WIN In-House Counsel Day Sydney

Transcription

1 WIN In-House Counsel Day Sydney Tuesday 22 March 2016 DEALING WITH A COMPANY IN CRISIS AMELIA KELLY

2 Introduction Advising in a distressed situation Australia has some of the harshest insolvency laws in the world with an emphasis on penalty rather than turnaround In-house counsel are often placed in an invidious position of having to manage their board in a time critical and strained context while performing their duties to the highest standard The purpose of today is to provide an outline of the insolvency regime in Australia and some insights to managing a crisis situation Overview of Australian insolvency laws - Voluntary Administration, Deeds of Company Arrangement and Liquidation The meaning of insolvency Directors' personal liability Insolvent Trading Taxation D&O Other personal liability Barriers to saving a company Law Reform In-house counsel's potential personal exposure Practical Tips for dealing with the Board WIN In-House Counsel Day, Sydney Tuesday 22 March

3 Overview of Australia's Insolvency Laws Six types of insolvency administrations or appointments: Receivership - primarily focused on realising the value of specific assets for secured creditors (usually financiers) Voluntary Administration -- provides breathing space to allow an insolvent company time to consider its future (and for the directors to avoid liability for insolvent trading) Deeds of Company Arrangement (DoCAs) - implement a plan to save an insolvent company or, at least, deliver its creditors a better deal than liquidation. Provisional Liquidation -an interim administration to maintain the status quo in circumstances where there is a risk to assets while winding up orders are pending Liquidation - generally the end game where a company s affairs are wound up with a view to deregistration Schemes of Arrangement a Court supervised process by which the debt and equity in a company can be restructured with 50% of creditors supporting holding 75% of value. can be solvent or insolvent WIN In-House Counsel Day, Sydney Tuesday 22 March

4 Voluntary Administration Purpose of Administration Part 5.3A was introduced into the Corporations Act in 1993 with the object of providing (s.435a): for the business, property and affairs of an insolvent company to be administered in a way that: maximises the chances of the company, or as much as possible of its business, continuing in existence; or if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors than would result from an immediate winding of the company. Appointment of Administrator and power of directors An administrator is usually appointed by the directors after a declaration of insolvency, but may be appointed by a secured creditor or a liquidator. The administrator is an officer of the company. The powers of directors are suspended during the administration. Outcome of Administration Voluntary administration involves the imposition of a short term moratorium, while the administrator investigates the affairs of the company and reports to the creditors with a recommendation for the future of the company that it: return to its directors (uncommon); be wound up and the VA be appointed liquidator; or enter into a deed of company arrangement. WIN In-House Counsel Day, Sydney Tuesday 22 March

5 Voluntary Administration Moratorium on creditor action Moratorium prevents recovery or enforcement action being taken against the company while in administration, except with the consent of the administrator or leave of the court; However, a secured creditor with a charge over the whole, or substantially the whole, of the company s property may appoint a receiver provided it does so within 13 business days; The moratorium will prevent a lessor or owner of property from taking possession of the property without the administrator s consent or leave of the court. Secured property The administrator (VA) is not permitted to dispose of property that is subject to a charge or which is owned by someone else, unless the disposal: is in the ordinary course of the company s business; is consented to by the chargee or owner; or is with the leave of the court. WIN In-House Counsel Day, Sydney Tuesday 22 March

6 Voluntary Administration Meetings of creditors First meeting - within eight business days of commencement. Purpose for creditors to appoint a committee of creditors if appropriate, and an opportunity to remove the VA and appoint another. Second meeting - within a window of five days of the expiry of the convening period, which is three to five weeks from commencement, subject to any court ordered extension. Purpose - for creditors to vote on company s future (liquidation, DoCA or return to directors) and thereby bring the administration to an end Creditors vote to wind up company VA becomes the liquidator of the company. Company wound up as if it were a voluntary liquidation commencing on the date of the appointment of the VA. Creditors vote to execute a DOCA WIN In-House Counsel Day, Sydney Tuesday 22 March

7 DOCAS If Creditors vote in favour of a DoCA VA becomes the deed administrator (in most cases). Purpose of DoCA - to provide a vehicle to restructure the affairs of the company and/or a means of maximising the benefits to the creditors. DoCA binds all creditors debts, except secured creditors, lessors and owners of property in respect of their proprietary / security rights, unless those creditors vote in favour of the DoCA. Secured creditors/lessors rights may be limited by court orders. DoCAs generally After a DoCA is executed, the deed administrator has the responsibility to put the DoCA into effect and will be granted powers under the terms of the DoCA to do that. The suspension of the directors powers comes to an end with the end of the administration - the directors powers are restored to them, but subject to the terms of the DoCA (usually limits the directors powers in any event). Flexible tool to deal with variety of classes of creditors and lead to the survival and restructure of the business. Avoids liquidation which is the only process where director's personal liability becomes an issue WIN In-House Counsel Day, Sydney Tuesday 22 March

8 Liquidation Forms of Liquidation Liquidation is the process of winding up the affairs of the company by collecting and realising its assets, discharging its debts and liabilities and distributing any balance to creditors. Liquidation can involve claims against directors and usually is a last resort. Compulsory (court ordered) winding up A Court may order the winding up of an insolvent company on an application made by the company, a creditor, a debenture holder, a contributory, a director, a liquidator, ASIC, prescribed agencies (eg APRA) and receivers. Voluntary winding up members voluntary winding up (solvent companies only); or creditors voluntary winding up (where company insolvent) usually following a voluntary administration. Liquidator s functions: take possession and realise the company s assets ascertain the company s liabilities apply the company s assets towards payment of the cost of liquidation and distribute any balance equitably among the creditors examine the circumstances which precipitated the liquidation and identify improper dispositions of property and offences bring about the dissolution of the company WIN In-House Counsel Day, Sydney Tuesday 22 March

9 Liquidation Liquidator s duties preparing various reports to creditors and regulators carrying out an impartial investigation of the company s affairs keeping proper books and records collecting the companies assets fiduciary duties: (a) to act honestly; (b) to avoid a conflict of interest; and (c) to act impartially sections 180 to 183 duties (as per directors of a company) Liquidator s powers carry on the company s business (but only as so far as necessary for the beneficial disposal of the assets) bring legal proceedings enter agreements (but subject to creditor approval in certain circumstances) power of sale power to execute documents investigation WIN In-House Counsel Day, Sydney Tuesday 22 March

10 Liquidation Effect of Liquidation Directors Directors do not lose office but their powers are suspended and can act only with the written approval of the liquidator or the Court Required to deliver up books and records to the liquidator Members Members become contributories and are subject to a call on unpaid capital No transfer of shares unless the Court orders otherwise (compulsory liquidation) or consent of liquidator (voluntary liquidation) Creditors Unsecured creditors cannot proceed against company without leave of the court (not readily granted) Secured creditors can enforce security (eg appoint receiver, take possession of secured property) Employees Dismissed upon publication of court order to wind up (cf voluntary liquidation resolution to wind up does not necessarily, of itself, dismiss the employees) Contracts Liquidation does not necessarily constitute grounds to terminate or a repudiation of contract depends on contract and circumstances WIN In-House Counsel Day, Sydney Tuesday 22 March

11 Liquidation Certain pre-liquidation transactions certain company transactions which occurred prior to the winding up become voidable at the election of the liquidator and may be set aside or varied. a transaction will be voidable under Part 5.7B if it is: an uncommercial transaction or an unfair preference that, in either case, satisfies another condition of being an insolvent transaction; or an unfair loan. complex rules and various relation back periods regulate when a transaction may be voidable and the creditor is required to disgorge to the liquidator the benefit from the transaction. Insolvent trading and breach of duty Proof of debt process creditors lodge proofs of debt creditors have a right to appeal to the Court if proof is rejected in whole or in part. Distribution of assets prescribed order of payment of debts - all unsecured creditors rank equally and are paid rateably, but subject to a statutory order of priority (broadly) that first addresses such claims as the liquidator s expenses and remuneration, employee entitlements and redundancy payments. any surplus is paid to the contributories/members. WIN In-House Counsel Day, Sydney Tuesday 22 March

12 Meaning of Insolvent Section 95A of the Corporations Act a company is insolvent if it is unable to pay all of its debts as and when they become due and payable. Cash flow test rather than balance sheet test but there is some overlap The Bell Group Ltd (in liq) v Westpac Banking Corporation & Ors [No 9] [2008] WASC 239 "In the light of commercial reality, all things considered, could the company pay its debts as and when they become due? Such an approach includes the balance sheet test, and other commercial realities such as access to money from third parties, raising capital or credit and financial support are all relevant considerations in determining a company's ability to pay debts" Future debts The test is when the debt is incurred rather than due. For example, the time the contract is entered Large debts on the horizon touchstone is 'reasonableness'. Accurate cashflows and forecasts become critical Must be quantifiable and voluntarily entered For example, not unliquidated damages Cash flow Sale of assets proceeds are taken into account if it is reasonable to believe sale achievable borrowings long term v short term trading proceeds support from related creditors legally binding, past conduct, clearly defined assurance, likely to eventuate WIN In-House Counsel Day, Sydney Tuesday 22 March

13 Directors' Personal Liability Insolvent Trading Insolvent Trading - Section 588G Corporations Act 2001 (Cth) A director will engage in insolvent trading if the company incurs a debt and: the company is insolvent at the time of incurring the debt or becomes insolvent by incurring the debt; at the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent or will become insolvent; the director is aware of such grounds or a reasonable person in a like position in a company in the circumstances of the company would be so aware; and the director fails to prevent the company from incurring the debt. Penalties: Pecuniary penalty up to $200,000 (ASIC). Disqualification order preventing director from taking part in the management of companies (ASIC). Compensation in the amount equal to the debts incurred in contravention of the section. (liquidator, creditor, or ASIC). Criminal Liability where actual suspicion of insolvency and dishonesty, criminal liability may apply with a fine of up to $200,000 or imprisonment for up to five years, or both. WIN In-House Counsel Day, Sydney Tuesday 22 March

14 Directors' Personal Liability Insolvent Trading Reasonable grounds for suspecting insolvency low threshold suspect rather than expect. Reasonable means an objective test not subjective reasonably knowable financial circumstances rather than actual knowledge. Extension of liability to non appointed directors shadow directors - while not appointed they purport to act as a director or the directors are accustom to act in accordance with their wishes or instructions. Only an individual can be a shadow director (Grimaldi v Chameleon Mining NL (No 2)). parent company - a holding company which controls more than half of the voting rights, or hold more than 50% of the issued shares can be liable for insolvent trading under s. 588V if (among other things) the parent, or one or more of its directors, was aware at the time that the debt is incurred that there are grounds for suspecting the subsidiary's insolvency; or having regard to the nature and extent of the parent's control over the subsidiary's affairs and to any other relevant circumstances, it is reasonable to expect awareness. Defences Expected Solvency - Director had reasonable grounds to expect solvency and did expect solvency when debt incurred required to show active management. Reasonable reliance on information supplied by a subordinate - director had reasonable grounds to believe and did believe that the person delegated to provide information was supplying adequate information, fulfilling their responsibility and no grounds to suspect information inaccurate. Ill health or good reason the director did not take part in management of company for good reason. Reasonable steps to prevent incurrence of debt positive duty to take preventative steps, eg tried to stop it Relief from liability section 1318 director acted honestly and having regard to all circumstances ought fairly be excused. WIN In-House Counsel Day, Sydney Tuesday 22 March

15 Directors' personal liability - Taxation Tax debts PAYG and SGC PAYG - Companies are required to withhold PAYG tax from wages and remit the amount to the ATO under the pay as you go (PAYG) withholding system, the Income Tax Assessment Act Superannuation Guarantee Charge Companies are required to pay to the ATO a SGC under the Superannuation Guarantee (Administration) Act 1992 (SGA Act). Director Penalty Notices If a company fails to comply with their obligations directors are personally liable for those amounts. The director becomes liable to a penalty at the end of the day the company is due to meet its obligation - the penalty is automatic. The ATO does not need to issue a DPN for the liability to arise. However, enforcement proceedings can only be brought 21 days after a DPN is issued to a director. Defences illness or another acceptable reason - the director was not managing the company at the time the liability was incurred - it is unreasonable to expect (the director) to take part due to illness (theirs or someone else s) or some other good reason. reasonable steps the director took all reasonable steps to make the company to meet its obligation or (b) appoint an administrator or (c) wind up the company. Preferences repaid by ATO Section 588FGA - directors are liable to the ATO for payments made by a company to the ATO that are set aside as preferences and refunded to the liquidator. Directors will be liable to the ATO to reimburse the preferential payment and any costs the ATO is ordered to pay to the liquidator. Liability extends all directors at the time of the original payment to the ATO even if they resign prior to the winding up. WIN In-House Counsel Day, Sydney Tuesday 22 March

16 Directors' personal liability D&O Restrictions on Company indemnifying directors Prohibition on Company indemnifying officers insuring for wilful breach s. 199A-C: A company cannot indemnify directors and officers, other than for legal costs, for a liability incurred by the director (a) owed to the company or a related body corporate; (b) for a pecuniary penalty order or a compensation order for a breach of certain provisions (including the insolvent trading provisions); or (c) owed to someone other than the company and arose out of bad faith. Insuring Directors Sections 199B and 199C - a company is prohibited from paying, or agreeing to pay, the premium for insurance of an officer against a liability (other than for legal costs) arising out of: conduct involving a wilful breach of duty in relation to the company; or a contravention of section 182 or 183 (which relate to directors' use of position and use of information). D&O Policy A D&O policy will not cover a director or officer for liability incurred for insolvent trading where such a contravention is a criminal offence ie committed as a result of a wilful breach or deceit. A D&O policies will only cover the liability of directors or officers which is incurred under a civil penalty provision, such as an imposition of a fine or the requirement to pay compensation to the company rather than criminal. WIN In-House Counsel Day, Sydney Tuesday 22 March

17 Directors' personal liability Duties to creditors Walker v Wimborne (1976) duty upon reaching insolvency Directors of a company in distress breached their duties in authorising a loan to a related company that was in financial difficulties and unable to repay the loan. Justice Mason found that the transaction prejudiced the company s unsecured creditors. He held that: The directors of a company in discharging their duty to the company must take account of the interests of its shareholders and creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The Bell Group Ltd (in liq) v Westpac Banking Corporation The restructuring of financing arrangements which limited the pool of assets available to creditors upon liquidation was found to be a breach of the directors fiduciary duties. The duties owed by directors to creditors was extended: In such a circumstance of insolvency the directors would fail to discharge their duty to act in the best interests of that company if they caused the company to prejudice the interests of its creditors Director duties - sections the duty to exercise powers and duties with the care and diligence that a reasonable person including taking steps to be properly informed about the financial position of the company the duty to exercise powers and duties in good faith in the best interests of the company and for a proper purpose the duty not to improperly use position to gain an advantage or to cause detriment to the company, and the duty not to improperly use information obtained through the position to gain an advantage for yourself or someone else, or to cause detriment to the company. The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company The director's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. WIN In-House Counsel Day, Sydney Tuesday 22 March

18 Barriers to saving company Insolvent trading laws to avoid personal liability company placed in external administration Duties on insolvency practitioners sale duties process to achieve market value or best possible price. sale process, marketing campaign Loss of value reputational stigma associated with formal appointments terminating contractors - ipso facto clauses Power of secured creditors usually security over all assets and control any solution may appoint receivers Mismanagement or personality issues WIN In-House Counsel Day, Sydney Tuesday 22 March

19 Law Reform Law reform announced December 2015 In December 2015, the Australian Government announced that it would significantly reform Australia s current insolvency laws by mid The reforms are intended to achieve greater likelihood of business preservation by introducing the flexibility to achieve real turnaround of businesses in crisis. Proposed changes reduction of the bankruptcy period from three to one year introduction of a safe harbour for directors to avoid personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company ipso facto clauses (which allow contracts to be terminated solely due to an insolvency event), unenforceable if a company is undertaking a restructure. WIN In-House Counsel Day, Sydney Tuesday 22 March

20 Law Reform Safe Harbour Defence to insolvent trading If company makes and records a decision to appoint an adviser with a view to constructing a turnaround plan directors will have a defence to insolvent trading a safe harbour. the defence will commence from the date of the appointment of the adviser. Appropriate adviser the adviser must be registered and must have at least 5 years experience as an insolvency and turnaround practitioner. Solvency at the time of the appointment the company must be solvent (this must be certified by the adviser), although it can become insolvent during the safe harbour period. the appointment must be for the express purpose of providing restructuring advice focused on the company s continued solvency and viability. Moratorium Moratorium on enforcement action during period of restructure. Implementation the adviser to certify within one month that there are reasonable grounds to believe that the company is capable of being viable - the adviser will end their appointment if the company is no longer viable. the directors must demonstrate that they took all reasonable steps to pursue the restructuring as advised by the adviser. the safe harbour will end once the restructure has been implemented or the appointment has ceased. True reform? While the defence exists during the safe harbour period the requirement of solvency minimises use WIN In-House Counsel Day, Sydney Tuesday 22 March

21 Law Reform - Ipso Facto Clauses Ipso facto clauses permit the termination of a contract where an insolvency event has occurred even if there is no breach of contact proposed moratorium on the exercise of right under the ipso facto clause In favour of Reforms exercise of such rights - can cause company collapse eg major suppliers, customers termination puts contractor in a superior position to other creditors dissipates value possibly prevents ability to restructure business as a going concern Against Reforms interference with freely-negotiated contracts; re-write contracts to circumvent prohibition leaves a contractor exposed to dealing with a company without sufficient safe guards for its financial interest- Leases in voluntary administration and VA's personal liability for rent. VA is liable for debts they incur True reform? suppliers will still supply in an insolvency context as VAs have personal liability. WIN In-House Counsel Day, Sydney Tuesday 22 March

22 In-house counsel exposure Potential officer perform a legal role but are close to the objectives and strategy of the company. in some circumstances in-house counsel are central to the decision making process even if not the ultimate decision maker. likelihood that in-house counsel can be viewed as an officer under the Act. can hold dual roles eg Company secretary recent examples where ASIC and Liquidators pursue in-house counsel eg James Hardie case, Tinkler Group Insolvent trading only directors however often accompanied by breach of duty claims Potentially viewed as shadow director although less common Buzzle v Apple Be aware of giving guidance rather than participating in decisions Maintaining independence and distance Insolvency context is highly charged, fast moving and time critical Pressures to provide advice that directors want to hear Complex area and difficult questions are we insolvent, can a certain restructure be done, personal liability asked to scrutinise information to ensure not misleading or omissions define and document role and advice Proactive and fearless in identifying risk Often in-house counsel will see risks before others proactive in-house counsel can identify risk and implement strategy to enable sufficient time to properly restructure WIN In-House Counsel Day, Sydney Tuesday 22 March

23 Practical tips for advising the Board Managing the board and different personalities 'head in the sand' approach; pessimist v optimist board should be proactive and act quickly Increased monitoring financial position should be monitored closely bank facilities, cash flow, assets, liabilities danger signs include continuing losses, liquidity ratio scores, creditor stretch, ATO payments Planning have a plan A (for example a sale or capital raise); a plan B (debt injection) and a plan C Uncertainty in circumstances as to what will / will not be achievable Appoint advisers early accountant to assist with cash flow restructuring practitioner with turn around experience legal advisers assists in-house counsel and a good point of reference Independent legal advice to directors external advisers will be acting for the company directors have different interests to the company's so independent legal advice is essential WIN In-House Counsel Day, Sydney Tuesday 22 March

24 Practical tips for advising board Liaising with stakeholders Determine stakeholders value how important are they to the business what impact could they have on the business going forward Key stakeholders financiers, major creditors, employees, unions, landlords, customers, shareholders Financiers key is transparency and trust - financiers hate surprises negotiating stand stills, forbearances S. 588FJ - A circulating security interest (floating charge) to secure a past debt within 6 months of relation back day void S. 588FL - A charge for good consideration entered within 6 months before relation back day AND not registered on PPSR within 20 business days void against liquidator Creditors maintaining confidence, implementing mutually satisfactory regime with suppliers (eg COD) Shareholders rise of class actions, misleading and deceptive conduct adequate and critical market disclosure Managing reputation risks destruction of value (b) ongoing business (c) communications team / media adviser / crisis management WIN In-House Counsel Day, Sydney Tuesday 22 March

25 Amelia Kelly Partner, Restructuring Scott Harris Partner, Restructuring