RESTRUCTURING COMPANIES IN THE TWILIGHT ZONE OF

INSOLVENCY: A MODEL FOR AUSTRALIA

PATRICK JAMES WESTMAN

A paper submitted for Honours Thesis

ANU College of Law, The Australian National University

3 November 2014

Word length: 13,000

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ACKNOWLEDGEMENTS

I would, first, like to thank those people that have assisted me in a professional role. To Michael

Murray from the Australian Restructuring Insolvency and Turnaround Association, Damian

Templeton from KPMG and Graeme Blank from Henry Parkes Chambers, thank you for giving

up your time to walk me through a number of insolvency issues, as well as providing a practical

perspective on a complex debate. To Craig Collins, my supervisor, thank you for your

direction, guidance, knowledge and experience in drafting this Thesis. I would also like to

thank my family, Margaret, Gregory, Andrew and Claire, as well as my wonderful network of

friends. I would especially like to thank my partner, Hannah, for putting up with me throughout

the process, you have been an incredible support. Thank you to all of you for accompanying

me on this journey. Whether it was providing me with encouragement and support from

beginning to end, facilitating a study environment at home and on the farm, or tolerating my

endless need for discussion, you have played an integral part in making this an enjoyable and

rewarding experience.

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TABLE OF CONTENTS

I INTRODUCTION ........................................................................................................................ 2

PART I: THE NEED FOR REFORM

II LEGAL CONTEXT ..................................................................................................................... 5

A The Australian insolvency framework ......................................................................... 5

B Reform options ............................................................................................................. 7

C The US insolvency framework ..................................................................................... 9

D What can we learn from Chapter 11? ....................................................................... 10

III TIMELY ACTION: THE MOST IMPORTANT FACTOR IN VIABLE RESTRUCTURING .................... 12

A Entering VA prematurely ........................................................................................... 13

B Entering VA as a last resort ....................................................................................... 14

C The importance of early intervention ......................................................................... 14

PART II: A MODEL FOR AUSTRALIA

IV THE MODEL ........................................................................................................................ 16

A Operation of the Model.............................................................................................. 18

B The new ‘safe harbour’ provision .............................................................................. 19

V FEATURE 1: THE ‘SAFE HARBOUR’ DEFENCE ......................................................................... 20

A Conflicting duties ....................................................................................................... 21

B Difficulties in assessing solvency ............................................................................... 21

C Inconsistent judicial interpretation ............................................................................ 22

D Inconsistent interpretation by ASIC .......................................................................... 25

E Conclusion ................................................................................................................. 26

VI FEATURE 2: RETAINING MANAGEMENT DURING THE PLAN .................................................. 27

A Regulatory approach is unable to deter insolvent trading ........................................ 27

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B Retaining management can incentivise timely restructuring ..................................... 29

C Conclusion ................................................................................................................. 34

VII FEATURE 3: OVERSIGHT BY THE RESTRUCTURING PANEL AND A CHIEF RESTRUCTURING

OFFICER .................................................................................................................................... 35

A Oversight in the US.................................................................................................... 36

B The Model .................................................................................................................. 37

VIII FEATURE 4: DISCRETIONARY POWERS .............................................................................. 39

A Discretionary Power 1: Accept or reject a Plan at application or approval stage .. 39

B Discretionary Power 2: Allow an application from a SME....................................... 41

C Discretionary Power 3: Implement a stay of proceedings ........................................ 44

D Discretionary Power 4: Waive disclosure obligations and vary acceptance

requirements ................................................................................................................... 46

E Discretionary Power 5: Prohibit creditors exercising ipso facto clauses ................. 50

F Discretionary Power 6: Notify ASIC .......................................................................... 53

G Discretionary Power 7: Impose additional monitoring requirements ....................... 54

IX CONCLUSION ....................................................................................................................... 55

APPENDIX: THE INSOLVENT TRADING PROVISIONS .................................................................. 57

GLOSSARY ................................................................................................................................ 60

BIBLIOGRAPHY ......................................................................................................................... 61

1

Australia, 2001

‘Air New Zealand placed the Ansett group of companies into voluntary administration with

PricewaterhouseCoopers on 13 September 2001. A day later, the administrator decided that

Ansett was not viable and grounded the fleets of Ansett’.1 After six months of failed attempts to

save Ansett, ‘[w]ith no other saviours, Ansett ceased operations permanently on 4 March

2002’.2 ‘The collapse of Ansett marked the demise of an Australian icon, and hardship for tens

of thousands of Australians caught up in it.’3

United States, 2009

At 8:00 AM on 1 June 2009, General Motors Corporation, a company listed on the New York

Stock Exchange since 1916, presented its Chapter 11 reorganisation plan to the United States

Bankruptcy Court for the Southern District of New York. 4 In a speech following the event, US

President Barack Obama stated that ‘GM and its stakeholders have produced a viable,

achievable plan that will give this iconic American company a chance to rise again.’5

1 Paul Fanning, A Chronology of Ansett Australia’s History, After Ansett <www.afteransett.com/ansett-

australia-history>. 2 Ibid. 3 Peter Westmore, ANSETT: the Collapse, by Geoff Easdown and Peter Wilms (8 February 2003) NewsWeekly

<newsweekly.com.au/article.php?id=1227>. 4 Linda Sandler et al, GM Files Bankruptcy to Spin Off More Competitive Firm (Update1) (1 June 2009)

Bloomberg.com <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4brqCWwvYXY>. 5 Ibid.

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I INTRODUCTION

There has been significant debate as to whether or not Ansett could have been saved if Australia

had a system similar to the United States (‘US’) – Chapter 11. Chapter 11 is the section of the

United States Code6 that governs the restructuring of distressed companies (and to a lesser

extent individuals). Although studies have concluded that Chapter 11 could probably not have

saved Ansett,7 there has been growing support for implementing a US approach in Australia.8

In accordance with this support, this Thesis argues that there are fundamental problems with

the current insolvency system and that to mitigate them, Australia should adopt elements from

Chapter 11. This Thesis adopts a comparative methodology, by proposing a model of law

reform for Australia (‘the Model’). The Model draws on features of Chapter 11 and proposes

a new defence, as well a practical guide, which may form a basis for future legislation.

Chapter 11 has been considered by two government inquiries in 2014: first, by the

Commonwealth Financial System Inquiry (‘FSI’)9 (refer to glossary on page 60), which has its

Final Report due in November 2014, and secondly, by the Commonwealth Senate Economics

References Committee (‘SERC’).10 In June 2014, the SERC recommended that

[t]he Government commission a review of Australia’s corporate insolvency laws to consider

amendments intended to encourage and facilitate corporate turnarounds. The review should

consider features of the Chapter 11 regime in place in the United States of America that could be

adopted in Australia.11

6 Bankruptcy Reform Act of 1978, 11 USC (‘Bankruptcy Act’). 7 KordaMentha, Ansett Part 5.3A and Chapter 11 (June 2003), 1 <http://www.camac.gov.au/camac/camac.nsf/b

yHeadline/PDFSubmissions/$file/KordaMentha_301.pdf>. 8 SERC, Parliament of Australia, Performance of the Australian Securities and Investments Commission

(‘ASIC’) (2014) 449. 9 FSI, Parliament of Australia, Interim Report (2014) 2-70. 10 Performance of ASIC, above n 8. 11 Ibid.

3

The ‘twilight zone’ refers to the period where a distressed company is uncertain whether

‘formal insolvency will ensue or whether some form of consensual solution can be achieved

among the stakeholders.’12 This Thesis argues that the principal shortcoming of the Australian

system is that, when in the twilight zone, companies are not encouraged to undertake timely

and appropriate restructuring. Commentators have suggested that companies are either entering

external administration prematurely, due to the threat of personal liability for directors attached

to insolvent trading,13 or alternatively, delaying entry, until all other options are extinguished.14

Accordingly, it is imperative that Australia’s insolvency system is reformed to rehabilitate

viable companies. There are economic considerations, as preserving a company as a whole

maximises its value,15 yet even greater social costs. Insolvency has a significant effect on

thousands of Australians every year. In 2012-13, the Commonwealth Government paid $262

million to ‘16,023 eligible claimants from 2,111 insolvent entities who were owed employee

entitlements.’16 The International Bar Association (‘IBA’) has also suggested that suicide is an

‘increasingly prevalent human and societal cost of ineffective “fresh start” regimes.’17

Companies are being increasingly exposed to the insolvency system. Over the last decade,

insolvency appointments increased by 50 per cent18 and the number of publicly listed

12 INSOL International, Directors in the Twilight Zone IV (2013) i. 13 Chris Bowen MP, Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External

Administration, Discussion Paper (2010) [3.12] (‘Safe Harbour Paper’). 14 McGrathNicol, Submission to Parliament of Australia, FSI, 26 August 2014, 7 (‘FSI Submission’) 15 Law Council of Australia (‘LCA’), Insolvency Practitioners Association of Australia (‘IPAA’) and

Turnaround Management Association of Australia (‘TMAA’), Submission to Commonwealth Treasury, Safe

Harbour Paper, 2 March 2010, 2–3 (‘Safe Harbour Paper Submission’). 16 DEEWR, Annual Report 2012-13 (17 October 2013) 88 <https://docs.employment.gov.au/system/files/doc/ot

her/deewr_annual_report_2012-13.pdf>. 17 IBA, Report to the International Bar Association: Meeting of the World Bank Working Group on Insolvency

of Natural persons (December 2012), 2 <http://www.ibanet.org/Document/Default.aspx?DocumentUid=8E493F

07-9FBD-4F73-BA6E-D9C1ABECA800>. 18 ASIC, External administrators’ reports (July 2013 to June 2014) (29 September 2014), 13 <https://dv8nx270

cl59a.cloudfront.net/media/1914730/rep412-published-29-september-2014.pdf >.

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companies experiencing insolvency issues tripled.19 CPA Australia found a ‘substantial

increase’ in auditors reporting uncertainty around a company’s ability to continue operations

over the next 12 months – as a going concern.20 This rose ‘from 13% in 2005 to 22% by 2009

following the GFC, and a continuation of this trend to 25% in 2012 and 32% in 2013.’21

The FSI is seeking evidence of whether ‘Australia’s external administration regime causes

otherwise viable businesses to fail.’22 This Thesis contends that, although the regime does not

directly cause companies to fail – it still impedes viable restructuring attempts. The personal

liability for directors renders companies unable to undertake informal restructuring. Yet,

companies are unwilling to undertake formal restructuring due to the unfavourable conditions

in VA. As a result, companies exist in ‘limbo’, not restructuring and instead delaying until VA

is a last resort. In that regard, the regime is causing businesses to delay VA entry, which ensures

successful rehabilitation is unlikely and indirectly causes companies to fail.

This Thesis is divided into two parts. Part I (Chapters II and III) outlines the debate and the

relevant aspects of the Australian and US insolvency systems, and explores the evidence behind

companies not undertaking timely restructuring. Part II (Chapters IV to VII) proposes the

Model, which encourages companies to restructuring early, with enough time and resources to

be successfully rehabilitated. The Model may facilitate the continuing operations of viable

companies like General Motors (‘GM’), which, through Chapter 11, returned its ‘third

consecutive year of profitability’ in 2013.23

19 CPA Australia, Audit Reports in Australia 2005-2013: Preliminary Findings (September 2014), 4 <http://ww

w.cpaaustralia.com.au/professional-resources/audit-and-assurance>. 20 Ibid. 21 Ibid. 22 FSI, above n 9, 2-71. 23 General Motors, Annual Report (September 2013) <http://www.gm.com/annualreport/2013_highlights.html>.

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PART I: THE NEED FOR REFORM

II LEGAL CONTEXT

A The Australian insolvency framework

In Australia, formal restructuring is undertaken through voluntary administration (‘VA’). VA

was introduced in 1993 in response to the 1988 Harmer Report24 to maximise the chances of

an insolvent company remaining in existence25 and ensure higher returns than immediately

winding-up a company.26 VA has four objectives: to ensure speed, minimal court involvement,

flexibility, and ‘ease of transition to other insolvency solutions’.27

Directors relinquish control to administrators when companies enter VA.28 VA has three

outcomes. First, companies can enter into a deed of company arrangement (‘DOCA’),29 which

is a binding arrangement with creditors to either defer payment or settle for a negotiated

amount.30 Secondly, companies can be wound-up and sold, or its assets realised through

liquidation.31 Thirdly, the administration can end and control returned to the directors.32

Creditors can also commence insolvency proceedings, through a receivership33 or creditor-

initiated VA.34 However, these procedures are not within the scope of this Thesis.

24 Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) (‘Harmer Report’). 25 Corporations Act 2001 (Cth) s 435A(a) (‘Corporations Act’). 26 Ibid s 435A(b). 27 Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth) [449]. 28 Corporations Act s 437A. 29 Ibid s 438A(b)(i). 30 James Routledge and David Morrison, ‘Insolvency administration as a strategic response to financial distress’

(2012) 37(3) Australian Journal of Management 441, 442. 31 Corporations Act s 438A(b)(iii). 32 Ibid s 438A(b)(ii). 33 Ibid s 420. 34 Ibid s 436C.

6

Recent evidence has challenged the success of VA at meeting its legislative objectives,

especially for large companies.35 Although when VA is used effectively, it can yield higher

returns than immediately winding-up.36 However, of the companies that execute DOCAs, only

28 per cent exhibit any subsequent substantial trading – the majority are quasi-liquidations.37

Further, survival rates range from 64 per cent38 down to 45 per cent.39 These low rates have

arguably led to a decline in the use of VA, and a perception that VA is ‘the scenic route to

winding up and dissolution’.40

Companies can also pursue informal restructuring outside of VA, which is not governed by

insolvency legislation. Informal workouts are preferred by insolvency practitioners41 and

banks,42 because they allow for restructuring ‘without the full glare of publicity, formal

mechanisms, delays and costs’ of formal insolvency.43 However, in Australia, workouts are

risky because of the liability of directors who trade while insolvent.44

A director is in breach of the duty to prevent insolvent trading by incurring a debt where the

company is insolvent.45 This can create civil and criminal liability depending on the level of

knowledge and honesty.46 There are defences available where there were reasonable grounds

35 Mark Wellard, A sample review of Deeds of Company Arrangement under Part 5.3A of the Corporations Act (

19 May 2014) Australian Restructuring Insolvency and Turnaround Association (‘ARITA’), 15 <http://www.ari

ta.com.au/docs/default-source/tts/tts-2013-final-report-for-arita-website.pdf?sfvrsn=0>. 36 Ibid 21. 37 Ibid 23. 38 Ibid 11; 18. 39 Abe Herzberg, Mark Bender and Lee Gordon-Brown, ‘Does the voluntary administration scheme satisfy its

legislative objectives? An exploratory analysis’ (2010) 18 Insolvency Law Journal 181, 190. 40 Cameron Cheetham, Ipso facto clauses and insolvency (2 February 2012) Clayton Utz <http://www.claytonut

z.com/publications/edition/02_february_2012/20120202/ipso_facto_clauses_and_insolvency.page>. 41 ARITA, 26 August 2014, 7. 42 Australian Bankers Association (‘ABA’), FSI Submission, August 2014, 21–22. 43 Terry Bond, ‘Informal workouts – out of court restructuring’ (Paper presented at Second Forum for Asian

Insolvency Reform, Bangkok, Thailand, 16-17 December 2002) 197. 44 Corporations Act s 588G. 45 Ibid s 588G(1). 46 Ibid s 588G(2)–(3).

7

to expect solvency, where the director reasonably relied on information from a competent

person or took reasonable steps to prevent the debt, or was absent.47 Additionally, a court may

relieve a director under sections 1317S and 1318 if they acted honestly,48 and, ‘having regard

to all the circumstances of the case’, should be excused.49 The circumstances include whether

an administrator was appointed, when that occurred, and the result.50

Australia’s insolvent trading laws are ‘arguably the strictest in the world.’51 However, there is

a question of whether this strictness contributes ‘to the creation of a culture in which directors

will opt for insolvency administration, rather than take the personal risk that might be

associated with a restructure aimed at trading out of short-term financial difficulty.’52

According to the Hon James Spigelman, if the law is causing premature entry, ‘it is at odds

with economic policy goals and needs to be reformed.’53

B Reform options

The general consensus is that the current insolvency regime in Australia works well, but could

be improved to better facilitate both formal and informal restructuring.54 Discussion of reform

has focussed, first, on the conditions that exist prior to VA, to promote informal restructuring

through granting a safe harbour defence for directors through a business judgement rule

(‘BJR’). This aims to ensure companies do not enter VA unnecessarily. Secondly, discussion

47 Ibid s 588H. 48 Ibid s 1317S(2)(b); 1318(1). 49 Ibid. 50 Ibid s 1317S(3). 51 Chief Justice Wayne Martin, ‘Official Opening Address’ (Speech delivered at the IPAA16th National

Conference, Perth, 28 May 2009). 52 Ibid. 53 AICD, ‘The Honest and Reasonable Director Defence’ (Policy Paper, 7 August 2014) 11. 54 TMAA, FSI Submission, 25 August 2014, 12.

8

has focussed on reform to the conditions in VA, to avoid the value destruction and negative

perceptions of VA, which causes companies to delay entry.

Proponents of the status quo argue that a safe harbour defence may increase unviable

companies engaging in insolvent trading (further discussion on page 20). Accordingly, Model

restricts access to viable companies through a screening process (see page 18).

There is currently discussion of streamlining insolvency procedures for small and medium

enterprises (‘SMEs’).55 One of these options is allowing pre-packaged administrations, which

exist in the US and UK.56 These allow a company’s sale to be ‘fully negotiated pre appointment

and implemented immediately on appointment’.57 Improving the conditions in administration,

however, arguably negates the need for pre-packaged administrations.58 Further, because the

Model is considered too costly for SMEs, their access to it is limited (see page 41).

The FSI and SERC inquiries have suggested looking to the US for a model Australia could

implement. This is because the US has a turnaround culture, with ‘the goal to rescue and

rehabilitate the distressed company’.59 In Australia, legislative support for viable restructuring

is lacking. Consequently, a stigma has attached itself to insolvency, which impedes a

turnaround culture (see page 46).60

55 ARITA, above n 41, 14. 56 Ibid 5–6. 57 McGrathNicol, above n 14, 9. 58 Ibid. 59 ARITA, above n 41, 20. 60 DibbsBarker, FSI Submission, 15 August 2014, 4.

9

Australian Governments have previously considered Chapter 11, but have not be implemented

it due to concerns about the length, cost and effectiveness of the process.61 There have also

been cultural concerns, with Australia having a different attitude to debtors, whereby it is

considered undesirable for a reorganisation system to leave control with the people responsible

for a company’s problems.62 This Thesis considers these concerns in incorporating the reform

options into a Model for Australia.

C The US insolvency framework

In the US, Chapter 11 was designed to facilitate the ongoing operation of companies. As Geoff

Berman of the American Bankruptcy Institute explains, in a traditional Chapter 11:

A distressed company can find protection in the safe harbor … dispose of unprofitable parts of the

business, stabilize what remains, operate for a short time to see that the core business can be

profitable, propose a plan based upon the smaller, profitable core business, restructure its balance

sheet pursuant to a Chapter 11 plan, and emerge as a healthy, albeit smaller, business enterprise.63

In the US, a distressed a company has two main options. First, it can file for Chapter 11,64 a

debtor-controlled process designed to reorganise the company to continue as a going concern.

Secondly, it can file for Chapter 7,65 a liquidation process where an independent trustee realises

the company’s assets.

61 Parliamentary Joint Committee on Corporations and Financial Services (‘PJCCFS’), Corporate Insolvency

Laws: A Stocktake (2004) 89–90 (‘Stocktake Report’). 62 Ibid 86–91. 63 Robert Keach, ‘Commission to Explore Overhauling Chapter 11’ (2011) 30(5) American Bankruptcy Institute

Journal 36, 36. 64 Bankruptcy Act. 65 Ibid, 7 USC.

10

Chapter 11 is commenced by the distressed company filing a petition with the bankruptcy

court.66 Under Chapter 11, the company retains the exclusive right to propose a reorganisation

plan during the first 120 days.67 The company then has a further 60 days to gain acceptance of

the plan,68 by at least 50 per cent of the company’s creditors, comprising no less than two-

thirds of the total debts.69 The timeframes for proposal and acceptance can be extended to 18

and 20 months respectively.70

D What can we learn from Chapter 11?

A 2012 study assessed the operating performance of companies after they emerged from

Chapter 11.71 It found companies that filed for Chapter 11 improved their operating cash

flows,72 and deleveraged themselves, through shedding debt quicker than assets.73 The study

demonstrated the ability of Chapter 11 to assist companies to restructure their operations and

improve performance to enable them to continue operations.

ASIC Chairman Greg Medcraft stated that Chapter 11 is a ‘very good system’, especially for

larger companies, where value destruction and job losses are minimised.74 Under Chapter 11,

management is retained and contracts are frozen to enable management to negotiate a

company’s rescue.75 Although there may be debate as to the long-term effectiveness of

66 Bankruptcy Act, 11 USC § 301(a). 67 Ibid § 1121(c)(2). 68 Ibid § 1121(c)(3). 69 Ibid § 1126(c). 70 Ibid § 1121(d)(2). 71 Varouj Aivazian and Simiao Zhou, ‘Is Chapter 11 Efficient?’ (2012) 41(1) Financial Management 229, 230. 72 Ibid 246. 73 Ibid 247. 74 Evidence to Senate Economics Legislation Committee, Parliament of Australia, Canberra, 26 February 2014,

(Greg Medcraft) 43–44. 75 Ibid.

11

companies that emerge from Chapter 11,76 there is much Australia can learn from the US and

its fundamentally different attitudes towards debtors. Chapter 11 is by no means perfect, and

is currently undergoing an extensive review, which is due in December 2014.77 However, this

Thesis contends that Chapter 11’s ability to encourage timely restructuring, is an element

Australia needs, to ensure that viable companies are rehabilitated and continued.

76 FSI, above n 9, 2-70. 77 Keach, above n 63.

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III TIMELY ACTION: THE MOST IMPORTANT FACTOR IN VIABLE RESTRUCTURING

This Thesis contends that the greatest inhibitor to viable restructuring in Australia is the

framework’s inability to encourage companies to pursue timely and appropriate restructuring,

given their stage of distress. In the Safe Harbour Options paper, the Hon Chris Bowen MP

noted that

[p]lacing a company into external administration may not always be the most appropriate method

to affect a business rescue or to otherwise realise value for the benefit of the company’s creditors

and members. Such objectives may more appropriately be effected through a work-out.78

Figure 1 below shows the stages of company distress. When in the twilight zone (Stages 1 and

2), companies arguably entry VA prematurely. This is either where a company is still solvent

(Stage 1), or where it is insolvent, but informal restructuring could have been successful (Stage

2). By contrast, if a company enters VA during Stage 3, this is considered too late, as there are

minimal resources remaining to undertake viable restructuring.

It is difficult to know the state of companies that enter VA because there is a lack of data.79

Chapter III explores the evidence (albeit limited) around entry into VA.

78 Safe Harbour Paper, above n 13 [1.8]. 79 Performance of ASIC, above n 8, 351–6.

Figure 1: Stages of company distress and insolvency

STAGE 1

Company is distressed but solvency CAN be established

STAGE 2

Solvency CANNOT beestablished but an

informal workout isPREFERABLE

STAGE 3

Solvency CANNOT be established and an

informal workout is NOT POSSIBLE

The Twilight Zone

13

A Entering VA prematurely

It is clear from research that directors are aware of, and are concerned about, personal liability

for insolvent trading. In 2010, the Australian Institute of Company Directors (‘AICD’) found

that 73 per cent of directors believed there was a ‘medium to high risk of directors being found

personally liable for decisions they have made in good faith’,80 65 per cent believed the risk of

personal liability had caused overly cautious decision-making,81 and 90 per cent believed that

optimal business decision-making was not being achieved as a result.82 Despite the lack of

statistical evidence, Ferrier Hodgson has anecdotally suggested there have been circumstances

where companies ‘would not have entered into external administration but for the personal

liability’.83 KordaMentha, reviewed ‘twenty large administrations/liquidations’ they had been

involved with and found that ‘in all but a few cases those involved did not believe that the

external administration had occurred predominantly because of the trading whilst insolvent

laws’.84

However, commentary regarding premature entry often does not distinguish between Stages 1

(solvent) and Stage 2 (insolvent, but a workout is preferable). The AICD has stated that the law

‘discourages directors from taking sensible risks when considering other kinds of informal

corporate reconstructions’.85 However, again there is little statistical evidence to support this.

In 2010, KordaMentha conceded that in a number of cases, directors were ‘sufficiently

concerned about the consequences of trading whilst insolvent laws to seriously consider formal

80 AICD, Impact of Legislation on Directors (November 2010), 13 <http://www.companydirectors.com.au/~/me

dia/Resources/Media/Media%20Releases%20and%20Speeches/2010/The%20impact%20of%20legislation%20o

n%20directors_November%202010.ashx>. 81 Ibid 21. 82 Ibid 23. 83 Ferrier Hodgson, FSI Submission, 26 August 2014, 15. 84 KordaMentha, Safe Harbour Paper Submission, 2 March 2010, 2. 85 AICD, ‘Director Defence’, above n 53, 5.

14

administration rather than a workout even where there was no doubt a workout was the

preferred course of action’.86 Ferrier Hodgson submitted that they were ‘aware of instances in

which a business might have survived with some informal restructuring’.87

B Entering VA as a last resort

While there is support for premature entry into VA, companies usually trade well into Stage 3

(as per Figure 1). At this time, directors often only seek assistance when there are no options

available, apart from liquidation.88 In 2013-14, ASIC reported that 61 per cent of companies in

administration had less than $10,000 in assets, and 41 per cent were ‘assetless’.89 This means

that often companies enter VA when they have minimal remaining assets. Routledge found that

prior to VA entry, companies suffer extreme distress, significant increases in leverage, a lack

of liquidity, and deteriorating earnings.90 Routledge concluded that companies enter VA as a

last resort without the capacity to implement a strategy.91

C The importance of early intervention

In 1988, Hambrick and D’Aveni categorised three stages of corporate decline as (a) early

impairment, (b) marginal existence, and (c) the death struggle.92 They found a period of rapid

deterioration immediately prior to insolvency, where a company’s prospects diminish

86 KordaMentha, Safe Harbour Paper Submission, above n 84. 87 Ferrier Hodgson, above n 83, 11. 88 Paul Burges, ‘A stitch in time: Early intervention in a corporate context’ (2012) 26(3) Commercial Law

Quarterly 10, 14. 89 ASIC, ‘Administrators’ reports’, above n 18, 33. 90 James Routledge, ’The Decision to Enter Voluntary Administration: Timely Strategy or Last Resort’ (2007) 6

(2) Journal of Law and Financial Management 8, 11. 91 Ibid. 92 Donald Hambrick and Richard D’Aveni, ‘Large Corporate Failures as Downward Spirals’ (1988) 33

Administrative Science Quarterly 1, 14.

15

significantly.93 In the death struggle, companies experience a deficiency in ‘resource slack’,94

which represents the resources firms can use in a discretionary manner that are not tied to

liabilities.95 Slack is critical for survival as it determines the resources that companies can use

as part of restructuring strategies to halt the decline.96 Where early intervention is sought, there

is a ‘greater range of alternatives available’.97

In Australia, Routledge and Morrison observed that companies that executed a DOCA had

substantial resource slack declines ‘immediately prior to VA’.98 Had those companies executed

a DOCA earlier, their decline would have halted and prevented ‘a dysfunctional distribution of

resources over the period of critical financial distress immediately prior to VA’.99 Reform is

required to prevent companies delaying until viability is no longer an option. Part II presents

the Model, which facilitates such timely restructuring.

93 Ibid. 94 Ibid. 95 James Routledge and David Morrison, ‘Voluntary Administration: Patterns of Corporate Decline’ (2009)

Company and Securities Law Journal 95, 100. 96 Ibid 105. 97 Burges, above n 88. 98 Routledge and Morrison, ‘Patterns of Decline’, above n 95, 106. 99 Ibid.

16

PART II: A MODEL FOR AUSTRALIA

IV THE MODEL

This Thesis proposes an additional tier of restructuring that occurs prior to VA. The Model is

specifically designed for distressed, but viable companies, to restructure and continue as a

‘going concern’. This Model adopts aspects of Chapter 11, but is not to be used by companies

as a precursor to liquidation or as a means to provide unviable companies respite from creditors.

Those companies should be subject to the current insolvency framework. Accordingly, the

Model restricts access to distressed but viable companies, to not delay inevitable liquidation or

winding-up.

Under the Model, the restructuring process operates in two stages (see Section A below) and

has four key features. First, it inserts a ‘safe harbour’ defence for directors into the

Corporations Act (see Section B below). Secondly, the Model recommends establishing a

Restructuring Panel (‘the Panel’) to evaluate and approve Restructuring Plans (‘the Plan’). The

Panel would be government-funded, have quasi-judicial authority and consist of experienced

turnaround professionals. While it would not be adversarial in nature, applicants would be

required to have met the acceptance requirement from creditors before the Plan could be

approved. The Model’s third feature allows for directors to retain control of the company

throughout the restructuring process. These three features will each be addressed respectively

in Chapters V to VII.

The fourth feature is granting seven discretionary powers to the Panel. This is because the Panel

needs to be flexible, to provide targeted assistance to companies to assist company survival.

17

Accompanying these powers is a set of criteria (‘Guidance Notes’) which the Panel should

consider when deciding whether to exercise their power. These criteria, along with the rationale

for the discretionary powers, are presented in Chapter VIII.

Legislation would be needed to facilitate the establishment of the Plan and the Panel, in addition

to the administrative operation of the Panel and selection criteria. The Panel would also need

to be indemnified in order to attract members. This processes are, however, beyond the scope

of this Thesis. Rather, a set of general principles is proposed, which subsequent legislative

drafting should reference.

18

A Operation of the Model

STAGE I

The board of directors has formed an opinion that their company is insolvent, or at risk of

becoming insolvent, but believes it has prospects of reorganising to continue trading as a

going concern. The company applies to the Panel for permission to develop a Plan. The

Panel can exercise Discretionary Power 1 to accept or reject the application:

(i) If the application is accepted, the Panel can exercise four further discretionary powers:

(a) Discretionary Power 2: Allow the company to develop a Plan if it is a SME;

(b) Discretionary Power 3: Implement a stay of proceedings and decide its length;

(c) Discretionary Power 4: Waive disclosure obligations and determine the

acceptance requirements; or

(d) Discretionary Power 5: Prohibit creditors from exercising ipso facto clauses.

(ii) If the application is rejected, the Panel can recommend that the company file for formal

insolvency proceedings. It may exercise Discretionary Power 6, to notify ASIC of its

opinion that the enterprise value of the company will be severely diminished by the

directors remaining in control.

STAGE II

The approved company develops the Plan and presents it to the Panel. The Panel can

exercise Discretionary Power 1, to accept or reject the Plan:

(i) If the Plan is accepted, the Panel may aid the company through implementing

Discretionary Powers 3–5. The Panel may also exercise Discretionary Power 7, to

subject the company to additional monitoring requirements.

(ii) If the Plan is rejected, the Panel will recommend the company file for formal insolvency

proceedings and may consider exercising Discretionary Power 6.

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B The new ‘safe harbour’ provision

Section 588H(7): Defence for the duty to prevent insolvent trading for directors that have

engaged in a Plan

In determining whether a defence under subsection (5) has been proved, the matters to

which regard is to be had include, but are not limited to:

(a) the person was a director of a company that applied to the Panel for permission to

propose a Plan;

(b) the Panel granted approval for the company to form a Plan;

(c) the person took all reasonable steps to ensure the company diligently formed the Plan;

(d) the Panel approved the proposed Plan; and

(e) the person took all reasonable steps to ensure the company diligently executed the

Plan.

20

V FEATURE 1: THE ‘SAFE HARBOUR’ DEFENCE

There has been consistent support for affording a defence to insolvent trading to a ‘well advised

director forming a restructuring plan to save a viable business’ – a ‘safe harbour’ defence.100

There has, however, been debate over the defence’s format. In 2010, Chris Bowen MP

proposed a modified BJR.101 However, the proposal did not adequately define what constituted

restructuring advice,102 which would have resulted in directors being unsure when following

the restructuring advice would have indemnified them.103 Further, it could only have applied

retrospectively; after a director had already restructured in anticipation of relying on the BJR.

This would have resulted in an inability to prevent unviable companies from attempting

restructuring. Without directors being granted pre-approval for their actions by a body with the

authority to indemnify them, the uncertainty around a director’s liability for restructuring in

the twilight zone would have remained.

By inserting s 588H(7), the Panel would be granted the power to indemnify a director for

diligently carrying out a pre-approved Plan. This chapter argues that this safe harbour is

necessary for clarifying the conflicting duties of directors in the twilight zone. Further, as

solvency can be a complex state to determine, the judiciary and ASIC have provided

inconsistent interpretations, and created some latitude to directors to trade out of insolvency.

This creates uncertainty for directors when considering their liability for restructuring.

100 TMAA, above n 54, 6. 101 Safe Harbour Paper, above n 13, vi. 102 David Morrison and Colin Anderson, Safe Harbour Paper Submission, 1 March 2010, 8–9. 103 Ibid.

21

A Conflicting duties

In Australia, directors’ duties conflict in the twilight zone. When a company is insolvent, but

an informal workout is deemed appropriate, pursuing the workout is technically in breach of

the duty to prevent insolvent trading.104 Simultaneously, by not pursuing a viable workout,

directors may breach their duty to act in good faith and in the best interests of the company,105

and its creditors.106 This conflict creates uncertainty as to directors’ liability and obligations.107

In the US, ‘directors owe actionable duties to look out for the interests of creditors once a

company finds itself in the twilight zone.’108 Although s 588H(7) does not clarify the

conflicting duties, it protects directors who pursue restructurings in the twilight zone that are

in the best interest of the companies and its creditors.

B Difficulties in assessing solvency

A common assumption is that insolvency is a clear-cut state.109 Conversely, the ‘identification

of insolvency is an art, not a science, and open to interpretation and debate’.110 Under the

Corporations Act, a company is insolvent if it is not solvent,111 and is solvent if it can pay its

debts ‘when they become due and payable’.112 While this ‘central feature of the insolvency

concept is clear … thereafter, the fog descends.’113 The law may treat a company as either

insolvent or solvent, but due to commercial realities it can ‘teeter on the edge of insolvency for

104 Corporations Act s 588G. 105 Ibid s 181. 106 Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722. 107 TMAA, above n 54, 6. 108 TMAA, above n 54, 6. 109 LCA, IPAA and TMAA, above n 15, 4. 110 KordaMentha, Safe Harbour Paper Submission, above n 84, 3. 111 Corporations Act s 95A(2). 112 Ibid s 95A(1). 113 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 23 WASC 239 [1064] (‘Bell v

Westpac’).

22

some time’.114 For example, in 2008, in 24 per cent of companies that failed, auditors reported

‘no prior going concern’ issues,115 down from 41 per cent in 2007.116 Solvency’s uncertain

nature is recognised by auditors; in fact, the auditing standards acknowledge that insolvency is

about ‘making a judgement … about inherently uncertain future outcomes of events or

conditions’.117 As a result of this conceptual difficulty, there is significant uncertainty of a

director’s liability in the twilight zone.

C Inconsistent judicial interpretation

1 Insolvent trading

The judiciary determines when a company became insolvent, to establish a director’s liability

for insolvent trading. The judiciary has provided ‘directors some latitude in choosing whether

to try to trade out of a perceived temporary liquidity problem or to place the company into

[VA]’.118 Prima facie, this offers comfort to directors that they may justify their actions by

reference to their perceived solvency. However, it creates uncertainty of what circumstances

will construe insolvency as ‘temporary and remediable or endemic and fatal’.119

An assessment of solvency begins with a ‘cash flow test’,120 which assesses a company’s

‘capacity to finance its current operations’.121 This cash flow test is line with s 95A,122 but is

114 ARITA, above n 41. 115 Yang Xu et al, ‘Audit Reports in Australia during the Global Financial Crisis’ (2011) 56(1) Australian

Accounting Review 21, 28. 116 Ibid. 117 Auditing and Assurance Standards Board, ASA 570 Going Concern (1 January 2010), [5] <http://www.auasb.

gov.au/admin/file/content102/c3/Jul13_Compiled_Auditing_Standard_ASA_570.pdf>. 118 David Morrison, ‘When is a Company Insolvent?’ (2002) 10 Insolvency Law Journal 4, 21. 119 Hall v Poolman (2007) 65 ACSR 123 [331]. 120 Bell v Westpac (2008) 23 WASC 239 [1075]. 121 Ibid [1066]. 122 Ibid [1072].

23

‘vague and uncertain’.123 The judiciary can also use a ‘balance sheet test’ to determine

solvency, where a company is solvent if its assets exceed its liabilities.124 Insolvency is not a

temporary lack of liquidity,125 but an examination of the company’s ‘position in its entirety’.126

Accordingly, the balance sheet test can indicate a company’s ability to generate cash. However,

the extent of its application is uncertain.

There are generally three situations where courts have afforded latitude to directors, to assess

whether the insolvency is temporary or permanent.127 First, the judiciary have looked to a

company’s ability to reorganise the timing of its debts.128 The ‘commercial reality is that

creditors will usually allow some time for payment beyond normal trading terms, if there are

worthwhile prospects of an improvement in the company’s position.’129 Nevertheless, a debt is

assumed payable when stipulated unless there is evidence of contrary intention, through

conduct, an express or implied agreement or an established industry practice.130 Secondly,

courts have assessed a company’s ability to sell assets to meet its liabilities, to the extent that

it does not inhibit the company’s ability to earn future income.131 Thirdly, a company may offer

assets to obtain finance,132 through ‘unsecured borrowing or a voluntary extension of credit by

another party’.133

123 Ibid [1069]. 124 Ibid [1067]. 125 Sandell v Porter (1966) 115 CLR 666, 670. 126 Ibid. 127 James Routledge and Ray McNamara, ‘Assessing solvency for financially distressed companies’ (2005) 13

Insolvency Law Journal 205. 128 Ibid 207. 129 Hall v Poolman (2007) 65 ACSR 123 [331]. 130 Southern Cross Interiors v Deputy Commissioner of Taxation [2001] NSWSC 621 [54]. 131 Re United Medical Protection & Ors [2003] NSWSC 1031 [56]. 132 Routledge and McNamara, above n 127, 208. 133 Lewis and Anor v Doran and Ors [2004] NSWSC 608 [116].

24

It is clear that an assessment of ‘solvency is not a question of law … [but] of fact and opinion

to be determined … by reference primarily to commercial considerations’.134 There is no

specific test as to when exactly a company is solvent, which creates uncertainty of directors’

obligations in the twilight zone. Accordingly, directors need a safe harbour defence to provide

certainty as to their liability.

2 Defences

The scope of the available defences is uncertain due to the judiciary’s unwillingness to exercise

discretion to relieve a director of liability. It is generally accepted that s 588H does not provide

a defence where an insolvent company has undertaken good faith informal restructuring. A

2004 study found that insolvent trading defences were only successful on 11 per cent of

occasions they were argued.135

Under s 1318, relief may be granted, but only where it ‘would be unjust and oppressive not to

do’,136 and only ‘once a finding of breach of duty has been made’.137 From the commencement

of the Corporations Act until 2009, out of 23 cases where directors tried to rely on s 1318, not

one has been granted full relief.138 It may therefore be seen as a discretionary last resort, not an

established defence to commercial decision-making. Although the flexible application of s

134 Nuncio D’Angelo, ‘What directors need to consider before calling in an administrator – and it’s not just

solvency…’ (2006) 24 Company and Securities Law Journal 7, 8. 135 Paul James, Ian Ramsay and Polat Siva, ‘Insolvent Trading – An Empirical Study’ (Research Report No 72,

University of Melbourne, 9 June 2004) 2. 136 Daniels v Anderson (1995) 37 NSWLR 438, 525. 137 Steven Wong, ‘Forgiving a Director’s Breach of Duty: A review of recent decisions’ (May 2009) University

of Melbourne 6 <http://www.law.unimelb.edu.au/files/dmfile/stevenwong_essay_6_May_20091.pdf>. 138 Ibid 12.

25

1318 may be an advantage, the uncertain outcome, the lack of established use and the fact that

it is only discretionary,139 renders it an inappropriate defence to restructuring while insolvent.

D Inconsistent interpretation by ASIC

ASIC officially operates on a basis of deterrence, by transmitting information about sanctions

of failing to ‘conform to proscribed behavior’.140 This approach is consistent with the insolvent

trading framework. However, in practice, ASIC displays understanding for commercial

considerations.141 For example, ASIC Insolvency Commissioner, Michael Dwyer stated that a

director would ‘be OK’ if they have traded whilst insolvent, but followed appropriate advice

and ‘acted in good faith’.142 According to Ferrier Hodgson, RG 217 ‘sets out the key principles

which, if met by a director, would mean that ASIC would likely not pursue an insolvent trading

action. Those principles, by and large, reflect the elements of a business judgment rule’.143

Additionally, ASIC appears reluctant to prosecute insolvent trading. Between 1961 and 2004,

103 insolvent trading cases were decided,144 but only 17 per cent were prosecuted ‘by the

corporate regulator’.145 In 2012, ASIC received liquidation reports, which alleged 7,253

criminal offences,146 but only commenced legal proceedings in 36 cases.147 Directors are

139 Ibid 6. 140 Robert Apel, ‘Sanctions, Perceptions, and Crime: Implications for Criminal Deterrence’ (2013) 29 Journal of

Quantitative Criminology 67, 71. 141 James Eyers, ‘ASIC Leniency for Business Failure’, Australian Financial Review (Sydney), 28 April 2009,

60. 142 Ibid. 143 Ferrier Hodgson, above n 83, 10. 144 James, Ramsay and Siva, above n 135, 1. 145 Ibid 3. 146 Trevor Treharne, Underfunded ASIC admits it is ‘overstretched’ (18 Sep 2012) Insurance Business

<http://www.insurancebusinessonline.com.au/news/underfunded-asic-admits-it-is-overstretched-143814.aspx>. 147 Ibid.

26

uncertain of ASIC’s position on insolvent trading and arguably refrain from restructuring as a

result.

E Conclusion

Directors ‘must make commercial decisions … [which] often involve some form of

commercial risk and are sometimes made on the basis of limited information’.148 The judiciary

and ASIC’s interpretations of the insolvency framework render it difficult for directors to know

when they are compliant with the law, when they can rely on a defence, and when an action

will be brought against them. The Model therefore proposes a safe harbour defence to ensure

that, when in the twilight zone, directors are encouraged to undertake lawful and good faith

restructuring.

148 Wong, above n 137, 2.

27

VI FEATURE 2: RETAINING MANAGEMENT DURING THE PLAN

Chapter VI outlined the need for a safe harbour defence to provide certainty of directors’

liability during informal restructuring. Yet, where informal restructuring is not possible,

companies need to pursue formal restructuring through VA. Directors are, however, required

to relinquish control in VA, which causes financial and reputational harm through termination

and unemployment.149 This chapter presents key behavioural theories to argue that this

requirement discourages entry. Significantly, Chapter 11 incentivises early restructuring,

through allowing management to retain control. This is the approach preferred by the Model.

Under an agency theory approach, directors ‘make decisions that cause them the least harm’.150

Routledge and Morrison explain that ‘[i]f managers perceive that VA is not in their interests

… [they will] delay the entry decision.’151 To minimise the risk of delay, harsh penalties are

imposed for non-compliance with the duty to prevent insolvent trading. This chapter outlines

first, why the lack of enforcement of the duty (see Chapter VI) results in directors not fearing

the penalties, and secondly, why retaining management facilitates timely restructuring.

A Regulatory approach is unable to deter insolvent trading

The ‘Corporations Act seeks to achieve deterrence primarily by’ providing mechanisms to

liquidators, creditors and ASIC to recover funds against directors.152

149 William Donoher, ‘To File Or Not To File? Systemic Incentives, Corporate Control, and the Bankruptcy

Decision’ (2004) 30(2) Journal of Management 239, 245. 150 Routledge and Morrison, ‘Strategic response’, above n 30. 151 Ibid. 152 Ferrier Hodgson, above n 83, 9.

28

Arguably, the threat of insolvent trading does little to deter the offence if it is not enforced.

From a regulatory theory approach, ‘risk perceptions are an important intermediate link

between sanctions and behavior’.153 If criminal behaviour goes unpunished, individuals adjust

their risk perceptions downwards.154 Furthermore, the perceived certainty of punishment has a

greater impact on the prospect of the behaviour occurring than the severity of the offence.155

In the insolvent trading context, the ‘effectiveness of the deterrent significantly depends on

whether there is any consequence for reported breaches.’156 If directors do not perceive

enforcement to be a realistic possibility, they will not believe their actions will have adverse

consequences.157 There is a perception that ASIC does not pursue complex and difficult

cases,158 or those related to large companies.159 There is ‘little evidence to suggest that large

entities fear the threat of litigation brought by ASIC.’160 It is these perceptions of ASIC’s

ineffectiveness that impede its ability to deter insolvent trading.161 According to McGrathNicol,

‘whilst touted as a significant motivator of pre-emptive appointments or disincentive to attempt

to restructure distressed companies, in fact the risk of being pursued for insolvent trading must

be considered low.’162

Liquidators and creditors can also bring actions for insolvent trading. Yet often a cost-benefit

analysis often results in a decision not to bring action.163 This is especially true for SMEs,

153 Apel, above n 140. 154 Ibid 72. 155 Ibid 73. 156 McGrathNicol, above n 14, 5. 157 Ibid. 158 Performance of ASIC, above n 8, 264–5. 159 Ibid. 160 Ibid 279. 161 Evidence to SERC, Parliament of Australia, Canberra, 19 February 2014, 42 (Alex Malley). 162 McGrathNicol, above n 14, 8. 163 Ferrier Hodgson, above n 83, 10.

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where there are limited funds remaining to prosecute directors,164 but also for large and

complex companies where insolvent trading is difficult to establish.165 This is compounded by

the inadequate separation of ownership and management for SMEs and the prevalence of

personal guarantees, which often turn corporate insolvency into personal bankruptcy.166

According to McGrathNicol, when comparing the ‘risk of losing business, livelihood and

home, the risk of being pursued for insolvent trading causes little or no additional anxiety.’167

Limited resources have made it economically unfeasible for creditors and liquidators to pursue

directors for insolvent trading. ASIC Chairman Greg Medcraft has admitted that ASIC’s

depleted funds have meant that regulation of the securities market is largely based on an

honesty system.168 ASIC’s enforcement account needs to be bolstered to fund litigations to

provide adequate deterrence.169

B Retaining management can incentivise timely restructuring

1 US approach

The US incentivises timely restructuring by allowing managers to remain in control during

Chapter 11. This is facilitated through companies retaining the exclusive right to propose a

reorganisation plan.170 Congress believed managers needed to retain control to avoid

companies delaying until Chapter 11 could not ‘be an effective remedy.’171

164 Ibid. 165 Ibid. 166 ARITA, above n 41, 6. 167 McGrathNicol, above n 14, 8. 168 Treharne, above n 146. 169 Performance of ASIC, above n 8, 279. 170 Bankruptcy Act § 1121. 171 HR Rep No 595, 95th Congress, 1st Session 231–2 (1977).

30

In reality, however, management rarely survives Chapter 11. Fewer than 10 per cent of

managers who are in charge 18 months prior to a reorganisation are in place 6 month after.172

This trend is due to the increase in creditor influence from 2001-2002,173 resulting from

‘changes in the Uniform Commercial Code, a new judicial attitude toward management, and

increased incidence of secured creditor monopoly on debtors’ source of liquidity’.174 Adler,

Capkuny and Weiss found that this ‘change in the legal environment induced managers to delay

their bankruptcy filing’.175 Significantly, companies that filed before 2001-02 had better

liquidity, higher income and assets and were less leveraged.176 Evidently, debtor-orientated

systems are superior at inducing companies to restructure early, in a healthier financial state.

2 Australian approach and behavioural theories

This Thesis contends that in Australia’s creditor-orientated system, if companies are not

permitted to restructure while retaining control, early intervention may not be possible.

Behavioural theories are powerful tools, where ‘small alterations to choice architecture can

give effect to disproportionately large behavioural changes.’177 However, according to the

Commonwealth Department of Finance and Deregulation, policy makers have not placed

sufficient emphasis on behavioural economics.178 In Australia, ‘decision making is hopelessly

impaired’ in the twilight zone.179 Yet, there has been minimal research into how behavioural

biases deter VA entry.

172 Douglas Baird, ‘The Hidden Virtues of Chapter 11: An Overview of the Law and Economics of Financially

Distressed Firms’ (1997), Law and Economics 12. 173 Barry Adler, Vedran Capkun and Lawrence Weiss, ‘Theory and Evidence on the Bankruptcy Initiation

Problem’ (Working Paper No 53, American Law & Economics Association Annual Meetings, 2 May 2006). 2 174 Ibid. 175 Ibid 21. 176 Ibid. 177 Department of Finance and Deregulation, ‘Influencing Consumer Behaviour: Improving Regulatory Design’

(2013) 5. 178 Ibid 4. 179 John Winter, ‘Q&A with Tony McGrath’ (2014) 26(3) Australian Insolvency Journal 4, 9.

31

In Australia, an independent administrator assumes control of the company,180 and can also

dismiss a director.181 This is a key disincentive for directors to enter VA,182 because individuals

arguably possess a tendency to not want to give up ownership and control, which is exacerbated

when the asset is underperforming. This section attributes key behavioural theories to a

director’s unwillingness to part with a distressed company.

(a) The endowment effect

Individuals form an emotional attachment to an asset in their possession and perceive its value

to be higher when asked to part with it – the endowment effect.183 Although historical costs

should be irrelevant in decision-making, ‘paying for the right to use a good or service will

increase the rate at which the good will be utilized’ – the sunk cost fallacy.184 The endowment

effect has been tested across different age groups and cultures.185 It can present instantly, but

strengthens the longer the asset is held.186

The endowment effect is exhibited in Donoher’s findings, where companies with ‘higher levels

of inside equity … [were in] a worse financial condition’ when entering Chapter 11.187 In

Australia, share ownership is prevalent among directors.188 There is greater separation for

180 Corporations Act s 437A. 181 Ibid s 442A(a). 182 David Hahn, ‘Concentrated ownership and control of corporate reorganisations’ (2004) 4 Journal of

Corporate Law Studies 117, 147. 183 Richard Thaler, ‘Toward a positive theory of consumer choice’ (1980) 1 Journal of Economic Behavior and

Organization 39, 47. 184 Ibid. 185 Jeremy Blumenthal, ‘Group Deliberation and the Endowment Effect: An Experimental Study’ (2012) 50(1)

Houston Law Review 41, 42–43. 186 Ibid 43. 187 Donoher, above n 149, 254. 188 Nicholas Jackson and Dennis Godfrey, Share Ownership for Non-executive Directors (February 2013)

Godfrey Remuneration Group, 1 <http://www.godfreyremuneration.com/documents/130211_RI46_Share_Own

ership_for_Non-executive_Directors.pdf>.

32

publicly listed companies than SMEs, but equity is still owned by 20 per cent of non-executive

directors of ASX companies ‘with market capitalisations over $25 million’.189

Individuals are significantly more reluctant to relinquish assets they have greater involvement

with.190 Accordingly, SME directors are probably more susceptible to the endowment effect,

due to being tightly held. Further, when the effect exists prior to group deliberation, it is

exacerbated post-discussion,191 represented by a firmer unwillingness to sell an asset.192 This

has a significant effect on boardroom decisions,193 where the decision to enter VA may not be

more informed by board deliberation. According to Reb and Connolly, the effect is ‘primarily

driven by subjective feelings of ownership rather than by factual ownership’,194 for example

employees to their organisation.195 Even if directors do not possess factual ownership, they will

likely feel psychological ownership because of their fiduciary position, which triggers the

endowment effect.

(b) Commitment bias

In the context of entering VA, the loss of control occurs when the company is underperforming.

Staw proposed that commitment to a particular endeavour increases when it is failing.196 There

are two explanations for the commitment effect: first, self-justification, where ‘people are

189 Ibid. 190 Najam Saqib, Norman Frohlich and Edward Bruning, ‘The influence of involvement on the endowment

effect: The moveable value function’ (2010) 20 Journal of Consumer Psychology 355, 365. 191 Blumenthal, above n 185, 58. 192 Ibid. 193 Ibid 48. 194 Jochen Reb and Terry Connolly, ‘Possession, feelings of ownership and the endowment effect’ (2007) 2(2)

Judgment and Decision Making 107, 112. 195 Jon Pierce, Tatiana Kostova and Kurt Dirks, ‘Towards a theory of psychological ownership in organizations’

(2001) 26(2) Academy of Management Review 298, 307. 196 Barry Staw, ‘Knee-Deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of

Action’ (1976) 16 Organisational Behaviour and Human Performance 27, 27.

33

unwilling to admit’ their mistakes,197 and secondly, the aversion to avoid certain losses.198 In

Australia, given the heightened commitment that individuals have to a failing company, it is

unreasonable to expect directors to relinquish control until the level of distress reaches a point

where there is no alternative.

(c) Status quo bias

When faced with a decision, ‘individuals display a bias toward sticking with the status quo’.199

This is a spectrum where the reluctance to depart from the status quo is greater when the

perceived loss is greater.200 VA requires a significant change for directors through relinquishing

control and confronting restrictive conditions. When faced with the decision to enter, directors

will likely opt to continue on the current, albeit downward spiral because this does not require

a change in the status quo.

(d) Ethical dilemma

Legal ambiguity facilitates wrongdoing as individuals construct self-serving interpretations of

legal requirements.201 Given the ambiguity of directors’ responsibilities (see Chapter IV),

directors are likely to feel less ethically required to enter VA early than had the legislation set

out their obligations clearly. Further, unethical behaviour can be rationalised by social norms,

197 Eyal Zamir, Law, Psychology, and Morality: The Role of Loss Aversion (Oxford University Press, 2014)

(forthcoming) 30. 198 Ibid 30–31. 199 Samuelson, William and Richard Zeckhauser, ‘Status Quo Bias in Decision Making’ (1988) 1 Journal of

Risk and Uncertainty 7, 47. 200 Gil Riella and Roee Teper, ‘Probabilistic dominance and status quo bias’ (2014) 87 Games and Economic

Behavior 288, 288. 201 Yuval Feldman, Behavioral Ethics Meets Behavioral Law and Economics’ (3 October 2013) SSRN, 17

<http://ssrn.com/abstract=2226711>.

34

which increases its occurrence.202 Where a situation presents ambiguity, individuals look to the

behaviour of others for guidance. 203 Entering VA is a complex ethical dilemma which raises

uncertainty. Continuing to trade while insolvent breaches a director’s duties, but initiating VA

commonly results in ‘winding-up’ and job losses. In Australia, VA is perceived to be an

undesirable outcome. Consequently, directors are likely to feel pressure to exhaust all possible

options before entering VA.

C Conclusion

The behavioural biases exhibited in the twilight zone render it extremely difficult for directors

to enter VA, due to an inability to relinquish control, while the company is at a loss. Instead,

directors are likely to only do this as a last resort, as evidence has shown. The current system

arguably ignores these human characteristics. Accordingly, the personal liability attached to

insolvent trading fails to ensure timely entry into VA.

Individuals do ‘display varying degrees of loss aversion under different circumstances’204 and

there are ways of mitigating the biases.205 This Thesis contends, however, that the most

effective method to facilitate timely entry is to avoid the loss of control. The Model facilitates

this through allowing directors to retain control during a Plan.

202 Francesca Gino and Adam Galinsky, ‘Vicarious dishonesty: When psychological closeness creates distance

from one’s moral compass’ (2012) 119 Organizational Behavior and Human Decision Processes 15, 16. 203 Ibid. 204 Eyal Zamir, ‘Loss Aversion and the Law’ (2012) 65(3) Vanderbilt Law Review 829, 841. 205 Ibid.

35

VII FEATURE 3: OVERSIGHT BY THE RESTRUCTURING PANEL AND A CHIEF RESTRUCTURING

OFFICER

The idea of a ‘turnaround panel’ was first proposed by the Business Turnaround Association

(‘BTA’) in 2003.206 BTA proposed that the panel would sit under ASIC, similar to the

Takeovers Panel. Although the BTA’s overall model was not well received,207 the idea of a

panel has had recent support.208

This Thesis argues that Australia needs such oversight. If the Model was only offering safe

harbour, the Plan could possibly have been overseen by an administrator with ‘turnaround

experience’, as proposed by Bromley.209 However, the Model affords broad, substantial powers

to the Panel, which are necessary to ensure companies’ survival. Accordingly, it is unlikely the

Model would gain support without the oversight of an independent body with quasi-judicial

authority.

There are two reasons why the courts should not oversee the Plan. First, as stated by the Hon

Ray Finkelstein, ‘the backgrounds of many judges would not allow them to take on that sort of

commercial involvement.’210 Secondly, the judiciary should, arguably, not be forced to change

its nature to preside over ‘commercial matters … [which are] outside its appropriate judicial

decision-making role’.211 In the US, there are three institutions that oversee Chapter 11.

206 BTA, Stocktake Report Submission, 16 June 2003, 5. 207 Stocktake Report, above n 61, 40. 208 Interview with Michael Murray (Telephone Interview, 28 July 2014). 209 DibbsBarker, Attachment A, above n 60, 6. 210 Michael Murray, ‘Q&A with Ray Finkelstein’ (2014) 26(2) Australian Insolvency Journal 4, 10. 211 Corporations and Markets Advisory Committee (‘CAMAC’), Parliament of Australia, Rehabilitating large

and complex enterprises in financial difficulties (2004) 41 (‘Rehabilitation Report’).

36

A Oversight in the US

1 Bankruptcy court

The predominant oversight body in the US is the bankruptcy court. Congress intended for the

judiciary to form a supervisory role,212 with creditors’ committees performing administrative

matters.213 In a forthcoming study, LoPucki and Doherty found that company survival strongly

correlates with judicial experience of bankruptcy cases.214 Bankruptcy judges are vested with

the authority to make decisions of a commercial nature. As ARITA Legal Director, Michael

Murray, highlights, in comparison to Australian judges, US bankruptcy judges ‘come from a

background of commercial bankruptcy practice’.215

2 Creditors’ committees

Creditors’ committees consult with the debtor in regards to case administration,216 forming the

reorganisation plan,217 and investigating the financial condition of the debtor, the operation of

the debtor’s business and the desirability of the continuance of such business’.218 The

committees employ lawyers, accountants and advisers,219 the fees for which come out of the

assets of the company.220 While Congress hoped that creditors’ committees would serve as the

212 Harvey Miller,’The Changing Face of Chapter 11: A Reemergence of the Bankruptcy Judge as Producer,

Director, and Sometimes Star of the Reorganization Passion Play’ (1995) 69 American Bankruptcy Law Journal

431, 431. 213 Ibid 432. 214 Lynn LoPucki and Joseph Doherty, ‘Bankruptcy Survival’ (2014) UCLA Law Review (forthcoming) 43. 215 Murray, above n 210, 10. 216 Bankruptcy Act § 1103(c)(1). 217 Ibid § 1103(c)(3). 218 Ibid § 1103(c)(2). 219 Ibid § 1103(a). 220 Ibid § 330(a)(1).

37

primary point of negotiation when forming a plan,221 in practice, they are inefficient, expensive

and commonly have difficulty finding creditors to participate.222

3 Chief Restructuring Officer (‘CRO’)

The majority of large Chapter 11 reorganisations are guided by a CRO.223 A CRO is often hired

by the company to facilitate the restructuring and importantly, possesses industry and

turnaround experience, which adds credibility to the reorganisation attempt.224 CROs are also

seen as a less drastic remedy than appointing an independent trustee and are therefore preferred

by both creditors and debtors.225 There is a trend to appoint a CRO as oppose to an external

consultant because a ‘CRO has greater authority to direct the reorganization process … and

greater independence over existing management’.226

B The Model

The costs of creditors’ committees in the US, due to their fee structures and enhanced role,

necessarily limits the role they should play in the Model. However, the an experienced

oversight body is an element Australia can adopt. Australian judges, arguably, may not possess

the requisite commercial experience. Accordingly, their role in the Model should be limited.

Instead, the Panel should consist of experienced turnaround professionals that have the capacity

221 Miller, above n 212, 449. 222 Ibid 450–451. 223 Shai Waisman and John Lucas, ‘The role and retention of the chief restructuring officer’ in Jo Moore (ed),

The Americas Restructuring and Insolvency Guide 2008/2009 (Global White Page, 2nd ed, 2008) 200, 200. 224 Ibid. 225 Ibid 201. 226 Mark Bossi, Are CROs More Powerful than Turnaround Consultants? Creditors Drive Trend Toward New

Title (1 October 2006) Turnaround Management Association Global <www.turnaround.org/Publications/Article

s.aspx?objectID=6588>.

38

to distinguish viable companies and oversee diligent restructuring. It is envisaged that the

independence and experience of the Panel will facilitate ‘outcomes according to considerations

of practicality, policy, economic impact, commercial and market factors and the public

interest’,227 similar to the Takeovers Panel.

A final benefit of the proposed safe harbour defence is that it would facilitate companies

retaining CROs. CROs are presently not permissible in current framework, due to the risk of

being held a shadow director228 and the liability for knowingly restructuring a near-insolvent

company.229 Their presence may help facilitate a serious turnaround culture in Australia,230

which the Model supports.

227 A-G (Cth) v Alinta Limited & Ors [2008] HCA 2 [45] (Kirby J). 228 Corporations Act s 9. 229 Ibid s 588G. 230 KordaMentha, FSI Submission, 26 August 2014, 2.

39

VIII FEATURE 4: DISCRETIONARY POWERS

This chapter outlines the rationale for Panel’s powers and why they should be used on a

discretionary basis.

A Discretionary Power 1: Accept or reject a Plan at application or approval stage

The Model restricts participation to companies that should be rehabilitated (viable), as opposed

to those that should not (unviable). Allowing unviable companies to retain their assets through

a lengthy stay of proceedings (see DP2 below) is not congruent with Australian insolvency

culture. As the Panel would consist of experienced practitioners, the Panel would be better

equipped to distinguish viable from unviable companies; through using indicators of a

company’s ability to restructure successfully (see page 14).

However, there are two detriments of restricting participation. First, there is a risk companies

will not apply for fear of being rejected and potentially reported to ASIC (see DP6). Secondly,

affording unviable companies protection, incentivises unviable companies to enter the formal

insolvency process earlier.

Guidance Note

In implementing DP1, the Panel will consider:

(a) The prospects that the company has to restructure and continue as a going concern,

given the use of discretionary powers 2 to 7.

40

1 US approach

Chapter 11 is arguably effective at sorting ‘winners from losers’.231 Yet, approximately 50 per

cent of companies that enter Chapter 11 never file a plan and are instead converted to Chapter

7.232 Critics have suggested that providing a safe harbour delays inevitable liquidation,

especially for companies never file a plan. However, filing forces companies to reassess their

financial situation, before providing assistance to viable companies through the stay of

proceedings and liquidating unviable companies.233 Yet, companies only reassessed their

financial position upon entering Chapter 11. This would have been unlikely had there been no

prospect of restructuring.234

However, cases converted from Chapter 11 to Chapter 7 take longer to complete. Chapter 7

liquidations average two years,235 with converted cases averaging six years.236 If time elapsed

directly correlates to costs incurred, as LoPucki proposed,237 converted cases are highly costly.

2 The Model

Chapter 11 is effective at facilitating the early restructuring of companies, but inefficient at

winding up unviable companies. The Model permits all companies to apply to the Panel, which

encourages companies to consider timely restructuring. However, approval is only granted to

companies with a realistic prospect of rehabilitation.

231 Elizabeth Warren and Jay Lawrence Westbrook, ‘The Success of Chapter 11: A Challenge to the Critics’

(2009) 107 Michigan Law Review 603, 630. 232 Ibid 618. 233 Ibid 619. 234 Ibid. 235 Stephen Lubben, ‘Business Reorganization’ (2007) 81 American Bankruptcy Law Journal 65, 83. 236 Ibid. 237 Lynn LoPucki and Joseph Doherty, ‘The Determinants of Professional Fees in Large Bankruptcy

Reorganization Cases’ (2004) 1(1) Journal of Empirical Legal Studies 111, 113.

41

B Discretionary Power 2: Allow an application from a SME

The Model adopts elements of Chapter 11, which is arguably more expensive than VA,

especially for SMEs.238 Chapter 11’s cost was a key reason why CAMAC refuted a procedure

based on it.239 In Australia, company size does not restrict access to any insolvency procedure.

However, Chapter 11 is designed for large companies, not small ones.240 Accordingly, there is

a question of whether the Model should restrict access to SMEs. Further, SMEs often fail

because of an inability to identify profitable business activities due to poor record keeping.241

This raises questions about a SMEs’ ability to design and implement an effective plan.

1 Costs in Chapter 11

It is generally accepted that company size, as measured by total assets, is the key determinant

of costs.242 LoPucki found that for large companies, Chapter 11 fees averaged 1.4 per cent of

238 McGrathNicol, above n 14, 10. 239 Rehabilitation Report, above n 211, 16. 240 Evidence to SERC, Parliament of Australia, Canberra, 2 April 2014, 32 (David Lombe). 241 Jim Everett and John Watson, ‘Small Business Failure and External Risk Factors’ (1998) 11 Small Business

Economics 371, 372. 242 LoPucki and Doherty, ‘Fee Determinants’, above n 237, 113.

Guidance Note

In implementing DP2, the Panel will consider:

(a) The company’s ability to form a Plan;

(b) The company’s impact of fees on the development of a Plan;

(c) The company’s motives for applying to develop a Plan; and

(d) The experience of the officers of the company.

42

total assets.243 However, costs in Chapter 11 are subject to ‘economies of scale’, where relative

costs decrease with a corresponding increase in assets.244 Accordingly, Chapter 11 is

comparatively far cheaper for large companies than SMEs.

It is difficult, however, to accurately compare the cost of the US and Australian systems by

comparing fees to total assets. This is because the costs included in reorganisation systems vary

across jurisdictions. For example, when comparing the US and the Netherlands, Lubben and

Cowenberg found that prima facie, costs in Chapter 11 appeared nearly five times higher.245

However, when taking into account variables resulting from the jurisdictional differences, two-

thirds of the variance could be explained.246

2 The Model

The ‘economies of scale’ aspect of Chapter 11 means that costs may be comparable to VA for

large companies, but not for SMEs. Companies need significant free resources to succeed in

restructuring. However, the high cost of Chapter 11 for SMEs will quickly erode any resources

that can be put towards restructuring.

Nevertheless, to restrict access to the Model based on cost ignores a major problem of the

current framework – SMEs are more likely to delay entry until their assets are depleted (see

pages 29–31). Because SMEs are tightly held, SME directors are more susceptible to the

behavioural biases that delay entry. As SMEs are usually not required to file an audit report,247

243 Ibid. 244 Ibid. 245 Oscar Cowenberg and Stephen Lubben, ‘Costs of Chapter 11 on Context: American and Dutch Business

Bankruptcy’ (2011) 85 Americal Bankruptcy Law Journal 63, 75. 246 Ibid 83. 247 Corporations Act s 292(2).

43

they do not have to undergo scrutiny of their financial position until VA. There is a need to

bring SMEs into the restructuring/insolvency process early, but removing a SMEs’ ability to

apply to the Panel removes this vital benefit.

Ultimately, ‘whether chapter 11 is “too expensive” largely turns on whether or not … [it]

produces benefits in excess of cost.’248 This is a balancing act, weighing the cost of the Model

for SMEs against the potentially higher returns to creditors. The Model provides an exception

for SMEs in the event they can demonstrate their ability to effectively restructure. This may

encourage SMEs to apply to develop a Plan when exhausting all options. Accordingly, the

Model may still facilitate earlier scrutiny of their financial position. Further, the Model does

not define the threshold for a SME. This Thesis suggests that when defining a SME, future

research should performed to investigate the level at which the Model would become too

expensive for SMEs.

248 Cowenberg and Lubben, above n 248, 65.

44

C Discretionary Power 3: Implement a stay of proceedings

Under VA, administrators have 28 days to devise a plan and a further 15 days to gain

acceptance from creditors. According to McGrathNicol, this timeframe is ‘too short for many

companies to enable the assessment of the current position, receipt and evaluation of proposals

for DOCA’s [and an] investigation of what a hypothetical liquidation might generate.’249 This

is consistent with a 2008 ASIC review, which found that many reports to creditors failed to

provide enough information to enable creditors to make informed decisions about whether to

accept a DOCA or liquidate the company.250 This makes it difficult to design and implement

an effective arrangement. To encourage restructuring, administrators need to be able to provide

creditors an accurate assessment of their options and the viability of any arrangement.

1 US approach

In the US, a debtor is granted an automatic stay from actions against its property251 of up to 20

months.252 The stay continues until plan confirmation or conversion to another Chapter.253

249 McGrathNicol, above n 14, 12. 250 ASIC, Report 129: Review of s439A reports for voluntary administrations (2008), 5 <https://dv8nx270cl59a.

cloudfront.net/media/1344896/REP_129_v2.pdf >. 251 Bankruptcy Act § 362(a). 252 Ibid § 1121(d)(2)(b). 253 Ibid § 362.

Guidance Note

In implementing DP3, the Panel will consider:

(a) The company’s motives for applying to develop a Reorganisation Plan; and

(b) The impact on a company’s creditors.

45

Bankruptcy judges are unwilling to lift the stay while the company is continuing ‘as a going

concern and the debtor is making a good faith effort to resolve disputes among different

creditors and draft a plan.’254

2 The Model

In line with the need for flexibility when assessing an individual company’s restructuring

needs, the Panel should have the discretion to set the stay of proceedings at a length, which

enables the best chance of rehabilitation. The Model does not seek to deny access to creditors

unnecessarily. The long moratorium period in the US arguably ties-up capital, which should be

recycled through creditors. Through the viability test and the discretionary stay, cases which

unnecessarily tie-up capital with unviable companies should be minimised.

254 Baird, above n 172.

46

D Discretionary Power 4: Waive disclosure obligations and vary acceptance requirements

Under the ASX Listing Rules, directors of listed companies are liable for misleading the

market,255 if they fail to disclose information ‘that a reasonable person would expect to have a

material effect on the price or value of the entity’s securities.’256 This includes formal

insolvency procedures.257 However, there is uncertainty of what disclosure is required during

an informal workout.258 This is because disclosure is not required when the information is

uncertain or material, as is the case in informal restructuring.259 This lack of certainty can result

in directors being unwilling to conduct a workout, and instead entering VA to avoid breaching

their disclosure obligations.

255 Corporations Act s 674. 256 ASX, Listing Rules (14 April 2014) [3.1] <http://www.asx.com.au/documents/rules/Chapter03.PDF>. 257 Ibid [3.1A]. 258 Richard Fisher, ‘Managing commercial distress: Discharging obligations of disclosure’ (2007) 15 Insolvency

Law Journal 23, 23. 259 ASX, above n 256.

Guidance Note

In implementing DP4, the Panel will consider:

(a) The impact of disclosure on the company’s

(i) Goodwill;

(i) Enterprise value; and

(ii) Continuing operations; and

(b) Whether to vary the acceptance requirements, with reference to the:

(i) ‘Affected’ creditors; and

(ii) ‘Unaffected’ creditors.

47

Companies are reluctant to disclose their financial concerns, due to the stigma of being a

distressed company in Australia. The stigma is created, first, by the flow-on effect of the law

not supporting the good faith turnaround efforts of directors.260 Secondly, it is created by the

fear that the company’s distress will result in formal insolvency, which ‘is not well regarded in

the Australian community.’261

Forcing disclosure impedes the viability of informal workouts through inhibiting a company’s

‘ability to maintain relationships with … its workforce, financiers and suppliers while it

conducts that negotiation.’262 Customers may shun a product for fear of warranty or servicing

issues,263 or suppliers may refuse to enter contracts, for fear of not being fully remunerated. A

balancing act results, which requires ‘the company to accommodate both its obligations under

the continuous disclosure regime and the need to maintain the integrity of its business while

pursuing an informal resolution.’264

Formal restructuring through VA is also impeded by this stigma, but is exacerbated due to

being seen as a more drastic remedy than a workout. Companies find it difficult to restructure

in VA due to the perception that VA erodes value.265 VA is seen as a place for companies to

wind-up, not to restructure and continue operations – a gateway to liquidation.266 This belief

deters companies from entering VA until they have no other choice.

260 ARITA, above n 41, 5. 261 Ibid 262 Fisher, above n 258, 34. 263 LCA, IPAA and TMAA, above n 15, 3. 264 Fisher, above n 258, 34. 265 McGrathNicol, above n 14, 8. 266 Cheetham, above n 40.

48

1 US approach

In the US, insolvency does not possess the same stigma. There is ‘a different emphasis on how

to react to insolvency’.267 The US has a ‘liberal approach to corporate failure’,268 characterised

by the ‘expectation of a concerted effort to salvage the business’.269

2 The Model

(a) Disclosure requirements

Directors may feel compelled to disclose their participation in a Plan, which could impede

restructuring. The Model provides two benefits. First, it preserves goodwill by protecting

companies from the stigma of insolvency, through providing discretion to the Panel to remove

disclosure obligations. Secondly, it provides certainty to directors of their disclosure

obligations during the Plan, and that these obligations are no different than those under a

workout. If the Plan’s disclosure requirements were more onerous than informal restructuring,

companies may not to use the procedure.

Waiving disclosure is highly contentious, yet companies arguably need to be shielded from the

stigma of insolvency to undergo viable restructuring. The Panel requires the flexibility to, at

times, provide the delicacy that informal workouts facilitate. In practice, debtors will likely

rely on creditors to waive debt, which will require disclosure. The Model arguably reduces

individual creditors’ rights, but maintaining company value is beneficial to creditors as a whole.

267 Ibid. 268 Ibid. 269 Ibid.

49

(b) Acceptance requirements

Unless otherwise stated, a company must obtain approval of a Plan from 50 percent of creditors,

in number and value, in line with the current VA requirements.270 However, if the Panel waives

disclosure obligations, it may consider limiting acceptance to the ‘affected creditors’, which

are participating in the (undisclosed) Plan. If the Panel varies the requirements, it must consider

the initially ‘unaffected creditors’, and may consider requiring acceptance from them. This is

because although these creditors are not required to waive or postpone debt, their position may

be adversely impacted by a failed Plan.

270 Corporations Regulations 2001 (Cth) reg 5.6.21(2).

50

E Discretionary Power 5: Prohibit creditors exercising ipso facto clauses

An ipso facto clause refers to a contractual clause, which allows a party to terminate a contract

where another party has engaged in an ‘act of insolvency’.271 Ipso facto clauses take effect prior

to a stay of proceedings.272 Accordingly, informal workouts are advantageous because they do

not facilitate contract termination.273

Ipso facto clauses impede formal restructuring because a company is left stranded when

suppliers withdraw essential services. If the contract contributes to its primary means of

generating income, upon exercising an ipso facto clause, the company will have lost its most

valuable asset – its ability to generate income.274 During VA, administrators have the ability to

negotiate new contracts for the supply of goods and services. However, the time delays in

renegotiating supply may damage an already fragile business model. Further, given the stigma

of insolvency, companies in VA find it extremely difficult to enter new contracts due to the

unwillingness of companies to be involved in the financial distress of another company.

271 Nicholas Mirzai, ‘Ipso facto clauses: Should they be enforceable under Pt 5.3A?’ (2011) 19 Insolvency Law

Journal 4, 5. 272 Ibid. 273 Ibid. 274 Stocktake Report, above n 61, 215.

Guidance Note

In implementing DP5, the Panel will consider:

(a) The importance of the creditor to the continued operations of the company;

(b) The cost and availability of sourcing a substitute supplier; and

(c) The hardship on the creditor should the clause be prohibited.

51

1 The US approach

In the US, an ‘executory contract or unexpired lease … may not be terminated or modified …

solely because … [the provision] is conditioned on the insolvency or financial condition of the

debtor’.275 ARITA has consistently advocated that Australia’s corporate insolvency provisions

should be brought in line with the US approach to counter ‘the reduction in value of a business

on its entering insolvency’.276

2 The Model

There has been almost universal support for prohibiting ipso facto clauses. Prohibition has been

consistently advocated by insolvency practitioners,277 banks,278 the original Harmer report279

and international support from the UK, where prohibition is being considered.280

Proponents of permitting ipso facto clauses focus on two reasons. First, creditors should not be

forced to honour contracts when payment is not guaranteed. The detriment to creditors for

continuing supply is arguably minimal and the rights of creditors are unlikely to be affected.281

This is because during VA, administrators are personally liable for the debts incurred, so any

dishonoured contracts are void against the administrator.282 Secondly, prohibiting ipso facto

clauses may increase the cost of credit.283 Considering the support from lending institutions for

275 Bankruptcy Act § 365(e)(1). 276 ARITA, above n 41, 10. 277 Ibid. 278 ABA, above n 42. 279 Harmer Report, above n 24 [703]–[705]. 280 Insolvency Service and Jo Swinson MP, Continuity of supply of essential services to insolvent

businesses, 8 July 2014, UK Government <https://www.gov.uk/government/uploads/system/uploads/attachment

_data/file/328133/Continuity_of_supply_consultation_July_2014.doc>. 281 Ferrier Hodgson, above n 83, 12. 282 Ibid. 283 Rehabilitation Report, above n 211, 72.

52

prohibiting ipso facto clauses,284 the minimal detriment to suppliers285 and the Plan being

restricted to viable companies, it is difficult to envisage a significant impact on loan finance.

At present, the success of restructuring often hinges on creditors relying on each other to honour

contracts to ensure that a company in VA is kept alive. It is considered undesirable to place

creditors in this tenuous position. The Model acknowledges the importance of continuity of

supply and supports the US approach of prohibiting ipso facto clauses that are integral to the

operations of the company, except if a creditor is able to demonstrate hardship.

284 ABA, above n 42. 285 Ferrier Hodgson, above n 83, 12.

53

F Discretionary Power 6: Notify ASIC

If a Plan is rejected at either application or submission, a question arises as to what the next

step should be. Should the Panel be afforded the power to place the company into VA? Should

it take no action but advise ASIC of the decision for monitoring purposes? Arguably, if

directors are aware that the Panel has the power to either place the company into administration

or notify ASIC of the company’s financial difficulty, this would deter directors from applying

to the Panel. This would have the effect of continuing the delay into formal insolvency

proceedings.

The Model proposes that no action should be taken. Instead, an assessment should be made of

the impact of the company remaining in operation. If this is considered harmful to stakeholders,

and management has displayed an intention not to place the company into VA, ASIC should

be notified. However, as the Panel would provide evidence as to why the Plan was rejected, in

theory, directors should effectively be compelled to place the company into VA.

Guidance Note

In implementing DP6, the Panel will consider:

(a) Whether the value of the company will be severely diminished by remaining under the

control of current management; and

(b) Management does not display an intention to enter VA and this decision is considered

(ii) Reckless; or

(iii) Not made in good faith.

54

G Discretionary Power 7: Impose additional monitoring requirements

When a company files for bankruptcy protection a second time, it is considered a failure of the

reorganisation process.286 A 2014 study by Altman revealed that 15 per cent of companies that

emerge from Chapter 11, will re-file.287 Altman found that companies which re-filed for

Chapter 11 had a propensity for recidivism, characterised by a weak financial profile, through

being considerably over-leveraged.288 Significantly, this means certain companies that exit

Chapter 11 are often not instituting effective processes. Instead, they display the same weak

financial characteristics they did when entering Chapter 11. Accordingly, the Model grants

discretionary power to the Panel to institute monitoring to avoid the recidivism experienced in

the US.

286 Edward Altman, ‘Revisiting the Recidivism-Chapter 22 Phenomenon in the U.S. Bankruptcy System’ (2014)

8 Brooklyn Journal of Corporate, Financial, & Commercial Law 254, 256. 287 Ibid 273. 288 Ibid 274.

Guidance Note

In implementing DP7, the Panel will consider:

(a) The likely recidivism of the company.

55

IX CONCLUSION

This Thesis has presented a Model, specifically designed to rehabilitate distressed companies.

The Model incentivises timely restructuring through allowing directors to retain control, and

affording a safe harbour defence to directors who diligently carry out a Plan. There is a need

for a flexible procedure, which caters to companies’ individual circumstances. Accordingly,

the Model creates an experienced oversight body, the Panel, and equips it with the necessary

tools to assist companies to successfully restructure.

The Model’s success hinges on whether Australia is comfortable with a system possessing US

elements. According to Warren and Westbrook, ‘any thoughtful evaluation of Chapter 11

eventually boils down to weighing costs … from delayed liquidation that must be balanced

against the benefits of reorganization.’ 289 Any change to the current system to assist debtors,

needs to be balanced against creditors’ rights; arguably the innocent parties in insolvency.290

This Thesis contends that there is merit in Chapter 11 despite the cultural objections. Through

presenting favourable conditions to distressed companies, by allowing directors to retain

control, Chapter 11 incentivises early entry into the restructuring process. This is an outcome

Australia desperately needs. However, there is at this stage, only anecdotal evidence to suggest

that the current framework is driving companies into insolvency due to the fear of director

prosecution. However, through an analysis of the behavioural theories, this Thesis suggests

that VA’s fundamental characteristics impede timely restructuring.

289 Warren and Westbrook, above n 231, 625. 290 McGrathNicol, above n 14, 1.

56

There is a stigma attached to being a distressed company in Australia, due to the law not

supporting the good faith turnaround efforts of directors, and the value destruction and low

emergence rates of companies in VA. This stigma has impeded the creation of a ‘turnaround

culture’ in Australia. This Thesis contends that this ‘turnaround culture’ is difficult to achieve

without significant alterations to the current regime, or the creation of a new system that that

has the genuine capacity to revive companies. There needs to be legislative reform to encourage

companies experiencing insolvency issues, to undertake timely restructuring. This legislative

support may minimise the stigma surrounding insolvency and may create an insolvency process

coveted by the Harmer Report – a way for viable companies to restructure and continue

operations.

Returning to the GM and Ansett debate, the ‘contrast between what was achieved in the US,

and what would have occurred in Australia, could not be starker’.291 GM ‘traded for many

months whilst insolvent in order to enable the detailed and complex negotiations … [before a]

fully negotiated restructure plan was then presented to the Bankruptcy Court’.292 A

restructuring similar to GM ‘almost certainly could not have occurred in Australia’,293 because

of Australia’s restrictive framework and culture. Although Chapter 11 may not have saved

Ansett, it is envisaged that the Model may help to avoid a similar scenario, where tens of

thousands of Australians endured over a decade of hardship.

291 LCA, IPAA and TMAA, above n 15, 10. 292 Ibid. 293 Ibid.

57

APPENDIX: THE INSOLVENT TRADING PROVISIONS

588G Director’s duty to prevent insolvent trading by company

(1) This section applies if:

(a) a person is a director of a company at the time when the company incurs a

debt; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that

debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is

insolvent, or would so become insolvent, as the case may be; and

(d) that time is at or after the commencement of this Act.

(1A) For the purposes of this section, if a company takes action set out in column 2 of

the following table, it incurs a debt at the time set out in column 3.

When debts are incurred [operative table]

Action of company When debt is incurred

1 paying a dividend when the dividend is paid or, if the

company has a constitution that

provides for the declaration of

dividends, when the dividend is

declared

2 making a reduction of share

capital to which Division 1

of Part 2J.1 applies (other

than a reduction that consists

only of the cancellation of a

share or shares for no

consideration)

when the reduction takes effect

3 buying back shares (even if

the consideration is not a

sum certain in money)

when the buy-back agreement is

entered into

4 redeeming redeemable

preference shares that are

redeemable at its option

when the company exercises the

option

5 issuing redeemable

preference shares that are

redeemable otherwise than at

its option

when the shares are issued

58

When debts are incurred [operative table]

Action of company When debt is incurred

6 financially assisting a person

to acquire shares (or units of

shares) in itself or a holding

company

when the agreement to provide the

assistance is entered into or, if

there is no agreement, when the

assistance is provided

7 entering into an

uncommercial transaction

(within the meaning of

section 588FB) other than

one that a court orders, or a

prescribed agency directs,

the company to enter into

when the transaction is entered into

(2) By failing to prevent the company from incurring the debt, the person

contravenes this section if:

(a) the person is aware at that time that there are such grounds for so

suspecting; or

(b) a reasonable person in a like position in a company in the company’s

circumstances would be so aware.

Note: This subsection is a civil penalty provision (see subsection 1317E(1)).

(3) A person commits an offence if:

(a) a company incurs a debt at a particular time; and

(aa) at that time, a person is a director of the company; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that

debt, or by incurring at that time debts including that debt; and

(c) the person suspected at the time when the company incurred the debt that

the company was insolvent or would become insolvent as a result of

incurring that debt or other debts (as in paragraph (1)(b)); and

(d) the person’s failure to prevent the company incurring the debt was

dishonest.

(3A) For the purposes of an offence based on subsection (3), absolute liability applies

to paragraph (3)(a).

Note: For absolute liability, see section 6.2 of the Criminal Code.

(3B) For the purposes of an offence based on subsection (3), strict liability applies to

paragraphs (3)(aa) and (b).

Note: For strict liability, see section 6.1 of the Criminal Code.

(4) The provisions of Division 4 of this Part are additional to, and do not derogate

from, Part 9.4B as it applies in relation to a contravention of this section.

59

588H Defences

(1) This section has effect for the purposes of proceedings for a contravention of

subsection 588G(2) in relation to the incurring of a debt (including proceedings

under section 588M in relation to the incurring of the debt).

(2) It is a defence if it is proved that, at the time when the debt was incurred, the

person had reasonable grounds to expect, and did expect, that the company was

solvent at that time and would remain solvent even if it incurred that debt and any

other debts that it incurred at that time.

(3) Without limiting the generality of subsection (2), it is a defence if it is proved

that, at the time when the debt was incurred, the person:

(a) had reasonable grounds to believe, and did believe:

(i) that a competent and reliable person (the other person) was responsible

for providing to the first-mentioned person adequate information about

whether the company was solvent; and

(ii) that the other person was fulfilling that responsibility; and

(b) expected, on the basis of information provided to the first-mentioned person

by the other person, that the company was solvent at that time and would

remain solvent even if it incurred that debt and any other debts that it

incurred at that time.

(4) If the person was a director of the company at the time when the debt was

incurred, it is a defence if it is proved that, because of illness or for some other

good reason, he or she did not take part at that time in the management of the

company.

(5) It is a defence if it is proved that the person took all reasonable steps to prevent

the company from incurring the debt.

(6) In determining whether a defence under subsection (5) has been proved, the

matters to which regard is to be had include, but are not limited to:

(a) any action the person took with a view to appointing an administrator of the

company; and

(b) when that action was taken; and

(c) the results of that action.

60

GLOSSARY

Short-hand Term

AICD Australian Institute of Company Directors

ARITA Australian Restructuring Insolvency and Turnaround Association

ASIC Australian Securities and Investment Commission

BJR Business Judgement Rule

BTA Business Turnaround Association

CAMAC Corporations and Markets Advisory Committee

Chapter 11 Bankruptcy Reform Act of 1978, 11 USC

Corporations Act Corporations Act 2001 (Cth)

CRO Chief Restructuring Officer

DOCA Deed of Company Arrangement

DP Discretionary Power (as per the Model)

FSI Financial System Inquiry

GN Guidance Note

Harmer Report General Insolvency Inquiry, Report No 45

IPAA Insolvency Practitioners Association of Australia

LCA Law Council of Australia

Model The Model for Australia

Panel Restructuring Panel (as per the Model)

Performance of

ASIC

Inquiry into the Performance of the Australian Securities and

Investment Commission

PJCCFS Parliamentary Joint Committee on Corporations and Financial

Services

Plan Restructuring Plan (as per the Model)

Rehabilitation

Report

Rehabilitating large and complex enterprises in financial difficulties

Safe Harbour Report Insolvent Trading: A Safe Harbour for Reorganisation Attempts

Outside of External Administration

SERC Senate Economics References Committee

SME Small and Medium Enterprise

Stocktake Report Corporate Insolvency Laws: A Stocktake

TMAA Turnaround Management Association of Australia

USC United States Code

VA Voluntary Administration

61

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2 Submissions

Australian Bankers Association, Submission to Commonwealth Treasury, Insolvent Trading:

A Safe Harbour for Reorganisation Attempts Outside of External Administration, 4 March

2010

Australian Bankers Association, Submission to Commonwealth Treasury, Review of

Sanctions in Corporate Law, 12 June 2007

Australian Bankers Association, Submission to Parliament of Australia, Financial System

Inquiry, August 2014

70

Australian Institute of Company Directors, Submission to Commonwealth Treasury,

Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External

Administration, 2 March 2010

Australian Restructuring Insolvency and Turnaround Association, Submission to Parliament

of Australia, Financial System Inquiry, 26 August 2014

Australian Securities and Investment Commission, Submission to Parliament of Australia,

Financial System Inquiry, August 2014

Baker & McKenzie, Submission to Parliament of Australia, Financial System Inquiry, 26

August 2014

Business Turnaround Association, Submission to Parliamentary Joint Committee on

Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake, 16 June 2003

Business Turnaround Association, Submission to Parliamentary Joint Committee on

Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake, 16 June 2003

Certified Practising Accountants Australia, Submission to Commonwealth Senate Economics

References Committee, Performance of the Australian Securities and Investments

Commission, 26 August 2014

Chartered Accountants Australia and New Zealand, Submission to Parliament of Australia,

Financial System Inquiry, 26 August 2014

Clayton Utz, Submission to Commonwealth Treasury, Review of Sanctions in Corporate

Law, 31 May 2007

Clayton Utz, Submission to Parliament of Australia, Financial System Inquiry, 26 August

2014

Commonwealth Director of Public Prosecutions, Submission to Commonwealth Treasury,

Review of Sanctions in Corporate Law, 15 June 2007

DibbsBarker, Submission to Parliament of Australia, Financial System Inquiry, 15 August

2014

Ferrier Hodgson, Submission to Commonwealth Treasury, Insolvent Trading: A Safe

Harbour for Reorganisation Attempts Outside of External Administration, 2 March 2010

Ferrier Hodgson, Submission to Parliament of Australia, Financial System Inquiry, 26 August

2014

Insolvency Practitioners of Australia, Submission to Commonwealth Treasury, Review of

Sanctions in Corporate Law, 15 June 2007

71

Institute of Chartered Accountants, Submission to Commonwealth Treasury, Insolvent

Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, 2

March 2010

KordaMentha, Submission to Commonwealth Treasury, Insolvent Trading: A Safe Harbour

for Reorganisation Attempts Outside of External Administration, 2 March 2010

KordaMentha, Submission to Parliament of Australia, Financial System Inquiry, 26 August

2014

Law Council of Australia, Insolvency Practitioners Association of Australia & Turnaround

Management Association of Australia, Submission to Commonwealth Treasury, Insolvent

Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, 2

March 2010

Law Council of Australia, Submission to Parliament of Australia, Financial System Inquiry,

26 August 2014

McGrathNicol, Submission to Parliament of Australia, Financial System Inquiry, 26 August

2014

Minter Ellison, Submission to Commonwealth Treasury, Insolvent Trading: A Safe Harbour

for Reorganisation Attempts Outside of External Administration, 4 March 2010

Morrison, David and Colin Anderson, Submission to Commonwealth Treasury, Insolvent

Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, 1

March 2010

Morrison, David and Colin Anderson, Submission to Commonwealth Treasury, Insolvent

Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, 1

March 2010

Research Australia, Submission to Parliament of Australia, Financial System Inquiry, July

2014

The Law Society of New South Wales, Submission to Commonwealth Treasury, Review of

Sanctions in Corporate Law, 28 May 2007

Turnaround Management Association Australia, Submission to Parliament of Australia,

Financial System Inquiry, 25 August 2014

3 Books

Finch, Vanessa Corporate Insolvency Law: Perspectives and Principles (Cambridge

University Press, 2002)

72

INSOL International, Directors in the Twilight Zone IV (2013)

Murray, Michael and Jason Harris, Keay’s Insolvency: Personal and Corporate Law and

Practice (8th ed, 2014)

Rajak, Harry, ‘The Culture of Bankruptcy’ in Paul Omar (ed), International Insolvency Law:

Themes and Perspectives (Ashgate, 2008)

Ramsay, Ian, Company Directors’ Liability for Insolvent Trading in Australia (2000).

Symes, Christopher and John Duns, Australian Insolvency Law (2009)

Waisman, Shai and John Lucas, ‘The role and retention of the chief restructuring officer’ in

Jo Moore (ed), The Americas Restructuring and Insolvency Guide 2008/2009 (Global White

Page, 2nd ed, 2008)

Westbrook, Lawrence et al, A Global View of Business Insolvency Systems (World Bank and

Brill, 2010)

Zamir, Eyal, Law, Psychology, and Morality: The Role of Loss Aversion (Oxford University

Press, 2014) (forthcoming).

4 Reports/Discussion Papers

ASIC, External administrators’ reports (July 2013 to June 2014) (29 September 2014)

<https://dv8nx270cl59a.cloudfront.net/media/1914730/rep412-published-29-september-

2014.pdf >

Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988)

Australian Securities and Investment Commission, Report 129: Review of s439A reports for

voluntary administrations (2008) <https://dv8nx270cl59a.cloudfront.net/media/1344896/REP

_129_v2.pdf >.

Bowen Chris MP, Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of

External Administration, Discussion Paper (2010)

Corporations and Markets Advisory Committee, Parliament of Australia, Report on

rehabilitating large and complex enterprises in financial difficulties (2004)

CPA Australia, Audit Reports in Australia 2005 – 2013: Preliminary Findings (September

2014) <http://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-

resources/auditing-assurance/australian-audit%20reports-2005-2013.pdf>

73

Department of Finance and Deregulation, ‘Influencing Consumer Behaviour: Improving

Regulatory Design’ (2013)

Financial System Inquiry, Parliament of Australia, Interim Report (2014).

Insolvency Service and Jo Swinson MP, ‘Continuity of supply of essential services to

insolvent businesses’ (8 July 2014) United Kingdom Government <https://www.gov.uk/gove

rnment/uploads/system/uploads/attachment_data/file/328133/Continuity_of_supply_consultat

ion_July_2014.doc>

James, Paul, Ian Ramsay and Polat Siva, ‘Insolvent Trading – An Empirical Study’ (Research

Report No 72, University of Melbourne, 9 June 2004)

Parliamentary Joint Committee on Corporations and Financial Services, ‘Improving

Australia’s Corporate Insolvency Laws’ (Issues Paper, 13 May 2003)

Parliamentary Joint Committee on Corporations and Financial Services, Parliament of

Australia, Corporate Insolvency Laws: A Stocktake (2004)

Senate Economics References Committee, Parliament of Australia, Performance of the

Australian Securities and Investments Commission (2014)

B Cases

A-G (Cth) v Alinta Limited & Ors [2008] HCA 2

Daniels v Anderson (1995) 37 NSWLR 438

Hall v Poolman (2007) 65 ACSR 123

Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722

Lewis and Anor v Doran and Ors [2004] NSWSC 608

Re United Medical Protection & Ors [2003] NSWSC 1031

Sandell v Porter (1966) 115 CLR 666

Southern Cross Interiors v Deputy Commissioner of Taxation (2001) 53 NSWLR 213

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 23 WASC 239

74

C Legislation

Bankruptcy Reform Act of 1978, 11 USC

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth)

HR Rep No 595, 95th Congress, 1st Session (1977)

D Other Sources

1 Newspaper Articles

James Eyers, ‘ASIC Leniency for Business Failure’, Australian Financial Review (Sydney),

28 April 2009

2 Annual Reports

Department of Education, Employment and Workplace Relations, Annual Report 2012-13

(17 October 2013) 88 <https://docs.employment.gov.au/system/files/doc/other/deewr_annual

_report_2012-13.pdf>

General Motors, Annual Report (September 2013) <http://www.gm.com/annualreport/2013_h

ighlights.html>.

3 Evidence to Parliamentary Committees

Evidence to Commonwealth Senate Economics Legislation Committee, Parliament of

Australia, Canberra, 26 February 2014 (Greg Medcraft)

Evidence to Commonwealth Senate Economics References Committee, Parliament of

Australia, Canberra, 19 February 2014 (Alex Malley)

Evidence to Commonwealth Senate Economics References Committee, Parliament of

Australia, Canberra, 2 April 2014 (David Lombe)

75

Evidence to Parliamentary Joint Committee on Corporations and Financial Services,

Parliament of Australia, Canberra, 17 September 2003 (Ron Harmer)

4 Speeches

Craigie, Christopher, ‘Business behaving badly: white collar crime in the 21st century’

(Speech delivered at the 11th International Criminal Law Congress, 10 October 2008)

<http://www.cdpp.gov.au/Director/Speeches/20081010cc.aspx>

Martin, Chief Justice Wayne, ‘Official Opening Address’ (Speech delivered at the Insolvency

Practitioners’ Association of Australia 16th National Conference, Perth, 28 May 2009)

5 Interviews

Interview with Damian Templeton, Partner, KPMG (Telephone Interview, 25 September

2014)

Interview with Damian Templeton, Partner, KPMG (Telephone Interview, 11 September

2014)

Interview with Graeme Blank, Barrister, Henry Parkes Chambers (Canberra, 16 June 2014)

Interview with Greg Shailer, Associate Professor, Australian National University (Canberra,

20 August 2014)

Interview with Michael Murray, Legal Director, Australian Restructuring Insolvency and

Turnaround Association (Telephone Interview, 13 August 2014)

Interview with Michael Murray, Legal Director, Australian Restructuring Insolvency and

Turnaround Association (Telephone Interview, 28 July 2014)

6 Thesis

Forero, Andres, ‘Creditor Committee Composition in Bankruptcy Court: An Empirical

Study’ (PhD Thesis, University of Texas at Austin, 2011)

Neilson, Kathryn, ‘Weathering the Storm: Reforming Australia’s Corporate Insolvency Laws

for the Global Financial Crisis’ (Honours Thesis, Australian National University, 2009)

Purslowe, Ryan, ‘Decisions in the twilight zone of insolvency - Should directors be afforded

a new safe harbour?’ (2011) 13 University of Notre Dame Australia Law Review 113

76

7 Standards

Auditing and Assurance Standards Board, ASA 570 Going Concern (1 January 2010)

<http://www.auasb.gov.au/admin/file/content102/c3/Jul13_Compiled_Auditing_Standard_A

SA_570.pdf>

8 Internet Materials

Australian Restructuring Insolvency and Turnaround Association, The company cannot pay

me, and has gone into liquidation, but the director’s still driving her Porsche… <http://www.

arita.com.au/insolvency-you/item/lists/frequently-asked-questions/the-company-can’t-pay-

me-but-the-director’s-still-driving-a-porsche->

Australian Securities and Investment Commission, Australian insolvency statistics (October

2014) <http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/2004-2014-ASIC-

insolvency-statistics-series-3.3.pdf/$file/2004-2014-ASIC-insolvency-statistics-series-

3.3.pdf>

Australian Securities and Investment Commission, Information Sheet 42 Insolvency: a guide

for directors (December 2008) <http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/I

nsolvency_guide_for_directors.pdf/$file/Insolvency_guide_for_directors.pdf>

Australian Securities and Investment Commission, Regulatory Guide 217 Duty to prevent

insolvent trading: Guide for directors (29 July 2010) <https://www.asic.gov.au/asic/pdflib.ns

f/LookupByFileName/rg217-29July2010.pdf/$file/rg217-29July2010.pdf>

Australian Stock Exchange, Listing Rules (14 April 2014) <http://www.asx.com.au/document

s/rules/Chapter03.PDF>

Bossi, Mark, Are CROs More Powerful than Turnaround Consultants? Creditors Drive

Trend Toward New Title (1 October 2006) Turnaround Management Association Global <htt

p://www.turnaround.org/Publications/Articles.aspx?objectID=6588>

Cheetham, Cameron, Ipso facto clauses and insolvency, Clayton Utz (2 February 2012) <http

://www.claytonutz.com/publications/edition/02_february_2012/20120202/ipso_facto_clauses

_and_insolvency.page>

Fanning, Paul, A Chronology of Ansett Australia’s History, After Ansett <http://www.afteran

sett.com/ansett-australia-history/>

Jackson, Nicholas and Dennis Godfrey, Share Ownership for Non-executive Directors

(February 2013) Godfrey Remuneration Group <http://www.godfreyremuneration.com/docu

ments/130211_RI46_Share_Ownership_for_Non-executive_Directors.pdf>

77

KordaMentha, Ansett Part 5.3A and Chapter 11 (June 2003) <http://www.camac.gov.au/cam

ac/camac.nsf/byHeadline/PDFSubmissions/$file/KordaMentha_301.pdf>

O’Flynn, Karen and Ray Mainsbridge, Voluntary Administration: The Australian Experience

(2008) Clayton Utz <http://claytonutz.com.au/area_of_law/restructuring_and_insolvency/doc

s/VoluntaryAdministration_TheAustralianExperience.pdf>

Sandler, Linda et al, GM Files Bankruptcy to Spin Off More Competitive Firm (Update1)

(1 June 2009) Bloomberg.com <http://www.bloomberg.com/apps/news?pid=newsarchive&si

d=a4brqCWwvYXY>

Treharne, Trevor, Underfunded ASIC admits it is ‘overstretched’ (18 Sep 2012) Insurance

Business <http://www.insurancebusinessonline.com.au/news/underfunded-asic-admits-it-is-

overstretched-143814.aspx>

Westmore, Peter, ANSETT: the Collapse, by Geoff Easdown and Peter Wilms (8 February

2003) NewsWeekly <http://www.newsweekly.com.au/article.php?id=1227>