Insolvency reforms would benefit from US-style bankruptcy options – The Australian Financial Review

This would protect a company from claims being brought while its pursuing a scheme, Ashurst insolvency partner Alinta Kemeny said.

Ms Kemeny said the current schemes of arrangement framework already allowed for a debtor-in-possession model, but a costly court-driven process meant it was primarily used only by large corporations.

The Ashurst partner, who specialises in such schemes, said taking elements from the US debtor-in-possession Chapter 11 model would be a way to make the process more attractive and usable.

Two of the key things people tend to think are really valuable from a US chapter 11, other than the automatic stay, are debtor-in-possession funding and the ability to effect cross class cram down, she said.

The first allows directors to obtain funding while restructuring, which then takes priority over existing creditors; and the second so-called cross-class cram down stops creditors who would otherwise miss out on liquidator distributions from blocking a restructuring plan.

Cross-class cram down effectively means a class of creditors that are out of the money dont have a holdout right in relation to a restructuring process.

That would make these procedures more attractive.

King & Wood Mallesons head of restructuring and insolvency Tim Klineberg said US Chapter 11 laws were a powerful, debtor-led tool for larger businesses requiring comprehensive restructuring.

He said the United Kingdom, which has a comparable legal system to Australia, had successfully adopted elements of the US model in recent years.

Those processes are debtor-led, are complementary to schemes of arrangement, and could be adapted to work very well in Australia, he said.

They use innovative cross-class cram downs which would be adaptable for use here. We would look carefully at those new English procedures in designing new debtor-led restructuring procedures to use here.

McGrathNicol chairman Jason Preston said existing insolvency reforms for small businesses announced in last years budget did not include independent advice for creditors in the same way administration does, and this should not extend to larger, more complex company restructuring.

Under the changes, small businesses in financial distress can seek advice from an insolvency practitioner on developing a restructuring plan. If 50 per cent of the creditors accept the plan, all unsecured creditors are bound by it.

The small business can then continue to trade under what is known as a debtor-in-possession model, meaning it can keep trading under the control of its owners.

Mr Preston said this process did not include advice to creditors about the merits of the proposed restructure.

I think the balance is always that creditors need to have faith in: a) continuing to support the company, and if they do they should be paid for that; and b) the options being put to them to restructure the company are being presented independently so they can make an informed decision.

Peter Strong, chief executive of the Council of Small Business Organisations of Australia, said the reforms to extend protections to trading trusts were a positive step, but broader reforms capturing larger companies would need to be monitored to ensure small business creditors were not disadvantaged.

William Buck director of restructuring and insolvency Michael Brereton said the government needed to provide plenty of time to consult with the industry on the new reforms, but reforms which made it easier for businesses to restructure and save jobs were welcome.

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Insolvency reforms would benefit from US-style bankruptcy options - The Australian Financial Review