Restructuring developments: the adaptability and usefulness of creditors' trusts

02 June 2014

National builder reorganised using a creditors' trust

BRI Ferrier has recently overseen the restructuring of a national building company using a creditors' trust, combining its in-depth knowledge of both the construction industry and the ways of maximising value for creditors of distressed businesses.

What is a creditors' trust?
A creditors' trust is a trust set up under a deed of company arrangement (DOCA). By using an appropriate creditors' trust, all parties – secured creditors, unsecured creditors and the business operators – can achieve certainty and accelerate a company’s exit from external administration under the Corporations Act.

The trust is a new “entity” independent of the company. Creditors receive rights as beneficiaries of the trust to replace their rights as creditors of the externally administered company and the company running the business is then released from those claims. The trustee then collects a “settlement sum” and distributes it among the creditors. Shortly after the creditors' trust is set up, the DOCA is terminated and the company returns to the control of its directors.

The creditors' trust allows the owners of a troubled business to be confident about the extent of claims and that the costly and time-consuming processes of external administration, including the threat of liquidation, are behind them. The availability of this benefit enables a voluntary administrator to negotiate a better return for creditors. In the wrong hands creditors' trust can create risks for creditors. ASIC has issued specific guidance to the market, Regulatory Guide 82, which sets out the information to be provided to creditors and the steps required to set up a creditors' trust when one is proposed as part of a DOCA.

Case studies
BRI Ferrier has supervised the establishment of several creditors' trust in recent years. Two examples are summarised below.

Principals of BRI Ferrier were appointed voluntary administrators of Bevillesta Pty Limited in 2011. Bevillesta had, among other businesses, recently developed a major new Sydney shopping centre.

The administrators received a proposal for a creditors' trust from parties associated with the business operators which appeared to offer a return to creditors of as much as 100 cents in the dollar, much higher than the estimated return in a liquidation, but which did not comply with the terms of ASIC’s guidance. The proponents indicated they would not propose the same payments through a DOCA.

The administrators sought directions from the court about the appropriateness of recommending the proposal to creditors, where accepting the proposal would involve a permanent compromise of creditors’ rights and the risk of non-payment.

The court granted directions saying, among other things, that the administrators were justified in recommending the creditors' trust proposal to creditors where there was a “sound” commercial reason in doing so.

The court’s decision is significant because it paved the way for the increased use of creditors' trust in the restructure of financially distressed companies subject to the Regulatory Guide.

National Buildplan Group
Principals of BRI Ferrier were appointed voluntary administrators of National Buildplan Group Pty Limited (NBG) in April 2013. On appointment, NBG:

  • was a national, tier 2 and tier 3 construction business with substantial government-related accreditations
  • had 132 contracts on foot in various stages of completion
  • employed 179 staff and operated from eight offices across Australia
  • owed its secured creditors around $10 million
  • employees were owed around $3.3 million, which might increase with forced redundancies
  • owed $58 million to ordinary unsecured creditors, including sub-contractors and tax authorities
  • had an overall deficiency of assets of around $58 million

In a liquidation, the administrators expected there would be no return to unsecured creditors, while priority (employee) creditors would lose up to 60% of their claims. BRI Ferrier applied its construction industry expertise and knowledge of creditors' trust to work with NBG’s management to analyse each NBG contract to determine the value that could be extracted for the benefit of creditors including:

  • negotiating the return of bank guarantees as part of commercial settlements with the principals of contracts; and
  • secured the completion of projects under construction management agreements which allowed the release of bank guarantees and facilitated payments to subcontractors, thereby significantly reducing the pool of unsecured creditors’ claims against NBG.

Creditors resolved to restructure NBG using a DOCA / creditors' trust which involved the creation of a settlement using funds recovered from NBG contracts and a contribution by the company’s director. In return, NBG was released from its debts, and was able to continue to work out contracts and retain the valuable accreditation rights.
The creditors' trust will result in:

  • NBG’s secured creditors being paid in full
  • priority (employee) creditors receiving payment in full
  • remaining unsecured creditors receiving a dividend of around 5 cents. While much less than they were owed, this was significantly more than could be achieved in a liquidation.