Vol 12 (2015) - Issue 4

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What Is Old Is New Again: Corporate Reconstruction via Scheme of Arrangement in Australia

Introduction
Australia is currently undergoing a period of significant evolution as regards the manner in which corporate distress, restructuring and turnaround are perceived and addressed. In the years following the collapse of Lehman Brothers and the global financial crisis, the Australian insolvency and restructuring market has undergone a reorganisation and turnaround of its own. Despite lethargic economic conditions, rising unemployment figures, consumer confidence declining apace and interest rates now at a record low of 2.25%, secured creditors have seemingly been reluctant to enforce their security and, compared to the previous year, the incidence of formal insolvency appointments dropped almost 20% in 2014.
This incongruity may be explained, at least in part, by the comparative surge in companies exploring company-led corporate turnaround initiatives, tipping the scales towards earlier intervention through corporate turnaround in place of later enforcement or insolvency. Findings from a survey conducted by 333 Management and the Turnaround Management Association Australia, which analysed 164 businesses that completed turnaround initiatives in 2014, confirm an uptick in this activity. The maturing of the Australian turnaround market is borne out by the survey’s findings, which confirmed, first, a greater reliance on debt (rather than equity) as the source of funding for turnaround and, second, that the financiers of that debt are, increasingly, existing rather than new lenders.
Large and sophisticated Australian companies have shown greater appetite for taking interventionist action to improve efficiencies and shareholder returns including, where required, seeking assistance from turnaround professionals to address problem parts of a business or group.
Another tool, which has been part of English company law for well over a century and part of Australian company law since 1936, also provides a mechanism to assist with streamlining, reconstructing and thereby improving efficiencies in, corporate groups. That tool is found within the provisions dealing with schemes of arrangement.
The focus of this article is on the suitability of section 413 of the Corporations Act 2001 (Cth) ('Act') as a mechanism to assist with corporate restructuring and considers the recent Federal Court decision in Fiducian Portfolio Services Limited v Fiducian Investment Management Services Limited (No 2)3 which identified possible limitations in the operation of that provision.

Schemes of arrangement in Australia
In Australia, schemes of arrangement are predominantly used in M&A transactions, with members’ schemes of arrangement being considerably more flexible than formal takeover bids (due, in no small measure, to the fact that the scheme legislation is relatively confined, whereas the takeover regime spans some 100 highly-prescriptive sections). Notwithstanding few of recent notable high profile examples (Re Lehman Brothers Australia, Re Centro Group and Nine Entertainment Group), creditors’ schemes – which have the effect of compromising creditors’ claims against an insolvent company – are also used, though less frequently.