What you need to know
On 7 December 2018, amendments to the Australian Insolvency Practice Rules (Corporations) came into effect, which overhaul the manner in which assigned debts can be deployed in formal corporate insolvencies. These changes have the potential to significantly impact commonly used techniques for a solvent parent/group entity looking to control the formal insolvency of a subsidiary or affiliate.
- The new rules - which apply to voting at creditors' meetings in an external administration1. - make two significant changes of wide impact:
For debt traders in particular: Evidence must be provided to the insolvency appointee, setting out the value paid for any assigned debts sought to be voted at meetings of creditors.
- For parent companies in particular: The "value" for voting purposes at meetings of creditors of any assigned debt held by a "related entity" is, broadly, only permitted to be what was paid for the debt by the related entity (and not the full face value of that debt). Obviously, this tends to lessen the control that a solvent parent/affiliate can assert in a meeting, if it has acquired third party debts of an insolvent group member for less than face value.
Although the impact of these amendments will largely be felt by related entities, they will affect any creditor who has been assigned a debt and wishes to vote at a creditors' meeting in relation to that debt. We set out the detail of the definition of "related entity" at the bottom of this note.
In relation to timing, these new rules apply to all creditors' meetings convened on or after 7 December 2018 at which a resolution is proposed - this is regardless of when the underlying debt was assigned or when the external administration of the company commenced. So, the new rules are of immediate impact on the insolvency landscape.
For those interested, some further detail follows.
What do the new rules mean for insolvency practitioners and creditors?For insolvency practitioners
External administrators are now obliged to ask all creditors who are seeking to vote assigned debts for written evidence of the consideration given in exchange for the assignment. This requirement suggests that the external administrator must ask for not only evidence of the price agreed to be paid for the assignment of the debt but also the amount actually paid.
Valuing an assigned debt
Additionally, in valuing an assigned debt for voting purposes, the external administrator will need to:
- determine whether the creditor is a related entity; and
- if so, only admit the debt for voting purposes for the price paid for the assignment of the debt rather than the underlying debt itself (which may or may not be the same amount).
Given the breadth of the definition of "related entity" (set out below), it may not be easy to determine whether a person is a related entity of the company especially if the company in external administration is, or is a subsidiary of, a listed company with a large shareholder base.
For creditors (including debt investors) who are not related entities
If these creditors wish to vote at creditors' meetings, it is now a requirement to disclose evidence of the consideration given in exchange for the assignment of the debt.
This may require these creditors, particularly debt investors, to disclose sensitive information such as the price and payment structure to which the parties agreed. Debt investors in particular should pay careful attention to the drafting of the assignment documents, in anticipation of potentially having to disclose those documents to the debtor's external administrator and should be aware that any documents provided to the external administrator in support of their proof of debt for voting purposes will typically be tabled and made available for inspection by other creditors.
Unlike the restrictions faced by related creditors (discussed below), these creditors may continue to exercise their voting rights calculated with respect to the total value of the underlying debt that has been assigned rather than the consideration provided for it.
For related entities
If a "related entity" has taken, or is considering taking, an assignment of any debts owed by the company in external administration, the extent of their voting rights at creditors' meeting will now be limited to the consideration paid for the assignment of the debt rather than the value of the underlying debt.
The term "related entity" has broad compass, for the purpose of these new rules. A related entity may include:
- a holding company or subsidiary of the company;
- any other company who has one or more directors in common with the company;
- a director of the company or any related body corporate (such as a holding company or subsidiary);
- a relative2. of a director of the company or any related body corporate;
- a relative of a spouse of a director of the company or any related body corporate;
- a shareholder of the company or any related body corporate;
- a relative of a shareholder of the company or any related body corporate;
- a relative of a spouse of a shareholder of the company or any related body corporate;
- if the company was at any time a trustee, a beneficiary of the trust and any relative of that beneficiary or relative of a spouse of that beneficiary.
So, related creditors will no longer be able to try to control the outcome of voting at a creditors' meeting (such as the outcome of a resolution to approve a deed of company arrangement proposed by a related party) by purchasing debts for nominal consideration. Instead, if a related entity wants to establish control, it will be necessary to pay substantial consideration for any debts acquired from third parties - plainly, this increases the "price" of control.
1. A company is in external administration if it is in administration, is subject to a deed of company arrangement or is in liquidation (including provisional liquidation).
2. "Relative" includes a spouse, parent, grandparent (and any other remoter lineal ancestor), child, grandchild (and any other remoter issue), brother or sister.