Vol 11 (2014) - Issue 1

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Australia: The Strange Death of Statutory Corporate Rescue

The year 2013 marked the 20th anniversary of statutory corporate rescue in Australia.
In 1993, the Federal Parliament enacted Pt 5.3A of the Corporations Act. Part 5.3A established 'voluntary administration', a regime that, in the words of its opening section, aims to:
'(a) [maximise] the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence – [result] in a better return for the company’s creditors and members than would result from an immediate winding up of the company.'
The essence of voluntary administration is that a company in financial distress can appoint an external administrator. This imposes a short moratorium on the enforcement of debts against the company. During the moratorium, the administrator investigates the company and reports to creditors on whether it should enter a 'deed of company arrangement' (essentially a rescue or reconstruction of the company or its business) or proceed into liquidation. The creditors then vote on the administrator’s recommendation.
Back in 1993, voluntary administration was hailed as the way of the future. Naturally, there would still be companies that were so hopelessly insolvent that winding up or receivership was the only option. But voluntary administration, by subjecting creditors to a short enforcement moratorium and using that breathing space to allow an independent administrator to investigate rescue plans, would save companies that were only on the brink of the insolvency abyss.
Such was the enthusiasm for this new way that it was adopted in New Zealand and elements of it picked up in England and South Africa.
Fast forward 20 years, and the picture is not so rosy.
The latest annual corporate insolvency statistics1 show that, in the last financial year, 1560 companies appointed voluntary administrators. That is the same number as in 1999-2000; which would be good news if it were not for the fact that total corporate insolvencies have more than doubled in the same period (from 4205 to 10 746). In other words, voluntary administrations, as a percentage of corporate insolvencies, have dropped from 36% to 15%.
This fall is even more marked when one considers that, in 1999-2000, voluntary administration was the most popular form of insolvency administration, narrowly ahead of court-ordered winding up (34%) and significantly ahead of creditors’ voluntary winding up (16%) and receivership (11%).
By 2013, those figures were dramatically different:
– Creditors’ voluntary winding up – 46%.
– Court-ordered winding up – 28%.
– Voluntary administration – 15%.
– Receivership – 11%.
In other words, 74% of distressed Australian companies now head straight into liquidation, a figure that effectively rises to 85% when one considers that receivership is almost inevitably the first step towards liquidation.
So what went wrong? There are a number of explanations.

Changed statutory regime
One theory for the relative change in the popularity of administrations and creditors’ voluntary windings up is based on a change to the law at the end of 2007.
Part of the armoury available to the Australian Taxation Office is the ability to serve notice on a company’s directors requiring them, within 14 days, to pay outstanding tax, appoint a voluntary administrator or appoint a liquidator; failure to take one of these options could result in the directors’ becoming personally liable for the tax debt. Until the end of 2007, the statutory procedures for the appointment of a liquidator by the company itself did not readily allow the appointment of a liquidator within 14 days, so the appointment of a voluntary administrator was usually the only realistic option available to directors.