News & Insights

introduction

On 3 May 2021, the Treasurer and Assistant Treasurer of Australia announced that, as part of Australia’s economic recovery plan, the Government would be reviewing further aspects of the insolvency laws including to “consult on improving schemes of arrangement processes to better support businesses, including by introducing a moratorium on creditor enforcement whilst schemes are being negotiated.”

The emphasis on “improving” schemes of arrangement implies that the Government will not be adopting wholesale reform in the form of new laws similar to the Chapter 11 Laws in the United States, but rather will retain at least the core of the law relating to schemes of arrangement.

moratorium on creditor enforcement

The emphasis in the announcement on introducing a moratorium on creditor enforcement whilst schemes of arrangement are being negotiated is surprising considering the so called “ipso facto” regime which came into effect on 1 July 2018.

This provides, amongst other things, a stay on enforcement provisions in contracts entered on or after that date, where a scheme of arrangement is proposed for the purpose of avoiding an insolvent winding up. There are number of exemptions from the regime including syndicated loans, bonds and promissory notes, as well as the right of an all assets secured creditor to appoint a receiver or other controller to an asset where a scheme to avoid an insolvent winding up has been proposed. The explanatory memorandum to the declaration indicates that the latter exception is intended to prevent a company from frustrating an all asset secured creditor from exercising its rights by proposing a scheme of arrangement.

While there is no doubt scope to broaden the scope of the “ipso facto” regime, it appears that the various exceptions have been carefully considered, and it seems unlikely that a blanket moratorium approach would be adopted.

other reforms

The announcement anticipates that other reforms to schemes of arrangement could be made.

Schemes of arrangement have a significant benefit in that they are a so called “debtor in possession” regime – that is to say, the company’s board and management remain in control of the company during the scheme process rather than handing that control to a third party under an administration.

Nevertheless, creditors schemes of arrangement are sparingly used due to certain key impediments:

• Approval threshold – each class of creditors is required to be dealt with separately with the level of approval required for each class being more than 50% in number of creditors representing more than 75% in value of the applicable debts. While this threshold relates to creditors voting at a creditors’ meeting personally or by proxy, it still represents quite a high threshold which acts as a deterrence to companies embarking on what is a time consuming and costly exercise.
• Supervision by the Court – that embarking on a scheme of arrangement is a time consuming and costly exercise is largely due to the requirement that the process be supervised by the Court. This involves two Court hearings. At the first, the Court reviews and approves the scheme documents having determined that the proposal is fair and reasonable to each affected class of creditors. At the second hearing the Court satisfies itself that the scheme meeting has been properly conducted and that the resolutions comprising the scheme have been validly passed. The Court then orders that the scheme be implemented. The Court may entertain objections at both the first and the second Court hearings. Nevertheless, Australian Securities and Investments Commission is intimately involved in the process and reviews and approves the scheme documents before they are submitted to the Court. Given this, and given also that the matters dealt with at the second Court hearing are of an administrative nature, it would introduce a great deal of efficiency to the process to have schemes of arrangement supervised by ASIC rather than by the Court. Any party wishing to object could, of course, do so initially to ASIC and then apply to the Court for relief if it was not satisfied. Alternatively, a statutory body such as the Takeovers Panel could be established to determine disputes and objections concerning schemes of arrangement.

conclusion

Under the current regime creditors schemes of arrangement are expensive and time consuming. This coupled with the high approval threshold means that schemes of arrangement are rarely used to restructure company debt, and then only by large companies who can afford to do so.

The main advantage of schemes of arrangement is that the company’s board and management retain control of the company during the process. This is now widely regarded as being of benefit to the company and its creditors, including by the Government.

If wholesale reform is not proposed, then reform should at least address the key deterrents to the use of schemes of arrangement, particularly by smaller companies.