Today, the Australian Financial Review shared details of our proposal to reform the recapitalisation process in Australia to something much more focused on efficient, solvent outcomes that preserve value. 

Source: Australian Financial Review

 

A SHARP way to help directors save distressed firms

Giving directors the protection from insolvent trading they need to rescue struggling companies will help the broader economy through the COVID-19 fallout. 

While Virgin Australia's fall in administration justifiably hogged the headlines last week, an ASX collapse that received far less attention provided a window into the problems with how insolvencies operate in Australia.

Late last week, the controversial ASX-listed satellite communications business Speedcast announced to the ASX that it too was insolvent. But instead of entering administration or receivership in Australia, it chose to file for Chapter 11 bankruptcy protection in the US.

A better process for saving companies will be needed in a post-COVID world.  

Chris Wyke, a restructuring expert and the joint chief executive of ASX-listed advisory firm Moelis Australia, says Speedcast’s decision to prefer America’s insolvency regime speaks to the difficulties that listed entities and large companies face in trying to save their businesses under Australia’s insolvency laws.

While directors have been given a six-month reprieve from Australia’s strict insolvent trading laws to help weather the COVID-19 crisis, Wyke says the economic fallout will be spread over two or three years, making longer-term reform crucial.

Moelis, which Eikon SDC Platinum ranks as the top adviser in restructuring and special situations with a 70 per cent market share, has been involved in several high profile rescues in recent years, including Slater & Gordon, Oroton, Ten Network and Billabong.

It’s this experience, and Wyke’s concern about the economic pain coming for many companies, that has seen Moelis hold talks with Treasury about a new process designed to give directors a better chance to complete company-saving recapitalisations.

Its proposal for a new body called the Safe Harbour Asset Recapitalisation Panel (SHARP) has been driven by what Wyke sees as the biggest factor leading directors to declare a company insolvent rather than working towards a recapitalisation – their fear of the personal liability they face if found to have traded while insolvent.

Under the SHARP proposal, directors of ASX companies and large listed vehicles that are in financial distress would be able to seek protection from those liabilities by taking their recapitalisation proposal to the panel. It would examine the company’s chance of survival, look at the fairness of the proposal to various stakeholders (such as creditors and debt holders), and assess the prospects of the company continuing as a going concern.

Each panel would include a company director (preferably with experience in restructures), a corporate lawyer, an insolvency professional and an adviser, such as an investment banker, corporate adviser or capital markets specialist. In this way, the panel would call on a roster of experts in much the same way that the highly successful Takeovers Panel does.

The panel could seek further submissions from the company or various stakeholders as part of this process. Stakeholders of a distressed firm would also have the ability to apply to SHARP, to ask the panel to explore whether directors are thinking carefully about reconstruction.

SHARP would not have the power to force a recapitalisation proposal on a company, but can help a company shape an existing proposal.

And where a proposal is approved, the panel’s blessing would provide the company’s directors with protection from insolvent trading liabilities while they attempt to execute the plan.

Wyke emphasises that the panel proposal is not designed to override existing insolvency mechanisms or the legal rights of stakeholders. Instead, it is designed to offer a legal safety net for directors – the people who know the company best – to properly focus on reconstruction, and not simply throw away the keys because they are concerned about their personal liability.

Wyke says discussions with Treasury have been constructive. It should be noted that this is one of several proposals from insolvency and reconstruction experts, who can see the potential for a wave of COVID-19 collapses, and want to help save as many companies as possible.

What’s becoming clear is many insiders believe that while rigorous, Australia’s insolvency regime has become more focused attributing blame than actually rescuing businesses.

While the COVID crisis won’t make reform easy, it has shown why it’s needed.