As a leading professional services firm, KPMG Australia (KPMG) is committed to meeting the requirements of all our stakeholders – not only the organisations we audit and advise, but also employees, governments, regulators and the wider community. We strive to contribute to debate that seeks to develop a strong and prosperous economy and welcome the opportunity to provide a submission in relation to the consultation on improving schemes of arrangements to better support insolvent companies.
KPMG has one of the largest restructuring services practices in Australia and around the world. We provide restructuring, turnaround and insolvency services to a wide range of clients from small and medium businesses to large institutional and multi-national organisations. We strive to contribute to the development of reliable and practical insolvency and restructuring procedures to assist Australian businesses facing financial difficulty so that they may contribute to a strong and prosperous economy.
KPMG has one of the largest restructuring services practices in Australia and around the world. We provide restructuring, turnaround and insolvency services to a wide range of clients from small and medium businesses to large institutional and multi-national organisations. We strive to contribute to the development of reliable and practical insolvency and restructuring procedures to assist Australian businesses facing financial difficulty so that they may contribute to a strong and prosperous economy.
KPMG understands that the consultation paper is requesting feedback as to “whether the lack of a moratorium during the consideration and formation of a scheme is impacting the utility and usefulness of schemes as a means of restructuring insolvent companies”. In responding to the consultation paper, KPMG notes the following:
- Schemes of arrangement are designed to restructure companies that are currently solvent. The introduction of an automatic moratorium would fundamentally change the nature of a scheme, making it more akin to an insolvent restructuring process, however without the necessary checks and balances which are in place for Australian insolvency processes.
- A moratorium against any action or civil proceeding is already available by order of the Court pursuant to section 411(16) of the Corporations Act (2001). Introducing an automatic moratorium would not increase the uptake or utility of the current regime for the following reasons:
- The key inhibiter for companies considering using the scheme of arrangement regime is the substantial cost of court led restructuring. This limits the regime to large companies, of which Australia is a considerably smaller market relative to other jurisdictions.
- Schemes are mostly used to restructure complicated debt structures and are rarely used to compromise the claims of trade creditors. The use of non-bank lending and private credit by large Australian companies is relatively small compared to other jurisdictions. Additionally, an automatic moratorium would only be useful for this type of restructuring in circumstances where lenders have not agreed to a consensual standstill, which in our experience is rare in relation to viable businesses.
- A moratorium is a considerable impost on the rights of creditors which requires supervision by either the court or an expert appointed to represent the interests of the creditors (as occurs in the voluntary administration regime). The cost of court supervision is prohibitive to small and medium sized creditors, who do not have the resources necessary for legal representation in the scheme process. In other jurisdictions, the debtor company is required to cover the advisor costs of the creditor groups (including legal costs). If this is adopted as a solution, it would further increase to the cost of the scheme process and limit the number of potential candidates.
- In our experience1 , suppliers with outstanding debts that are subject to a moratorium are unwilling to extend further credit during the moratorium period. This generally requires a substantial increase in the amount of working capital to continue operating and may result in major disruptions to the business operations. Accordingly, an automatic moratorium that applies to trade creditors has the potential to accelerate the level of distress, rather than provide breathing space.
Overall, introducing an automatic moratorium in isolation from a complete review of the appropriateness and policy intention of the scheme of arrangement regime is likely to result in more complexity, cost that may exceed any benefit derived.
We have sought to answer the consultation questions set out in the discussion paper in this response. If you would like to discuss this letter or related restructuring policy at any stage, please don’t hesitate to contact us.
KPMG's recommendations
Recommendation 1:
Consideration should be given to how independent experts can be used to replace the role of the Court in certain aspects of schemes of arrangement, which may allow for the overall cost to be reduced.
Recommendation 2:
The Commonwealth consider a broader review of the formal restructuring regimes available to insolvent but viable businesses to determine which types of Australian companies do not currently have access to the necessary mechanisms to restructure and continue operating in a manner which is fair to both the debtor and creditors.
Recommendation 3:
As part of the above, or in isolation, a wholesale review of the entire scheme of arrangement process should be undertaken prior to implementing an automatic moratorium that effectively allows schemes of arrangement to be used as a restructuring regime for insolvent companies.
If an automatic moratorium is introduced KPMG recommends the following:
Recommendation 4:
The Commonwealth include a legislative review process or a sunset clause to ensure the moratorium is reviewed to ensure it is working as intended.
Recommendation 5:
A moratorium should be targeted at only the creditors or classes of creditors that the proposed scheme seeks to compromise. If a proposed scheme does not seek to compromise trade creditors, then trade creditors should not be subject to any moratorium. Consideration should also be given to how the moratorium is overseen in the scheme context, and whether the Court should solely be able to grant exceptions to the moratorium, or if an independent monitor could also perform that function.
Recommendation 6:
An automatic moratorium should last for no longer than 20 business days, unless extended by the Court. This is largely consistent with voluntary administration.
Recommendation 7:
To incentivise the provision of credit during an automatic moratorium, credit extended during the moratorium period should receive a priority status under any subsequent liquidation of the company.
Footnote
1. Based on the moratorium in the voluntary administration regime.
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