Informal deeds of arrangement

09 September 2015

We have recently become aware of situations in which individuals who are not registered insolvency practitioners provide advice to directors to either:

• transfer the underlying business and assets to a new entity which then continues to operate under the control of the same director(s); or
• seek to negotiate a moratorium on all debts due to creditors.

These individuals then purport to take control of the insolvent company and convene meetings of creditors to consider proposals to repay creditors’ debts. The reports sent to creditors look very similar to a formal report from a registered insolvency practitioner and utilise the standard proof of debt form from the Corporations Act 2001 (“the Act”) with section references removed.

As you may be aware, the voluntary administration process contained in the Act provides an insolvent company with an opportunity to restructure its affairs for long term viability. In summary, the voluntary administration process provides for:

• the appointment of an independent, experienced insolvency practitioner (registered with ASIC) to take control of the company’s operations;
• a moratorium on action by creditors (except secured creditors);
• an opportunity for the company’s director(s) to restructure the company and propose an arrangement with creditors;
• an independent assessment of the proposal for a deed of company arrangement by the appointed insolvency practitioner a formal recommendation by the insolvency practitioner as to whether it would be in the interests of creditors to accept the proposal;
• all unsecured creditors to be bound by the decision of the majority of creditors as to the company’s future.

Why should you or your clients be concerned?

If you or your clients receive a report of this nature, please proceed with caution. In our view creditors may be misled in that:

• the reports are prepared by individuals who are merely advocating for the company to ensure a deal is brokered between the company and its creditors;
• the reports sent to creditors do not provide creditors with the information that they need to assess the proposal put to them in that there is no independent assessment of:
  • the ongoing viability of the business; or
  • potential recovery actions that would be available if the company were to be placed into liquidation such as insolvent trading;
• if creditors resolve to accept any proposal, unless each and every creditor of the company is a party to any document that is prepared, any creditor who is not a party may take action to wind up the company. This may result in payments made to creditors pursuant to the document ultimately being recovered by a liquidator appointed to the company as an unfair preference.

The principals and directors of BRI Ferrier are available to assist you or your clients in assessing their position, whenever they are a creditor of a company undergoing a formal or informal insolvency process.