14 November, 2017
Will Safe Harbour make Australia a restructuring destination of choice, when compared to regimes in other jurisdictions? The reforms might be a step in the right direction, but if Australia truly wants to embrace restructuring law reform it should look to follow Singapore's lead.
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Singapore literally has ticked all the boxes in designing a restructuring friendly series of reforms. 15 years ago, Singapore embarked on a program to become an international arbitration hub. It succeeded. Its next agenda item was to become a regional restructuring hub.
Reforms were developed to make Singapore a more restructuring friendly destination both for domestic and pan-Asian companies. Reforms include super-priority for new debt, statutory cram down and judicial management with specialised courts and trained judges.
The reforms benefit not only local businesses but they serve to attract international business to Singapore. That is exactly what our government should be doing for Australia. Safe Harbour is a step in the right direction but it simply does not go far enough. Australia's reform ambition should be much bolder.
Imitation is the sincerest form of flattery. We should look at what Singapore has done and repeat it. The very best features of international restructuring law should be cherry-picked and adapted and adopted in Australia.
So how does Safe Harbour compare to the US's Chapter 11?
Another frequently asked question, particularly by international funds, relates to the comparison with the Chapter 11 regime in the United States.
The aim of the Safe Harbour reforms is to create a regulatory environment that encourages informal workouts, without the "red tape" that comes with formal Australian restructuring tools, such as voluntary administration and schemes of arrangement.
Safe Harbour, as a debtor-in-possession workout model, has often been likened to its American cousin: Chapter 11. However, this may be where the comparison ends.
Unlike Chapter 11, Safe Harbour is not a Court-controlled process. As such, there is no scope for cramming down dissenting creditors or granting super-priority status for fresh debt.
There will be no moratorium on creditors' enforcement rights during Safe Harbour. Indulgences from financiers and/or counterparties will be by agreement only. Voluntary co-operation by major secured creditors will be essential to ensuring that the turnaround is not derailed by the appointment of a receiver over the company's assets.
Creditors will not vote on matters pertaining to Safe Harbour, including any turnaround plan. In fact, in most instances creditors will not even be given notice that the board has invoked the protection of Safe Harbour and may be trading while insolvent.
At its core, Safe Harbour is designed to give a properly advised board the scope to take calculated risks in the interest of producing a better outcome for the company, rather than immediately invoking a formal insolvency process and suffering value destruction as a result. The reprieve from insolvent trading exposure is intended to promote flexible, efficient and cost-effective turnarounds.
The success of the reforms will depend on the company’s management, stakeholders and advisers to navigate Safe Harbour in a commercial manner. Chapter 11 has been plagued by restrictive judicial interpretation, professional costs, the spectre of board mis management and a flood of shareholder class action litigation. It remains to be seen whether the fledgling Australian debtor oriented framework for restructuring will sink or swim, but the good news is that there is an ocean of difference between Safe Harbour and the less attractive features of Chapter 11.
The Chapter 11 debate in Australia is over. The next debate will be whether we should follow Singapore's lead in restructuring law reform (albeit we are years behind and lack a settled political environment for bold reform).
To show the comparison of restructuring processes in four jurisdictions (available to download at the bottom of the page), we have also compared the United Kingdom which has, like Singapore, taken steps to become more restructuring friendly.
We should do the same. Safe Harbour, whilst positive, does not go anywhere near far enough to make Australia a restructuring hub. There should be bipartisan political support to emulate what Singapore has achieved. It will be good for business in Australia and Australia as a business.
| UNITED STATES CHAPTER 11 |
AUSTRALIA SAFE HARBOUR |
UNITED KINGDOM ADMINISTRATION |
SINGAPORE* JUDICIAL MANAGEMENT |
|
|---|---|---|---|---|
| Court Involvement | Court Controlled process. | None. | Not necessary if commenced out of court by the company, its directors or a secured creditor holding a "qualifying floating charge" by simply filing the requisite papers at the court. Otherwise, a court application is necessary. |
The company (including a foreign one with the requisite nexus to Singapore), it's directors or its creditor(s) may apply to court to appoint a judicial manager. The court has general supervisory oversight over the judicial manager upon appointment. |
| Creditor compromises and cram down | Creditors vote on the reorganisation plan. Impaired classes of creditors must accept by 2/3 in the dollar amount and more than half in number of the voting creditors in that class. If class is deemed to vote against the turnaround plan, the company may seek to effect a “cram down” to confirm the plan. |
Creditors do not vote on the turnaround plan. Creditor compromises will be by express agreement only. There is no formal “cram down” mechanism. | An administrator can use the statutory “cram down” procedures of a scheme of arrangement or a company voluntary arrangement. | Possible. Judicial managers often attempt to reach an arrangement or compromise with creditors to restructure the company’s debts. The arrangement or compromise may be implemented by way of a statutory “cram down” using a court-sanctioned scheme of arrangement. |
| Moratorium on creditor enforcement | Automatic stay provisions (including secured creditors). | No. Business as usual. Notably, secured creditors with security over the whole/substantially the whole of the assets of the company will be able to appoint a receiver. For this reason, it will be critical for the company to actively engage with its secured creditors. Practically the turnaround plan will likely require secured creditor approval. |
Yes. The moratorium stays all legal proceedings, and prevents the enforcement of judgments and security (other than under security financial collateral arrangements) without the leave of the court or the consent of the administrator. The moratorium does not, however, prevent the enforcement of contractual rights (such as the right to terminate the contract upon insolvency of the company). |
Automatic stay starting from the date on which the application is made to the court for the appointment of the judicial manager. Save with leave of court and consent of the judicial manager, the moratorium stays all legal proceedings, prevents the enforcement of judgments and security, and prevents forfeiture or re-entry under any lease of premises occupied by the company. The moratorium also prevents the company from being wound up. However, the moratorium does not prevent the enforcement of self-help remedies such as contractual set-off. |
| Super priority for fresh debt | Debtor may seek Court approval for “DIP” financing that provides for the granting of “priming” liens on encumbered assets, new liens on unencumbered assets and super priority claim status. | No. | No. Whilst an administrator has the power to borrow and encumber assets, no special priority is given to post-administration lenders. Borrowing by an administrator will be an administration expense and will rank above the claims of floating charge holders and behind the claims of fixed charge holders. | Yes, for rescue financing. |
| Notice to creditors | Creditors are able to obtain notice of entry into Chapter 11, by reason of the requirement for a petition to be filed for entry into Chapter 11. | With the exception of publicly listed companies who will need to comply with continuous disclosure requirements (discussed in Weekly Digest [5]), there is no formal requirement to notify creditors. In practical terms, standstill arrangements may need to be negotiated with secured creditors, which will involve informal notification of the company’s position. |
Yes. The administrator must publish their appointment and send a notice of such appointment to each known creditor of the company as soon as reasonably practicable. | Yes. An application for judicial management must be publicised. Creditors secured by a floating charge which entitles them to appoint a receiver of the whole (or substantially the whole) of the company’s property must also be notified. In addition, upon appointment of the judicial manager, the company’s invoices, purchase orders and letterhead must all contain a statement informing of the judicial management. |
| Employee Entitlements | As a general rule, all members in a class must be treated equally. Limited priority status for certain employee wage claims only. | Along with tax reporting obligations, the company must be able to pay employee entitlements (including superannuation) throughout the duration of Safe Harbour. | Employment contracts do not terminate automatically. Administrators have 14 days from their appointment to “adopt” an employment contract or to dismiss the employee. If the employee is dismissed, any redundancy costs are an unsecured claim (subject to a capped preferential claim). If the employee is kept on, his salary (but not any subsequent redundancy costs) will be an expense of the administration and be paid in priority to the administrator’s own remuneration. |
The company’s employees must be paid their salary and entitlements during the course of the judicial management, but this is not done in priority to other payments. However, in practice, an order of court is usually sought to give employees preferred creditor status with respect to their pre-judicial management claims. |
Download comparison table by clicking here (PDF .03MB).
Contributors: Meredith Bennett (Partner, Australia), Michael Sloan (Partner, Australia) and Jean Woo (Partner, Singapore); Anna Langton (Counsel, London); Dawn Tan (Managing Director, Ashurst ADTLaw), Lifen Tang (Director, Ashurst ADTLaw) and Adriel Chan (Senior Associate, Ashurst ADTLaw).
*Ashurst ADTLaw is a formal law alliance between Ashurst LLP and ADTLaw LLC in Singapore. Together, we offer seamless English and Singapore law advice in our banking & finance, derivatives, corporate, projects, employment and arbitration practice areas. ADTLaw LLC has an established Singapore law litigation practice.
For further information, please contact:
Meredith Bennett, Partner, Ashurst
meredith.bennett@ashurst.com
