The Commonwealth Government intends to consult on “improving schemes of arrangement processes to better support businesses, including by introducing a moratorium on creditor enforcement while schemes are being negotiated”. Changes in this direction may make Schemes more attractive, particularly for larger companies.
The main way that Australian companies can restructure their operations and balance sheets in a way that is binding on all creditors is through a Deed of Company Arrangement (DOCA). A DOCA follows from Voluntary Administration (VA). Alongside the VA/DOCA process, however, there is also the option of a Scheme of Arrangement process (Scheme), which has formed part of Companies Legislation for over 100 years. Similarities and differences between the two processes are as follows:
The VA/DOCA model is a ‘one size fits all’ regime, applying to all sizes of company. The VA regime can be unattractive to business owners, however, due to the uncertainty involved in giving up control to administrators (who are insolvency practitioners) and the burden of administrators’ fees incurred as a necessary part of the VA/DOCA process.
By contrast, Schemes see directors and management remain in control and do not involve administrators’ fees. The Scheme process can be expensive for other reasons, however, and in recent years its use has primarily been restricted to larger companies.
Effects of the Proposal
Whilst the ipso facto provisions apply, a company seeking to negotiate a Scheme is still subject to the whims of unsecured creditors, however, who can commence enforcement processes that can disrupt an orderly reorganisation in the interests of all creditors. The moratorium provisions in a VA, by contrast, help to prevent this.
The consultation announced on Schemes suggests the Government is looking to introduce a moratorium on enforcement as part of the Scheme process. This will make Schemes even more attractive for larger companies and may see, ultimately, a decline in the use of the VA/DOCA process.
Cowell Clarke has comprehensive experience in advising parties on insolvency matters and also in acting for companies putting forward Schemes of Arrangement.
Please contact us if you would like to discuss any matters in this regard.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.