This presentation examines issues with licensing arrangements by insolvency practitioners.

1. Fast track insolvencies:
The licensing option
Jason Harris
Associate Professor
UTS Faculty of Law
jason.harris@uts.edu.au

2. WHAT DRIVES CO TO INSOLVENCY?
• ASIC statistics record:
– Poor strategic management
– Inadequate cash flow control
– Trading losses
– Poor record keeping
– Undercapitalisation
– Poor economic conditions
• Drivers of insolvency appointments:
– Director penalty notices (Tax)
– Disputes with state revenue authorities
– Creditor enforcement
• Directors often leave it too late to seek help

3. CONCERNS WITH CURRENT LAW
• Liquidation
– Destroys goodwill
– Difficult to trade on for long period
– No stay against secured creditors
• Receivership
– No stay
– Works to benefit secured creditor
– Expensive (indemnities)
• Scheme of arrangement
– Time consuming and expensive
– No stay
• Voluntary administration
– Extensive personal liability
– Extensive reporting and meetings obligations
– Expensive (at least $30-$50k)

4. SME ISSUES
• Lack of clear insolvency statistics for SME
– 40% of insolvencies had no assets
– 20% had assets of >$50k
– Almost 70% had no secured debt
– Return of 11% or more: just 2.5% of insol co
• 95.9% of businesses are small (<20 employees)
– 3.8% are medium (20-199), 0.3% are large (>200)
• SME employ 70% of workers
• 40% of small business fail each year
– 24% (medium), 26% (large)

5. SME ISSUES-differences w/large
• Capital structure
– Owner manager v dispersed securities
– Only about 30% of small business have external loans
• Owners likely to have some personal exposure
– Guarantees for trade and operating finance
• Management/accounting skills-especially in
distressed/turnaround situation may be limited
• Market for many SME outputs very competitive:
– More choice, lack of supply side power
• Small businesses may have low levels of fixed and
specialist assets (eg building co, couriers, retail)

6. PRE-PACKS
• US and UK corporate insolvencies frequently
use pre-arranged or pre-packaged deals
– 1/3 of UK Administrations are pre-packs
– 72% of sales were to related parties (UK)
• Meetings with insolvency practitioner prior to
appointment
• Sale is arranged prior to appointment
• Sale may be judicially sanctioned (US) or
presented to creditors as completed (UK)

7. PRE-PACKS IN AUSTRALIA
• Not common
– Fiduciary duties of insolvency practitioner
– Limits on pre-appointment fee recovery
– Lack of regulatory guidance
– Insolvent trading liability
– Professional expectation of standard marketing for
sale of business (eg s420A)
– VA can be replaced at first creditors’ meeting in Aust
(not in UK)
• VA/Liq can sell any/all of the business without
creditor permission
• Creditors in VA decide on limited outcomes, not
approving what the VA does

8. LICENSING ARRANGEMENTS
• Some corporate rescue attempts are using a licensing
arrangement to introduce a de facto pre-pack sale
process
• IP (either VA or Liq in CVL) meets with the directors,
agrees to license business to them on appointment
• Directors agree to conditional sale and pay a licensing
fee to operate the business with IP permission
– Sale price determined by external valuation
– New co is the licensee of the business pending sale
• IP conducts a fast track sale process (2-4 weeks)
– If no higher bid-sale is concluded, co deregistered
– If higher bid-director has option to increase sale price

9. THE CHALLENGES POSED BY LICENSING
• Fiduciary and statutory duties of IP and of directors
– Balancing interests of the co, directors and creditors
– ARITA (formerly IPA) Code of Prof Practice (3rd ed)
• Pre-appointment work shouldn’t be claimed in insolvency unless court approved
[14.5]
• Scope for pre-appointment advice is limited [6.8]
• Independence concerns with referral arrangements [6.6]
• Voidable transaction protections (Pt 5.7B Corps Act)
– Lack of funding for action
– What if settled quietly-eg Somerville [2009] NSWSC
• Insolvent trading (s588G)
– Funding constraints during trading period
• Incentives for directors to run down assets to lower sale price
• Independent valuation is not a sufficient safety net
• Perception by creditors
– Not a sufficient investigation
– Leaving the ‘bad guys’ in charge
• Line between legitimate sale and improper phoenix is unclear