Financial System Inquiry - ARITA & HDY: Restructuring Moratorium Views Welcomed
Yesterday’s release of the Commonwealth Government's Financial System Inquiry (the FSI) Final Report affirms the view that Australia is well served by its current external administration provisions, which do not require “wholesale revision”.
A review of the Report, undertaken by leading Australian law firm and insolvency and restructuring specialists, Henry Davis York (HDY), on behalf of the Australian Restructuring and Turnaround Association (ARITA), highlights that the Report finds that a few elements similar to those found in the United States Bankruptcy Code's Chapter 11 insolvency framework warrant further consideration for incorporation into Australia's external administration regime.
Those elements, which were covered in ARITA's submission to the FSI, include:
- directors who have sought expert assistance to rescue distressed entities should be assisted by "safe harbour" provisions to create a restructuring moratorium period wherein they, and their specialist advisers, are protected from liability for insolvent trading
- "ipso facto" clauses that deem a company to be in default where there has been a "material adverse change" in its financial circumstances further compound a company's financial distress and should be suspended from operating during restructuring.
“We are delighted that the FSI has picked up these key recommendations of ARITA’s submission. We believe that providing for a restructuring moratorium – a safe harbour – and relief from ipso facto clauses are critical elements in facilitating effective restructuring of major entities when specialist restructuring and insolvency advisers are brought in,” says John Winter, Chief Executive Officer of ARITA.
In the Interim Report, the Inquiry expressed its reservations on Chapter 11 restructurings, stating it considered "adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress. Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights."
“The statements in the Final Report now embody a more open-minded and consultative approach to future reform,” says HDY Partner, John Martin.
“The FSI Final Report makes commendable recommendations for further stakeholder consultation into possible reform of key areas of Australia's external administration regime. The Inquiry accepts there is room for improvement - a view also expressed in ARITA's recent Discussion Paper – A Platform for Recovery 2014 - which invites discussion on the introduction of safe harbour provisions and the reworking of schemes of arrangements and voluntary administration, including a restriction on the exercising of ipso facto clauses, ” says Martin.
The Final Report also acknowledges other insolvency related areas that warrant further consultation and possible reform, namely:
- the overlap between external administration and bankruptcy processes, which affects smaller enterprises in which owners may face personal bankruptcy on top of the failure of their incorporated business;
- the complaints handling and dispute resolution processes in the external administration space could be improved; and
- the efficient use of technology could be further utilised.
“The profession is particularly keen to see improvement in the efficient use of technology in the insolvency process,” says Winter.
“We provided the FSI with a supplementary second-round submission that focussed entirely on how the insolvency process could be streamlined and costs reduced using accepted and proven technology like electronic creditor meeting systems, online proofs of debt and proxy lodgements and online direct voting by creditors. These systems would reduce the cost of insolvencies and maximise creditor returns.”
Following the release of the Final Report, the Treasurer has announced that the Government intends to consult with industry and consumers before making any decisions on the recommendations, with consultation to occur up until 31 March 2015.
As the recommendations of the Final Report take effect, ARITA and Henry Davis York look forward to continuing to stimulate discussion in the restructuring, insolvency and turnaround space, to further enhance and refine Australia's already robust external administration regime.
Background and context to the Inquiry
Released on 7 December 2014, the Commonwealth Government's FSI Final Report, provides a blueprint for the future of the Australian financial system. The Inquiry, chaired by former Chief Executive Officer of the Commonwealth Bank of Australia, Mr David Murray AO, makes 44 recommendations to promote the efficiency, resilience, and fairness of the Australian financial system.
Relevantly for restructuring, insolvency and turnaround practitioners, Recommendation 36 of the Final Report invites Government to consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty.
The Final Report also recommends reform of other complexities of Australia's external administration regime, including the overlap of the external administration and bankruptcy processes, the deficiencies in the complaints and dispute resolution processes, and the inefficient use of technology.
In making its recommendations and observations, the Final Report commendably activates the landscape for stakeholder consultation and reform to further refine Australia's external administration regime, tentatively paving the way for the potential strengthening shift towards a restructuring culture in Australia.
The Inquiry is the third wholesale inquiry into the Australian financial system of recent decades, following the Wallis Inquiry of 1996 and Campbell Inquiry of 1979. The Inquiry was commissioned by the Treasurer, Hon. Joe Hockey MP, to evaluate the Australian financial system and make recommendations on how it can most effectively assist the Australian economy to develop, be productive, and meet the financial needs of Australians.
For insolvency practitioners, the Final Report arrives at a time when proposals for reform are very much at the fore, both globally and locally. The Final Report comes as the American Bankruptcy Institute completes its major review of Chapter 11 in order to reflect the changes in the markets over the past decades. The review seeks to address the effects of increased complexities of debt and capital structures, and the expansion of secured and new breeds of lending, which have made restructuring under Chapter 11 more difficult and less effective.
Locally, Treasury released only last month the exposure draft of the Insolvency Law Reform Bill 2014 (Reform Bill), which seeks to improve efficiency in insolvency administrations, enhance communication and transparency between stakeholders, promote market competition, bolster confidence in the profession, and reduce costs of regulatory compliance.
The Reform Bill follows the release in October of ARITA's discussion paper "A Platform for Recovery 2014 - Dealing with Corporate Financial Distress in Australia". The Discussion Paper addresses, amongst other things, the continuing topical debates over the desirability of director safe harbour provisions, and whether characteristics of Chapter 11 ought to be reflected in the Australian context of reworked schemes and voluntary administrations; topics that now find themselves as the backbone of the recommendations made by the Inquiry's Final Report.
Relevantly for insolvency and restructuring practitioners, the Final Report accepts that Australia's external administration provisions are generally working well and do not require wholesale revision. The Final Report further notes that submissions to the Inquiry provided little evidence to indicate that the current regime causes otherwise viable businesses to fail.
About Henry Davis York
Henry Davis York (HDY) is a leading Australian law firm that specialises in the financial services and government sectors and is renowned for its tier 1 insolvency and restructuring expertise.
We have a clear vision and strategy, and we are making significant progress towards building a tier 1 law firm in our two sectors of focus, financial services and government.
HDY's reputation is built on the commercial outcomes we help our clients achieve and the experience we create for them. Our clients include the big four Australian banks, global investment banks, insolvency and accounting firms, fund managers, superannuation funds, regulatory bodies and key Commonwealth and NSW government agencies.
Our lawyers are talented, motivated and committed to excellence. Clients tell us that our lawyers understand their business in a way unlike other law firms and that this helps them achieve better commercial outcomes.
We have several partners listed as leading individuals in IFLR1000 2014, Legal 500 2014, and Best Lawyers 2013. We were also noted as a top tier firm in the IFLR 1000 2014 rankings.
The Australian Restructuring Insolvency and Turnaround Association (ARITA) represents practitioners and other associated professionals who specialise in the fields of insolvency, restructuring and turnaround.
We have more than 2,000 members including accountants, lawyers, bankers, credit managers, academics and other professionals with an interest in insolvency and restructuring.
ARITA’s mission is to support insolvency and recovery professionals in their quest to restore the economic value of underperforming businesses and to assist financially challenged individuals. We deliver this through the provision of innovative training and education, upholding world class ethical and professional standards, partnering with government and promoting the ideals of the profession to the public at large.
Some 76 percent of registered liquidators and 86 percent of registered trustees are ARITA members.
ARITA promotes best practice and provides a forum for debate on key issues facing the profession. We engage in thought leadership and advocacy underpinned by our members’ knowledge and experience.