﬁniHon ‐ s 95A Corpora&ons Act 2001“A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable” SecHon 95A(2) conHnues:‐“A person who is not solvent is insolvent.” This is known as the cash ﬂow test. 10
Terminology Bankruptcy v InsolvencyIn Australian legislaHon the word ‘bankruptcy’ is used to describe the process for dealing with an insolvent individual and the phrase ‘winding up’ is used for insolvent companies. The US uses the word bankruptcy for both.Winding upCompanies can be wound up whether they are solvent or insolvent. 11
Principles of insolvency law• The fundamental purpose of an insolvency law is to provide a fair and orderly process for dealing with the ﬁnancial aﬀairs of insolvent individuals and companies.• The insolvency law should provide mechanisms that enable both debtor and creditor to parHcipate with the least possible delay and expense.• An insolvency administraHon should be imparHal, eﬃcient and expediHous.• The law should provide a convenient means of collecHng or recovering property that should properly be applied toward payment of the debts and liabiliHes of an insolvent person.• The principle of equal sharing between creditors should be retained and in some areas reinforced.• The end result of an insolvency administraHon, parHcularly as it aﬀects individuals, should, with very limited excepHons, give eﬀecHve relief or release from the ﬁnancial liabiliHes and obligaHons of the insolvent.• Insolvency law should, as far as convenient and pracHcal, support the commercial and economic processes of the community.• As far as is possible and pracHcal, insolvency laws should not conﬂict with the general law.• An insolvency law should enable ancillary assistance in the administraHon of an insolvency originaHng in a foreign country. 12
Forms of external administraHon• Voluntary administraHon• LiquidaHon• Receiver and manager (incl agent for mortgagee in possession)
Voluntary AdministraHon• Voluntary administraHon is an insolvency procedure where the directors of a ﬁnancially troubled company or a secured creditor with a charge over most of the company’s assets appoint an external administrator called a ‘voluntary administrator’.• A voluntary administrator is usually appointed by a company’s directors, aler they decide that the company is insolvent or likely to become insolvent. Less commonly, a voluntary administrator may be appointed by a liquidator, provisional liquidator, or a secured creditor.
AdministraHon cont...• What is the voluntary administrator’s role?Aler taking control of the company, the voluntary administrator invesHgates and reports to creditors on the company’s business, property, aﬀairs and ﬁnancial circumstances, and on the three opHons available to creditors. These are: • end the voluntary administraHon and return the company to the directors’ control • approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or • wind up the company and appoint a liquidator.The voluntary administrator must give an opinion on each opHon and recommend which opHon is in the best interests of creditors.The voluntary administrator has all the powers of the company and its directors. This includes the power to sell or close down the company’s business or sell individual assets in the lead up to the creditors’ decision on the company’s future.The voluntary administrator must also report to ASIC on possible oﬀences by people involved with the company.If a deed of company arrangement is approved, the voluntary administrator will usually become the deed administrator and oversee its operaHon. 15
Voluntary AdministraHon cont...• What is the eﬀect of a voluntary administraIon on creditors?The eﬀect of the appointment of a voluntary administrator is to provide the company with ‘breathing space’ while the company’s future is resolved. While the company is in voluntary administraHon: • unsecured creditors can’t begin, conHnue or enforce their claims against the company without the administrator’s consent or the court’s permission • owners of property (other than perishable property) used or occupied by the company, or people who lease such property to the company, can’t recover their property • except in limited circumstances, secured creditors can’t enforce their charge over company property • a court applicaHon to put the company in liquidaHon can’t be commenced, and • a creditor holding a personal guarantee from the company’s director or other person can’t act under the personal guarantee without the court’s consent. 16
LiquidaHon LiquidaHon is the orderly winding up of a company’s aﬀairs. It involves realising the company’s assets, cessaHon or sale of its operaHons, distribuHng the proceeds of realisaHon among its creditors and distribuHng any surplus among its shareholders.The two types of liquidaHon for an insolvent company: • court, and • creditors voluntary.The most common type is a creditors’ voluntary liquidaHon, which usually begins in one of two ways: • Creditors vote for liquidaHon following a voluntary administraHon or a terminated deed of company arrangement, or • an insolvent company’s shareholders resolve to liquidate the company and appoint a liquidator. Within 11 days of being appointed by shareholders, the liquidator must call a meeHng of creditors who may conﬁrm the liquidator’s appointment or appoint another liquidator of the creditors’ choice. A court liquidaHon starts as a result of a court order, made aler an applicaHon to the court, usually by a creditor of the company. Others, including a director, a shareholder and ASIC, can also make awinding-up application.
LiquidaHon cont...• Aler a company goes into liquidaHon, unsecured creditors can no longer commence or conHnue legal acHon against the company, unless the court permits.• Liquidator’s role• When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. The liquidator’s role is to: – collect, protect and realise the company’s assets – invesIgate and report to creditors about the company’s aﬀairs, including any unfair preferences which may be recoverable, any uncommercial transacIons which may be set aside, and any possible claims against the company’s oﬃcers – enquire into the failure of the company and possible oﬀences by people involved with the company and report to ASIC – aler payment of the costs of the liquidaHon, and subject to the rights of any secured creditor, distribute the proceeds of realisaHon—ﬁrst to priority creditors, including employees, and then to unsecured creditors, and – apply for deregistraHon of the company on compleHon of the liquidaHon. Except for lodging documents and reports required under the Corpora&ons Act 2001 (CorporaHons Act), a liquidator is not required to do any work unless there are enough assets to pay their costs. – If the company is without suﬃcient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking acHon to recover further assets for the beneﬁt of creditors. 18
LiquidaHon cont...• Recoveries from creditors• A liquidator has the ability to recover, for the beneﬁt of all creditors, certain payments (known as unfair preferences) made by the company to individual creditors in the six months before the start of the liquidaHon.• Broadly, a creditor receives an unfair preference if, during the six months prior to liquidaHon, the company is insolvent, the creditor suspects the company is insolvent, and receives payment of their debt (or part of it) ahead of other creditors. To be an unfair preference, the payment must put the creditor receiving it in a more favourable posiHon than other unsecured creditors.• Not all payments from the company to a creditor in the six months before liquidaHon are unfair preferences. The CorporaHons Act provides various defences to an unfair preference claim.• If a liquidator seeks to recover a payment that has been made to you, you may wish to obtain independent legal advice on the merits of the liquidator’s claim before. repaying any money. 19
Receivership A company most commonly goes into receivership when a receiver is appointed by a secured creditor who holds security over some or all of the company’s assets.The receiver’s primary role is to collect and sell suﬃcient of the company’s charged assets to repay the debt owed to the secured creditor.What is the receiver’s role?The receiver’s role is to: • collect and sell enough of the charged assets to repay the debt owed to the secured creditor (this may include selling assets or the company’s business) • pay out the money collected in the order required by law, and • report to ASIC any possible oﬀences or other irregular mapers they come across.The receiver’s primary duty is to the company’s secured creditor. The main duty owed to unsecured creditors is an obligaHon to take reasonable care to sell charged property for not less than its market value or, if there is no market value, the best price reasonably obtainable. A receiver also has the same general duHes as a company director.The receiver has no obligaHon to report to unsecured creditors, including employees, about the receivership.What about the duIes imposed on a receiver when selling assets?
Restructuring ‐ what the?• Is another word for reorganisaHon.• Involves a way of dealing with debt that enables a company to conHnue trading. – On June 8, 2009, General Motors ﬁled for reorganizaHon under the provisions of Chapter 11, Title 11, United States Code. – It involved reﬁnancing in part by the US government. – Some nameplates like PonHac, Saturn, Hummer, and service brands like Goodwrench were disconHnued. Others, like Saab, were sold.• The opHons for restructuring are as wide as can be imagined but generally involve some measure of reﬁnancing.