Corporate
Insolvency
101*                     Presented
by:
Doug
Hayter                            3
May
2011Morgan
Lewis
...
OverviewThis
presentaHon
will
cover
the
following
topics:1. Meaning
of
insolvency2. Principles
of
insolvency
law.3. What
h...
STATISTICSAustralian insolvency statisticsReleased:
Monday
4th
April
2011Table 1.1 - Companies entering EXAD–Region summar...
4

Biggest
corporate
failures• Lehman
Brothers
•   Shortly
before
1
a.m.
15
September
2008
(New
York
Hme),
Lehman
Brothers
 ...
6
• HIH• It
was
placed
into
provisional
liquidaHon
on
15
March
2001.
• Largest
corporate
collapse
in
Australias
history,
wit...
8
• Enron•   Enron Corporation was an American energy, commodities, and services    company based in Houston, Texas.•   Befo...
Meaning
of
insolvency• The
statutory
definiHon
‐
s
95A
Corpora&ons
Act
2001“A
person
is
solvent
if,
and
only
if,
the
person...
Terminology   Bankruptcy
v
InsolvencyIn
Australian
 legislaHon
the
word
‘bankruptcy’
is
used
to
describe
the
process
for
d...
Principles
of
insolvency
law•   The
fundamental
purpose
of
an
insolvency
law
is
to
provide
a
fair
and
orderly
process
for
...
Forms
of
external
administraHon• Voluntary
administraHon• LiquidaHon• Receiver
and
manager
(incl
agent
for
  mortgagee
in
...
Voluntary
AdministraHon•   Voluntary
administraHon
is
an
insolvency
procedure
where
the
directors
of
a
    financially
trou...
AdministraHon
cont...•   What
is
the
voluntary
administrator’s
role?Aler
taking
control
of
the
company,
the
voluntary
admi...
Voluntary
AdministraHon
cont...•       What
is
the
effect
of
a
voluntary
administraIon
on
creditors?The
effect
of
the
appoin...
LiquidaHon
LiquidaHon
is
the
orderly
winding
up
of
a
company’s
affairs.
It
involves
realising
the
company’s
assets,
cessaHo...
LiquidaHon
cont...•   Aler
a
company
goes
into
liquidaHon,
unsecured
creditors
can
no
longer
commence
or
conHnue
legal
acH...
LiquidaHon
cont...•   Recoveries from creditors•   A
liquidator
has
the
ability
to
recover,
for
the
benefit
of
all
creditor...
Receivership      A
company
most
commonly
goes
into
receivership
when
a
receiver
is
appointed
by
a
secured
      creditor
...
Restructuring
‐
what
the?•   Is
another
word
for
reorganisaHon.•   Involves
a
way
of
dealing
with
debt
that
enables
a
comp...
QuesIons?
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  • Insovency presentation

    1. 1. 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
    2. 2. 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?
    3. 3. STATISTICSAustralian insolvency statisticsReleased:
Monday
4th
April
2011Table 1.1 - Companies entering EXAD–Region summary, ANNUAL, AustraliaPeriod1999-2000 4,2052000-2001 5,9672001-2002 6,4112002-2003 6,5912003-2004 6,5492004-2005 6,6242005-2006 10,0052006-2007 7,4872007-2008 7,9072008-2009 10,005 

2009-2010 9,281 3
    4. 4. 4
    5. 5. 
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.
    6. 6. 6
    7. 7. • 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
    8. 8. 8
    9. 9. • 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
    10. 10. 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
    11. 11. 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
    12. 12. 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
    13. 13. Forms
of
external
administraHon• Voluntary
administraHon• LiquidaHon• Receiver
and
manager
(incl
agent
for
 mortgagee
in
possession)
    14. 14. 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.
    15. 15. 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
    16. 16. 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
    17. 17. 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.
    18. 18. 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
    19. 19. 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
    20. 20. 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?
    21. 21. 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.
    22. 22. QuesIons?

    ×