John Keenan

When the Directors of Premier Air Services first came to see us, the construction company was in a dire financial situation. Having run out of funds defending litigation of a disputed defect and damages claim from a well-healed former customer, the directors were left with little option but to place the company into Creditors Voluntary Liquidation. We, John Keenan and Peter Krejci of BRI Ferrier, were appointed Liquidators of the company. The litigation involved the company, the former customer and the company’s insurer, all of whom denied responsibility. As Liquidators, we approached the matter from a different perspective, focussing on the commercial and legal merits, without the emotion that inevitably comes from drawn-out disputes. We assessed the claims on the facts and sought fresh legal advice as to the options available for the company. We determined that it was appropriate for the litigation to continue, effectively lifting the statutory stay of the proceedings. We explored the market for funding support, and took on some measured risks, as we prepared for the litigation to continue. Importantly, we demonstrated to both the former customer and the insurer, that the company had the wherewithal to push forward, and in doing so, brought the counter parties back to the negotiating table. Ultimately, we were able to negotiate a tri-partite settlement which saw the company receive a substantial recovery, contributed to by both the former customer and the insurer. The settlement was sufficient to discharge all creditor claims in full, returning the company to solvency. The surplus funds were then distributed to the shareholders. This is what the Director thought: “We are delighted with the outcome that John Keenan and his BRI Ferrier team delivered. He was able to see through the long-running disputes and negotiate a terrific commercial result for all parties. John ensured that it was a collaborative process, so we were across the strategy and could assist where needed. A great outcome in difficult circumstances.” Victor Gatt - Director Premier Air Services Key Takeaways

• Being unfunded does not necessarily mean that claims should be abandoned without exploring other recovery options.
• Using the Liquidation process can provide a defendant breathing space in litigation, whilst the position is re-assessed.
• Seeking specialist legal advice, with relevant expertise is paramount.
• Exploring external funding and negotiating support from professionals, can demonstrate capacity to push on.
• Strong negotiation, with a focus on the duties owed to the stakeholders, can result in:
  • all creditors paid in full;
  • a company being returned to solvency; and
  • significant distribution to the shareholders.

At BRI Ferrier, we have assisted many directors pursue restructuring opportunities, including where there are entrenched positions in long-running litigation. Our experience assists us to look at the situations dispassionately, with a focus on commercial outcomes for the parties involved within the legal framework. If your business is at a financial crossroads, or approaching one, please contact us at BRI Ferrier for confidential and prompt advice.

Restructuring Rabbit

In the wake of prevailing economic headwinds facing Australian business, you will likely be hearing about companies “Restructuring” in order to return to profitability, or indeed survive. Such economic headwinds are a result of surging inflation, interest rates hikes, declining consumer confidence, supply chain constraints, a more assertive ATO and the like. Companies with highly leveraged balance sheets, declining revenues and an inability to access capital will be among the first to experience the financial strain and could fail, if they do not consider restructuring.

What is Restructuring?     

At its most basic level, restructuring is the process of reorganising a company’s affairs and renegotiating its key contracts to a more manageable set of terms and obligations. A way to conceptualise this, is to view a company as a “nexus of contracts” as between its stakeholders (directors, owners, staff, suppliers, financiers and customers). The key contracts may be operational (leases, employee contracts, supplier contracts, joint venture agreements and so forth) or financial (terms and conditions of bank facilities, loans etc). By renegotiating the key contracts it can assist:

1. realign the financial obligations with longer-term strategic objectives and cash flows; and
2. set a platform through which the business can raise new capital and attract new talent.

Financial Restructuring

A Financial or balance sheet restructuring is a means of seeking concessions from counter-parties to remedy shortfalls or to bolster the company’s financial position. Businesses in need of financial, rather than operational, restructuring may be profitable on an EBITDA basis, but not profitable enough to service its debt. The concept can be implemented via a number of strategies, but typically results in the reduction of the overall debt composition in the business. Some examples include:

• Informal debt compromise agreements with a creditor(s)
• Debt-for-equity swap
• New debt or equity financing
• Debt-for-debt exchange, typically with deferred repayment terms

Operational Restructuring

Operational restructuring seeks to address shortcomings in the way the business operates. A company in need of operational restructuring may be unprofitable, even on an EBITDA basis, and the fixing the operational aspects would typically also require a financial restructure to fund the necessary changes in the business. Prime indicators that a business needs its operations restructured include:

• Incurring trading losses
• Costs & overheads excessive for size
• Unprofitable customer contracts or product mix
• Underperforming staff or divisions
• Underutilised or redundant assets
• Non-viable leasing or supply arrangements

Implementation – Informal vs Formal

The restructure process can be approached informally or formally, where key difference for the latter involves appointing an External Administrator to use the legal frameworks to bring about the needed results.

Informal Restructure

An informal restructure basically involves engaging with counter-parties (such as staff, suppliers or customers) to renegotiate contractual arrangements to make the operations profitable again. In circumstances where the business has a decent track record and there is a relationship between the parties, engaging in open and honest communication with a sense of commercial reality is an important initial step. Where the stakeholders are manageable, such as a relatively small group of suppliers, an informal restructure is a viable option. The frank discussions as to the options and potential outcomes, can create a sense of urgency and minimise parties’ holding-out for improved terms which can be unfavourable to the cash flows and improvement strategies. A prime example where an informal approach is useful is where a business is seeking to surrender or renegotiate terms with landlords, and the costs of reletting the space is prohibitive. However, some creditors, such as the Australian Taxation Office may not engage in informal discussions. The ATO typically will not extinguish primary tax debts without due cause, however they may be agreeable to waive interest and penalties if the underlying debt is paid in full, over time. It is worth noting that with the Covid relief having finished, the ATO are less accommodating and instead they are actively pursuing directors where debts are unreported or unmanaged.

Safe Harbour Regime

Not all restructures can, or do, succeed. The Safe Harbour regime provides Directors’ protection from personal liability from insolvent trading, should a restructure process fail. Under the Corporations Act, Directors of a company that traded whilst insolvent, can be pursued by a Liquidator for the debts incurred by that business. However, if implemented correctly, the Safe Harbour laws provides the directors a viable defence from liability, if the restructure fails and a Liquidator later brings an insolvent trading claim. There are various threshold requirements for entering into the Safe Harbour, but the fundamental test that the Directors must satisfy is whether the restructure plan is reasonably likely to result in a better outcome for the company than the immediate appointment of an administrator or liquidator. The Safe Harbour process typically suits medium to large businesses where the restructure plan is “realistic” and not just a hope. The process requires the Directors to engage an appropriately qualified advisor to assess the business and the restructure plan. That advisor typically prepares reports on the plan, which the Directors can later rely upon should the restructure fail, and a Liquidator pursues an insolvent trading claim. This is an important consideration when selecting the advisor, as the directors have the burden to prove the defence and the quality of the advisor’s report can become crucial in this regard. The regime allows for the plan to be revisited and adjusted to suit the evolving circumstances of the restructuring process. To remain “in” the safe harbour, the company needs to continue to satisfy the threshold requirements, otherwise it falls outside of the protections, and formal restructuring options will need to be pursued.

Formal Restructuring - Voluntary administration

The primary formal restructuring tool is the Voluntary Administration (“VA”) process implemented under the Corporations Act. The appointment of Voluntary Administrators to a business is a serious step, as the control of the business moves from the Directors to the Administrators. The objective of the VA is to provide a short period of time whereby options are explored to either:

• save the business and/or
• improve the return to creditors

Process runs for 4-5 weeks, during which all debts owed by the business are on hold. The law provides a framework aimed at providing time for the Administrators to explore options to save the business. To that end, the Administrators have the power to continue to trade, cease trading, terminate employees, repudiate underperforming contracts and leases, sell the business and a whole lot more (within the confines of law). Whilst this occurs:

• all creditor actions are on hold;
• landlords cannot enforce or evict;
• contracts cannot be terminated by the counter-party due to the company being in VA (ipso facto laws);

The outcome of the VA process is determined by creditors resolving by a majority in number and value, as to whether the Company should:

• Enter into a Deed of Company Arrangement (“DOCA”); or
• Be placed into Liquidation; or
• That the Voluntary Administration should end.

The key restructuring tool is the implementation of a DOCA, which is effectively a deal between the company and its creditors. The DOCA is a very flexible instrument which can compromise debts, provide time for repayment, raise capital, introduce new management, sell a business and much more. The key assessment for a DOCA is whether it is expected to deliver a better outcome for creditors, than a Liquidation scenario, which typically involves the business being shut down and all assets ‘liquidated’.

Small Business Restructuring

Another option recently introduced is the Small Business Restructuring Process (“SBRP”). It is similar to the VA process, however aimed at being quicker and more cost effective for small businesses. A key aspect of the SBRP is that the control of the business stays with the directors while a proposal is put to creditors. Under this type of External Administration, if creditors don’t agree to the proposal the company doesn’t automatically go into liquidation, although that is probably where it will ultimately end up, as the SBRP is only supposed to be used by directors when the company is considered to be insolvent. There are also some eligibility requirements to be able to qualify for the SBRP:

• Creditors are collectively owed no more than $1 million;
• All tax lodgements are up-to-date;
• All employee entitlements are up-to-date, including superannuation; and
• The company and its directors have not previously been through this process before within the last seven years.

Foundations of a Successful Restructuring

As has been set-out herein, there are many informal and formal strategies to pursue a restructure. However, at the core, there needs to be a commitment to save the business. In our experience, for any restructure to succeed, the following elements must be present:

• A core Viable Business
• Competent Management
• Confidence of key Financiers, Suppliers, Employees and Customers
• Directors/Management open to Change
• Access to capital.

At BRI Ferrier, we have assisted many clients pursue various restructuring opportunities, all in an effort to reset their business for future growth. Our experience assists us identifying options which may otherwise be overlooked and by acting early more avenues are available for a successful restructuring process. If your business is at a financial crossroads, or approaching one, please contact BRI Ferrier for confidential and prompt advice.

You may have heard about the ATO’s new policy to disclose non-compliant businesses with tax debts greater than $100,000 to Credit Reporting Bureaus. This is another tool available to the ATO to encourage taxpayers to manage and pay outstanding debts. Recent market volatility, interest rate hikes, inflation, and ballooning tax debts through Covid, makes this a timely reminder for business and their advisors. The ATO resumed debt collection activity in 2022, following a lengthy hiatus. The ATO has begun issuing warning letters, Director Penalty Notices and, recently, winding up applications. In negotiating payment arrangements with small to mid-sized taxpayers, the ATO are seeking mortgages over real property or bank guarantees as security, which is becoming challenging for business owners in a softening property market, with tightening credit. To date, the ATO has been sparing in terms of disclosing tax debts to Credit Reporting Bureaus. However, the broader need for the government to engage in "budget repair” may prompt the ATO to take a harder stance when it comes to recovering tax debts from non-compliant taxpayers. The risk to the business is obviously through their credit rating, where the public disclosure of defaults can impact their supply and financing facilities. Tax compliance and the management of tax debts are an important part of the credit assessment process. Public reporting of tax defaults brings this matter up front. The key message for business owners is to engage with the ATO when tax debts escalate, either directly or through their trusted advisors. However, if the tax debts cannot be paid now, or over time by agreement with the ATO, then there are other options available to address operational and balance sheet issues as a whole. At BRI Ferrier, we are regularly engaged by businesses to explore restructuring solutions through formal processes such as:

• Safe Harbour advisory
• Small Business Restructuring
• Voluntary Administrations
• Liquidations

Below is a high-level summary guide to the ATO’s tax debt disclosure policy:

Applies to: Businesses with tax debts of at least $100,000 which are overdue by more than 90 days. Most taxpayers with an ABN such as companies, trusts, sole traders and partnerships. Does not apply to certain excluded entities such as charities, deductible gift recipients, complying super funds or government entities Taxpayer has not engaged with the ATO to manage the tax debts, such as via a payment arrangement, an application to release debt or a formal objection process. There is no active complaint with the Inspector-General of Taxation Ombudsman about the ATO’s intention to report the tax debt information.

Process: ATO must give the taxpayer 28 days’ notice that they intend disclose the debt, during which time the taxpayer can take action to deal with the debt.

Remedy: The tax debt information can be removed by the credit reporting bureau if the taxpayer pays the debt in full or engages with the ATO to manage the debt. Note, does not prevent parties becoming aware of the initial credit default report (such as customers, suppliers or financiers).

More information can be found on the ATO’s website https://www.ato.gov.au/General/Paying-the-ATO/If-you-don-t-pay/Disclosure-of-business-tax-debts/ BRI Ferrier helps financially distressed businesses to recover, change and renew. Should you or your clients need assistance, please contact us.

Did you know that all new Directors now need a Director Identification Number? Take note - the Director Identification Number (“DIN”) system is now in place. This new system has been coming for some time, and the transitional arrangements have ended. All new directors now need a DIN. The DIN system has been designed to provide the public greater transparency over who is running which companies. Given the recent market volatility and financial stress caused by the pandemic, there are heightened risks of mismanagement, whether by circumstance or deliberate acts, which can cause real damage to the broader public. The DIN system has been created to reduce the risks of fraudulent or illegal activity, whether that be by using fictitious identities to act as a Director or by engaging in schemes such as illegal phoenix activity. At BRI Ferrier, we have encountered a variety of matters where suppliers and customers have lost significant sums when their dealings with the particular entity turned sour, and it is only later when they seek to recover their funds that they learn the registered Director was a ‘person of straw’ or a repeat offender of failed and phoenix activity. To put this in context, in 2018 the ATO estimated that the economy-wide annual cost of illegal ‘phoenix’ activity was between $1.8 billion and $3.2 billion. Recent market conditions indicate that the current figures could be far worse, having regard to record levels of tax debts which the ATO are now beginning to call up, substantial increases in supply-chain costs and prospects of interest rates rises. In short, it is TIME TO ACT for existing and new directors. The regime is being administered by ASIC and process of registering is relatively simple. That said, failure to comply can trigger quite severe penalties from ASIC, especially if it is seen to be deliberate. Improved knowledge in the marketplace creates comfort and mitigates commercial risks. If you or your clients have concerns about one of your suppliers or customers, the DIN system will should give you greater insight as to who you are dealing with. You can use this information to check public registers of other ventures that person is or was involved with, before engaging further. If you or your clients need assistance, please contact us at BRI Ferrier. Key facts to know:

Who needs a DIN?	All directors (including alternate directors) of: a company, a registered Australian body or a registered foreign company under the Corporations Act 2001 (Corporations Act) an Aboriginal and Torres Strait Islander corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).
Who doesn’t need a DIN?	a company secretary but not a director running a business as a sole trader or partnership a director of a registered charity with an organisation type that is not registered with ASIC or ORIC to operate throughout Australia an officer of an unincorporated association, cooperative or incorporated association established under state or territory legislation, unless the organisation is also a registered Australian body.
When to apply?	Date you become a director	Date to apply
	On or before 31 October	By 30 November 2022
	Between 1 November 2021 and 4 April 2022	Within 28 days of appointment
	From 5 April 2022	Before appointment
What happens if I don’t get a DIN?	Enforcement is controlled by ASIC and penalties apply. Non-compliance with the new regime can trigger penalties upto maximum of $13,200 and 1 year imprisonment (criminal) and $1.1M (civil)

More information can be found on the ASIC and ABRS websites.

The introduction of the Small Business Restructuring laws on 1 January 2021 provides a new regime to save businesses which are viable but struggling coming out of the Covid-10 pandemic. The process is a debtor led restructuring, which means owners remain in control of their business as a restructuring plan is developed. The timeframe is limited and the fees are fixed to give more certainty. We at BRI Ferrier believe in exploring ways to save viable businesses, providing unique turnaround opportunities and creative solutions. This new regime gives troubled small business another path to survival, with tangible outcomes for their creditors. We have prepared an easy to understand illustration of the Small Business Restructuring process below. Please contact us at BRI Ferrier for advice on this and the other restructuring options available. As always, in challenging times we encourage parties to seek advice early and take decisive action.

Online Wednesday 28 October 12.00 - 1.00pm AEST

The Federal Government has announced that it will be reforming the insolvency laws to allow directors of small businesses which are financially distressed to remain in control with a view to restructuring rather than immediately being placed in the hands of an administrator. The changes will become effective from 1 January 2021.

What about companies that don’t qualify, because they have debts of greater than $1 million? Large companies will be required to work under the existing insolvency laws, without the benefit of the temporary “Safe Harbour”.

This Webinar will examine;

• Transitioning from the temporary “Safe Harbour”
• When Voluntary Administration is the only option
• Interaction between Voluntary Administration and Receivership
• Voluntary Administration to restructure
• Voluntary Administration as a first step to winding up

BRI Ferrier and Macpherson Kelley invite you to view their webinar on current directors’ duties & restructuring options focusing on the not for profit and charity space. The impacts of COVID-19 have been significant for not for profits & charities. Join John Keenan and Gavin Robertson as they examine the unique challenges in the current environment including changing duties for directors and temporary ‘safe harbour’ provisions. This webinar will explore these issues and provide necessary strategies for surviving, recovering and restructuring in the current environment. Our presenters discuss the following:

• Corporations Act and ACNC providing a temporary ‘safe harbour’ for directors
• Other directors duties not affected
• Strategies to survive and recover
• Survival models
• Restructuring options

In a recent matter involving the appointment of BRI Ferrier’s Peter Krejci and Robyn Karam as voluntary administrators, a major creditor (by value) challenged the deed of company arrangement (DOCA) incorporating a creditors’ trust that had been accepted by vote of all other creditors (by number) and the administrators’ casting vote. Infa Products Pty Ltd was a child car-seat manufacturing company that had operated in the Australian market. However, approximately five years before the voluntary administration (VA) appointment it had sold its business operations to a related company, Infa Secure Pty Ltd. Shortly before the administrators’ appointment, the remaining business assets and intellectual property were also sold. Britax Childcare Pty Ltd, a major creditor and primary competitor, had brought a series of legal claims against Infa Products, relating to various alleged breaches of intellectual property. The litigation ran for a number of years until Infa Products was no longer financially able to defend the case, at which point it sought to appoint voluntary administrators. Britax was clearly frustrated that Infa Products had been placed into voluntary administration when they were so close to the end of the protracted intellectual property litigation. Furthermore, upon realisation that Infa Products had sold many of its assets, Britax took offence at the asset disposal transactions, and alleged that they had not been undertaken for a proper purpose or for proper value. A substantial portion of the administrators’ efforts were spent investigating and reporting on the asset disposal transactions, so that creditors could be properly informed when deciding the fate of Infa Products.

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The VA appointment and vote for a DOCA When the administrators were appointed in December 2015, Infa Products’ balance sheet included only cash, debtors and liabilities. The administrators immediately undertook a proper and thorough investigation of the company’s affairs and the conduct of its officers, including the previous asset disposals. They concluded that, while there may have been potential claims against the director and related parties, a liquidation was unlikely to result in a higher return to creditors as compared to the proposed DOCA. In accordance with the objectives of Part 5.3A of the Corporations Act, they were obliged to recommend the DOCA. The second creditors’ meeting ended in a deadlock on the vote, with all minor creditors voting for the proposed DOCA and Britax (the largest creditor by value) voting for liquidation. This meant the administrators had to exercise a casting vote and did so in line with their recommendation in favour of the DOCA.

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Legal proceedings against the administrator Following the vote and execution of the DOCA, Britax brought legal proceedings to overturn the DOCA and the conduct of the administration. It obtained an injunction preventing the deed administrators from executing the creditors’ trust pending the outcome of the proceedings. Britax asserted that a liquidator may have been able to pursue actions against Infa Products’ director, including claims for accessorial liability against related parties. It also asserted that the administrators’ investigations were insufficient and that they had wrongly exercised their casting vote to carry the DOCA. To not prejudice the other creditors, Britax offered funding to cover the projected dividend of those creditors under the DOCA. Further, to support the asserted claims in a liquidation, Britax offered limited funding for a liquidator to conduct further investigations. The court subsequently scrutinised the administrators’ investigations, reporting and their views formed as a result of their investigations. During the proceedings, the deed administrators as defendants maintained a predominantly ‘neutral’ position, acting for the benefit of all creditors including Britax, and informing the court as to the facts and their views.

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The judgment In July 2016, the court ruled overwhelmingly in the administrators’ favour, vindicating them in respect of the work they conducted and their recommendation in favour of the DOCA. The judge, in effect, found that the administrators had conducted complete and thorough investigations of the relevant transactions and had fully reported their findings to creditors. In some regards, he thought that the administrators may have even been optimistic in terms of some of the potential claims that may have been brought in a liquidation, which in the absence of any contradictory expert evidence from Britax, suggests the DOCA represented even greater comparative value. The judge was therefore not satisfied that there was a realistic prospect of a case against Infa Products’ director succeeding in a liquidation. He concluded that the administrators were correct to exercise their casting vote in favour of the DOCA. Ultimately, the judge dismissed the application by Britax, lifted the injunction preventing the creditors’ trust from being executed and awarded costs in favour of the deed administrators and Infa Products.

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Lessons from the case This case demonstrates that while the courts provide a forum for review, just because a creditor with overwhelming value may have a particular view (and possibly an underlying commercial agenda), this does not necessarily dictate the outcome of the administration. By undertaking a proper process, with a thorough investigation, the administrators were able to reach a reasonable outcome for all creditors in the circumstances – an outcome that stood up to scrutiny and concluded many years of litigation. Reflecting on the pitfalls of long-running litigation, it’s worth noting that Britax may have been able to settle their claims with Infa Products in the lead-up to the administration. This, with the benefit of hindsight, would have represented a far better financial return than Britax is now faced with, having lost the challenge to the DOCA and being the subject of an adverse costs order. Download this industry insight.