AUSTRALIA: An Introduction to Restructuring/Insolvency

Introduction 

Australia has not been immune to the economic impacts of global financial and geopolitical events. The recent global economic downturn has brought about a heightened focus on financial stability and risk management in Australian businesses. Sponsors and financiers alike are now navigating a complex economic terrain marked by:

i) volatile markets;

ii) supply chain disruptions;

iii) asset re-valuations;

iv) decreased consumer spending; and

v) the unpredictable effects of geopolitical events, including global political tensions and international warfare.

2024 will also be a record year for political elections around the world. The United States, India and Indonesia are among those planning for national elections. Again, how investors, sponsors and financiers approach these events internationally and regionally will no doubt impact on the investment and restructuring landscape in Australia.

Already, there has been an increase in restructuring and insolvency activity in Australia. Short-term economic prospects are unknown, and consequently Australian businesses are under pressure to try and anticipate their go-forward trading conditions. Traditional bank lenders continue to be less inclined to pursue enforcement action in response to events of default. Australian corporates, which may previously have had their choice of financiers to bank them, are now facing challenges in securing financing or a refinancing on “debtor friendly” terms.

In the context of constrained equity capital markets, Australia’s economic conditions have opened the door to alternative capital providers and private credit funds, who are using innovative ways to deploy their capital with offshore technology to document these transactions. Being a stable and creditor-friendly jurisdiction, we expect that Australia will offer a number of investment and restructuring opportunities in 2024.

Activity and Trends 

In the past year, Australia witnessed a surge in insolvency practitioner appointments, with 1,392 voluntary administrations (an increase of 42% from 2022) and 422 receiver and manager appointments (an increase of 56% from 2022). While this is not unexpected in the context of Australia’s economic climate, what is interesting are the circumstances in which some of these appointments are being promoted.

While formerly the domain of traditional bank lenders, we have seen an increase in alternative capital providers and secondary lenders pursuing restructuring transactions through the utilisation of the Australian voluntary administration and/or receivership regimes. There has been a growing trend of these formal insolvency regimes being utilised to implement loan-to-own transactions, including by way of credit bids as a path to ownership and equity-like returns. This has seen financiers taking advantage of the features of the voluntary administration regime, such as the statutory moratorium on creditor action that is automatic upon the appointment of the administrator.

In addition to this, financiers/investors are being creative in their use of the deed of company arrangement (DOCA) as a restructuring tool, and there is now significant precedent for DOCA proponents applying to the Australian courts to compulsorily transfer shares in a debtor company where it is demonstrated that the shares have no residual value (see Section 444GA of the Corporations Act 2001 (Cth)).

Where available, these financiers are also utilising the receivership regime at the same time, to maintain control of the restructuring process. In previous years, receivership has been underutilised as a means of effecting “control” transactions or debt recovery via a forced sale of the secured assets (including because of the prevalence of traditional bank lenders in a post-banking Royal Commission environment); however, more recently we have seen a sustained inclination towards restructuring businesses through receivership or by way of a dual receivership and administration process. The direct control that receivership provides the secured creditor means that transactions can be implemented with a higher degree of certainty.

In addition, we are also seeing debtors becoming increasingly proactive in seeking financial advice, including the appointment of a safe harbour adviser to provide advice to directors for trading on in a restructuring scenario, where cash flow forecasting indicates a potential default or a period of financial distress. This early engagement allows debtors to better understand their options and make informed decisions about their financial future.

Furthermore, there has been a noticeable trend of these debtors actively engaging with stakeholders with a view towards working collaboratively and preserving value. By involving stakeholders early and transparently, businesses can work on restructuring plans that are more likely to receive the support of their investors and financiers, and to ultimately succeed. This approach represents a shift from reactive insolvency measures to a more strategic, value-preserving approach, which is crucial in the current economic climate. On the flip side, this has meant more interest in restructurings by third-party investors seeking to take advantage of the position of the debtor or the compromised position of certain creditors. The existence of “creditor on creditor violence” means that there is a growing need for liability management advice. We expect this trend to continue as it has in other jurisdictions, in particular the United States and the United Kingdom.

Opportunities in 2024 

The global economy remains a challenging environment for Australian corporates. As such, we will continue to see an influx of alternative capital providers – from global investors to private credit firms and hedge funds – hitting our shores in 2024 with innovative capital solutions ready to be deployed. Sectors of interest will continue to be property, manufacturing, and mining and financial services (among others).

The opportunities these firms see are as a result of the creditor-friendly jurisdiction that Australia is, and the fact that it has a well-trodden path of judicial precedent as well as stable statutory and corporate governance frameworks. Australia has an active and vibrant private equity market, and an environment where global sponsors have a solid track record. In addition, it boasts a range of formal and informal restructuring technologies that are well understood and have been successfully implemented time and again in this market. With global economic challenges abound, Australia will certainly remain an attractive jurisdiction for distressed investment for the foreseeable future.