The global financial crisis has focused the spotlight on the adequacy and effectiveness of legal regimes for dealing with corporate insolvency. Australia is certainly not alone in considering reform.
The UK and Australia are both regarded as creditor friendly jurisdictions. However, there is increasing recognition in both countries of the value destruction risk inherent in formal insolvency processes, and a move to consider legal mechanisms that permit a financially distressed company the flexibility to pursue a consensual restructuring where appropriate.
At the other end of the spectrum, in the US, which provides through Chapter 11 a debtor in possession model for implementing restructurings, there is recognition that this law is 30 years old and perhaps in need of reconsideration and refinement. Among a number of bills proposed in Congress, there has been proposed a new Chapter 14 for the large non-bank financial institutions that are regarded as being too big to fail. Also, in the financial crisis, there has been an increasing move towards a sale model of reorganisation rather than the classic restructuring approaches typically utilised in Chapter 11. So called “363 Sales” have become commonplace and most notably were used in the Chrysler and GM bankruptcies.
There appears to be some convergence between these jurisdictions in their approach for dealing with financial distress, with the trend in the US towards using a sale model or reorganisation (which is commonplace in the creditor-friendly institutions), and the UK and Australia looking to facilitate ways of enabling companies to restructure under their existing management (which is the hallmark of the US approach).
Following an extensive consultation period, the UK Government said in November last year that it would be taking forward a number of moratorium-related legislative proposals, including the introduction of a new court-sanctioned moratorium of 42 days (with a possible extension to a maximum three month period), on application to court by the company’s directors, as a precursor to a CVA (Company Voluntary Arrangement, the rough equivalent to Australia’s Deed of Company Arrangement). The court would have the power to order a moratorium if it was satisfied that:
- the company was insolvent (on either a balance sheet basis or a cash flow basis) or was likely to become insolvent within three months;
- there was a reasonable prospect of a CVA being approved by the company’s creditors; and
- it was in the interests of creditors as a whole.
Executive control of the company during the moratorium would remain with the directors, subject to the supervision of the court (i.e. debtor in possession). There would be a need for the involvement of an insolvency practitioner as the court would require a statement from that person to be filed with the moratorium court application confirming his or her view that the three tests listed above were satisfied. Unlike the extended CVA moratorium separately proposed, this option would not require the company to have finalised a CVA proposal at the stage of seeking the moratorium.
If the majority feedback received during the consultation process is taken on board, it is possible that the moratorium might extend to prevent the exercise of contractual termination ipso facto clauses. The position will become clearer once the draft legislation has been made available. It would be the same as the approach taken in the US and would go beyond the scope of the reforms currently contemplated in Australia.
In addition, and particularly relevant in light of the looming election, the Conservative opposition party in the UK has stated that it would consider the introduction of US Chapter 11-style reforms.