Herbert Smith Freehills’ restructuring, turnaround and insolvency team has supported the Turnaround Management Association of Australia (the TMA) in considering and preparing the TMA’s submissions in response to the Australian Government’s consultation paper Helping Companies Restructure By Improving Schemes of Arrangement (the Consultation Paper).
On 2 August 2021, the Treasury released a consultation paper seeking feedback on changes to improve creditors’ schemes of arrangement in Australia. The submissions process has now closed.
The TMA submissions dated 17 September 2021 (the TMA Submissions) provided an considered and in-depth response to the Consultation Paper, reviewing the current use of creditors’ schemes of arrangement in Australia, considering the lessons from similar international reforms and recommending a number of reforms that should (and should not) be undertaken in Australia.
The TMA Submissions are available here.
Overview of the TMA Submissions
The TMA Submissions include:
- operation of creditors’ schemes in Australia: an explanation of how creditors’ schemes of arrangement are actually used in Australia, and in particular an examination of their role as part of the broader “out-of-court” restructuring process;
- international comparisons: an overview of recent law reforms undertaken in Singapore and the United Kingdom in respect of creditors’ schemes of arrangements, including the approach taken in those jurisdictions to moratoriums, cross-class cram downs and rescue financing;
- scheme automatic moratorium: discussion as to:
- why there is no apparent need for an automatic “debtor-in-possession” moratorium in respect of creditors’ schemes in Australia;
- the existing power for the court to restrain proceedings under section 411(16), and potential further adjustments to that provision;
- the fact that a scheme moratorium is essentially introduction of a new “debtor-in-possession” regime tied to creditors’ schemes of arrangements;
- the safeguards and creditor protections that would be needed if such a moratorium was to be adopted;
- the considerations that would need to be addressed in respect of transactions occurring during the moratorium period;
- the disclosure and transparency issues that would need to be addressed in respect of any debtor-in-possession moratorium;
- the credit market considerations in respect of any such moratorium;
- the potential for a broad ranging automatic moratorium to damage and disrupt the business;
- why the TMA considers that it would be more appropriate to consider a “standalone” debtor-in-possession regime rather than “bolting-on” a broad debtor-in-possession moratorium to the existing creditors’ scheme of arrangement process (but that this would need further more holistic review of the entire Australian insolvency and restructuring framework);
- cross-class cram downs: why an ability to “cram down” dissenting classes of creditors and shareholders would be beneficial mechanism to introduce in Australia (with appropriate protections), and why the TMA supports introduction of a cross-class cram down mechanism in Australia based on the UK’s new Part 26A “restructuring plan”;
- other reforms: a selection of other reforms which the TMA considers would improve creditors’ schemes of arrangement in Australia, including:
- practice statements: the introduction of a practice statement (modelled on the UK version) providing for improved disclosure to creditors ahead of the first court hearing by way of a practice statement letter;
- streamlining ASIC review: streamlining the ASIC review process, by shortening the review period and allowing ASIC to benefit from the practice statement letter;
- extended jurisdiction: extending the jurisdiction of Australian Courts to allow Australian creditors’ schemes to be undertaken by foreign companies with “sufficient connection” to Australia;
- public disclosure: public disclosure of explanatory statements (through ASIC lodgement requirements) to promote transparency, consistency and open access to justice;
- voting: removal of the requirement for schemes to be approved by 50% of each class of creditors by number voting on the proposal approve the scheme (but retaining the requirement that 75% by value approve the scheme);
- pre-packaged schemes: considering introduction of “pre-packaged” schemes of arrangement (similar to those introduced in Singapore) to allow quicker, cheaper and more efficient scheme processes where the requisite majority of creditors have already committed to support the scheme and the meeting is a forgone conclusion (and subject to appropriate disclosures); and
- rescue financing: an explanation as to why priority or rescue financing regimes are not a “silver bullet”, and why simply adopting a US or Singapore model is unlikely to make a significant difference to the availability of such funding in Australia (but that this topic is worthy of further consideration as part of a broader review process).
The TMA working group
The TMA working group preparing the TMA Submissions was comprised of:
- Paul Apathy, TMA Australia Director (Partner, Herbert Smith Freehills)
- Angus Dick (Solicitor, Herbert Smith Freehills)
- Jennifer Ball, TMA Australia Director (Partner, Clayton Utz)
- Alinta Kemeny (Partner, Ashurst)
- Maria O’Brien, TMA Australia President (Partner, Baker McKenzie)
Also involved were Andrew Rich, Natasha McHattan, William Chew, Mitchell Brunker and Stephanie Rowell (of Herbert Smith Freehills); Grace Lancaster and Lachlan Patey (of Clayton Utz); and Bernice Chen and Alasdair Huggett (of Ashurst).
We look forward to further opportunities to engage with Treasury and other stakeholders in this area as Treasury considers stakeholder submissions and what law reforms would be appropriate in Australia.