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APRIL 2013Legal Focus 121Out of Court RestructuringAustraliaContinuing with our focus on out-of-court restructuring and the issues that surround it,Lawyer Monthly speaks to Dominic Emmett from Gilbert + Tobin in Sydney.Would you say that out-of-court restructuringrather than the formal insolvency process isincreasing in popularity?In Australia the formal insolvency processes ofreceivership and administration can take placewithout any court involvement whatsoever.Courts are not involved in initiating eitherprocess. Further, receivers and administratorscan sell and realise assets without courtinvolvement. If an administration involves arescue or rehabilitation proposal it is for creditorsto decide upon it and not for a court toapprove any such proposal.Of late in a few very large restructurings, thescheme of arrangement process has been usedin Australia, which process is similar to that seenin the UK. The court is required to order theconvening of creditors’ meetings to approve ascheme and a second court hearing is requiredto sanction a scheme subject to it beingsatisfied on such issues as class and fairness.We have not necessarily seen an increase inrestructurings not involving receivership oradministration other than to say that it is still thecase that lenders and creditors continue toallow companies and debtors to remain incontrol (and grant such forbearance andwaivers as may be required to allow for that) solong as trust exists as between them and,indeed, as between creditor stakeholdergroups.What do you think are the advantages anddisadvantages of out-of-court restructuringprogramme as opposed to insolvency?The advantages of avoiding receivership andadministration include:• not having to incur the costs of administratorsand receivers; and• not facing the risk of counterparties tocontracts looking to terminate or repriceusing termination rights on administration orreceivership. In Australia debtors are notafforded any ‘ipso facto’ protection as theywould be under the US Chapter 11 regime.This advantage can be both critical andvaluable in the services, contracting, IT andmedia sectors.The disadvantages of restructuring outside ofadministration or receivership include:• inability to exit unprofitable businesses andcontracts;• inability to challenge antecedenttransactions, e.g. preferences, transactionsat an undervalue and certain claims againstdirectors; and• inability to cram down minority dissentingcreditors in creditor stakeholder groupsWhat other informal mechanisms are availableto companies in trouble?In Australia there is not really any other form ofinformal mechanisms available other thanthose arising by agreement and negotiation.What legal challenges and complexities arisewhen dealing with out-of-court restructurings inyour jurisdiction? How can you assist clients innavigating/solving these challenges andcomplexities?The most significant challenge to restructuringsoutside of receivership and administration inAustralia is the very conservative and strictinsolvent trading regime which has the potentialto impose personal liability on directors for allnew debt incurred from the time a company iscash flow insolvent. The practical impact of thismeans that lenders and secured creditorscannot make demand during the restructuringprocess and companies cannot unilaterallyextend payment to creditors without exposingthemselves to personal risk. The only practicalway to mitigate against that risk is for thedirectors to appoint administrators.Advisors can assist companies through aninformal restructuring process by setting theground rules with creditor stakeholders throughthe process such that directors are notpersonally exposed. For fear of stating theobvious, informal restructurings necessarilyinvolve agreement with stakeholders, with theonly real leverage against such stakeholdersbeing the threat of formal insolvency involvingreceivership or administration.How do you see this practice area progressingover the next 3-5 years?We believe both formal and informalrestructurings will continue at the same paceover the next 3-5 years. With the influx ofalternative capital providers from outside thejurisdiction we are likely to see more distresseddebt trading at least at the upper end of themarket along with the continuation of loanto own strategies which traditionally up untilaround 5 years ago were not common inAustralia. The local lenders in the market willcontinue to look to restructure in their traditionalways and tension will continue to subsistbetween them and others into the market whoare not otherwise restricted from adopting loanto own strategies and in holding equity. LMContact Details:Dominic EmmettTel: +61 2 9263 4328Email: demmett@gtlaw.com.auwww.lawyer-monthly.com