Dealing with receivers and administrators

January 5, 2018 | Author: Anonymous | Category: Business, Finance, Personal Finance
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L2: How to deal with the collapse of a key supplier of contractor

Bree Ludlow, Corrs Perth Victoria MacMillan, Corrs Perth

2.50 pm – 3.40 pm Thursday 21 November 2013

Join the conversation: #CPAcongress @cpaaustralia

How to deal with a key supplier or contractor in financial distress

Presenters:

David Yates and Bree Ludlow Corrs Chambers Westgarth 21 November 2013

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Overview

• Hotspots in the current market • Signs of Insolvency • The Insolvency Process Receiverships Administrations Liquidations • Practical tips - dealing with Administrators and Receivers •

ROT claims



Unfair preferences

• Questions

How to deal with a key supplier or contractor in financial distress

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Hotspots in current market •

Commercial property - Oracle, Soul, Southport Central on Gold Coast



Retail – Colorado, Darrel Lea, Allens Music, Fletcher Jones



Mining services and Construction – Hastie Group, D&G Cranes, Drilling & Grouting Services



Manufacturing – HP Industries, several car component manufacturers



Agriculture –Great Southern, Willmont and Gunns, Tamar Valley Dairy

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Signs of insolvency

• What to watch out for: • Industry rumours

• High turnover of staff

• ASX announcements and profit warnings

• Unusually high level of claims

• Financial difficulties of parent companies

• Sudden resignations of key members of management of the board

• Late material deliveries

• The “domino effect” – eg Ansett and Gate Gourmet

• Complaints by subcontractors

• Multiple legal proceedings (searches can be done)

How to deal with a key supplier or contractor in financial distress

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THE INSOLVENCY PROCESS

How to deal with a key supplier or contractor in financial distress

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Common types of corporate insolvency administrations

Receivership Administration Deed Administration

Liquidation

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Receiverships

Receivership • Contractual – private appointment • General Security Agreement (fixed and floating charge) over substantially whole of the assets = “receiver and manager”

• Receivers are agents of the company with primary duty to “pay out” secured creditor (appointor/chargee) • Receiver’s powers – very wide powers • Receiver must take reasonable care in exercising power of sale • Realisations from “circulating security interests” (floating charge assets) to priority creditors (employees)

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Voluntary Administration Administrator appointed

First creditors’ meeting

Second creditors’ meeting

Restore to directors

Deed of Company Arrangement (DOCA)

How to deal with a key supplier or contractor in financial distress

Liquidation

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Voluntary Administration •

First notice to creditors – declaration of relationships



First creditors’ meeting •

within 8 business days of appointment



creditors can vote to change the Administrators



committee of creditors will be formed



Administrator investigates company’s affairs and prepares a report to the creditors



Second meeting held – normally within 20 business days of appointment (can be extended by Court order)



Creditors decide company’s future at the second meeting



Exit routes out of administration



administration ends – restore company to directors; or



deed of company of company arrangement (DOCA); or



liquidation How to deal with a key supplier or contractor in financial distress

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Voluntary Administration Main key features •

Appointment by company’s board when a company is insolvent or likely to become insolvent



Secured creditor (with full charge) can also appoint Administrator, or Receiver



Purpose is to maximise company’s chances of survival or a better return to creditors



Administrator takes control of the company



Secured creditor has option to appoint receiver in first 13 business days

How to deal with a key supplier or contractor in financial distress

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Voluntary Administration Main key features •

Statutory moratorium – claims are frozen



Lessors and ROT Suppliers cannot recover possession of property or goods without Administrator’s consent or permission of the Court



During an administration, cannot enforce guarantees provided by directors



Administrator owes a duty to all creditors (secured and unsecured)



Administrator is personally liable for: •

services rendered, goods bought, property hired, leased, used or occupied during an administration; and



for the repayment of money borrowed by the Administrator

How to deal with a key supplier or contractor in financial distress

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Voluntary Administration Outcome of Administration •

Business is sold or restructured



Fate of company is determined by creditors voting at second meeting – Majority in value AND number and secured creditors can vote



Casting Vote by Administrator if there is a deadlock – must exercise in best

interest of creditors •

Exit routes • Administration ends • Deed of Company Arrangement (DOCA) • Liquidation

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Deeds of Company Arrangement (DOCA)

Key Issues • Contractual • Administered by deed administrator

• Needs to deal with secured and priority creditors • Binds all creditors except secured creditors and lessors who did not vote in favour of the DOCA

• Ends when conditions in DOCA satisfied or a resolution is passed by the creditors that the company be wound up • Needs the support of secured creditors and a majority in value and number of other creditors • Suppliers should carefully monitor companies that have been restructured through DOCAs

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Dealing with receivers and administrators •

Day One – notify the Administrator and/or Receiver of any ROT claim or claim to equipment held by company



Day One – provide Administrator and/or Receiver with your contact details and reserve your rights – provide one key contact



Assist the receiver or administrator where possible



Normally receivers (or administrators) are in full control of the company, its assets and business operations



If a company is in both receivership and administration – the receiver is normally in control because secured assets take priority



Receivers and administrators will try and continue to trade business if able to do so



Receivers and administrators are personally liable for services rendered, goods purchased or property hired, leased, used or occupied, which is why it is important to get fresh purchase orders from them and not rely on previous POs granted by the Company.

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Dealing with receivers and administrators •

Ensure you obtain the receiver’s (or administrator’s) purchase order before you supply a company in receivership (or administration)



Alternatively, continue to apply the terms of the contract and deal with requests by Administrator to vary terms and have Administrator adopt contract.



Continuation of supply – major issue



While operations may continue - there can be no guarantee of supply



Start preparation for “Plan B” – alternate suppliers



Manage your internal stakeholders – they will be frustrated at lack of information and lack of access to decision makers



Communication to your customers – what is impact? Eg. Change in timelines

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Dealing with administrators – rights of creditors •

Creditor meetings and proofs of debt • Complete proof of debt and proxy form

• Accepted for voting purposes • Creditors cannot vote for unliquidated or contingent debts or debts where the value cannot be established • Take extra care if you are a secured creditor (not to disclaim your rights – eg to appoint your own Administrator or Receiver) • Set Off • Statutory right of set off (section 553C of Corporations Act) • Broad right of set off

How to deal with a key supplier or contractor in financial distress

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Liquidation Liquidation ss459A - 600

Members’ voluntary liquidation S495 - 496

Creditors’ voluntary liquidation s497 - 500

Provisional liquidator S472(2)

How to deal with a key supplier or contractor in financial distress

Court appointed liquidator

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Court Appointed Liquidator Main key features



Sufficient grounds - insolvency or other general grounds (eg just and equitable) – onus on petitioning creditor



Insolvency ground - statutory demand procedure to partially reverse onus of proof • 21 days to comply with statutory demand or apply to have it set aside • “Genuine dispute” - statutory demand will be set aside • If not set aside (or amount not paid) then a presumption of insolvency forms basis of a winding up application • When to use?

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Liquidation generally •

End of the road for the company



Liquidator realises assets, determines proofs of debt (creditors’ claims) and pays dividends to creditors



Shareholders usually receive nothing



Determines priority creditors



Only a liquidator can take proceedings for insolvent trading and voidable transactions eg, unfair preferences

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Unfair Preferences •

What to do if you suspect debtor is in financial difficulties



“Cash is king!”



Elements of an unfair preference: i.

Company in liquidation;

ii.

Payment was made by company within 6 months of its collapse;

iii. Company was insolvent when payment made; iv. Payment resulted in creditor receiving more than in a winding up; v. Creditor (or reasonable person) had reasonable grounds for suspecting company was insolvent •

Dealing with preference claims

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Pre-existing Contracts •

Not automatically terminated by an insolvency appointment



Liquidator – power to disclaim



Administrator – no express power to disclaim



Receiver – can ignore pre-existing contracts, with exceptions

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Forewarned is Forearmed

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Overview



Contractual techniques to manage the risk of insolvency with Contractors



Three key groups of clauses: • Value for money • Security • Escape



Contract administration

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Value for Money



Payment clauses • Key objective: To link payment to the value of the work performed. • Milestone vs monthly payments • Evidence of completion • Right to inspect works • Right to audit • Right to withhold payment

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Value for Money



Direct payment of subcontractors/employees • Key objective: Ensuring that the direct payment discharges the liability of the Company to the Contractor. • Right vs obligation to make payment

• Evaluating the subcontractors claim • Avoiding liability to unlawful interference in contractual relations • Recovery of payment by liquidator

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Value for Money



Title • Ensure that provisions in relation to passage of title are clear • Consider position in relation to off-site works and materials • Equitable liens



Pay when paid clauses • Prohibited if the Construction Contracts Act (WA) applies • Draft very clearly as usually construed strictly by the courts

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Security



Bank guarantees • Key objective: To limit any conditions that affect your ability to call on the bank guarantee. • Form of the guarantee:

• Conditional vs unconditional • Expiry date

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Security



Contractual provisions in relation to security • Timing of provision of security • Consequences if security is not provided • Trigger event for right to call on the security • “Company may call on the security at any time…” • “Company may have recourse to the security where it has become entitled to exercise a right under the Contract…” • Prohibition on injunction • Status of proceeds of security

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Security



Parent Company Guarantees • Solvency of parent • Enforcement issues



Retention • Rate at which retention should be withheld • Status of retention monies

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Escape Clauses



Termination • Key objective: To obtain a right to terminate or take over the works early in the insolvency process. • Trigger events

• Notification requirements • Take over vs termination • Novation of subcontracts • Retention or use of plant and equipment

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Contract Administration



Financial investigations prior to contract award



Indications of possible insolvency during performance of contract: • Industry rumours • Late material deliveries • Low productivity • Complaints by subcontractors • High turnover of staff

• Unusually high level of claims

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Signs of insolvency

• Payment

 Pay when paid

•Link between payment and value of work performed

Link between payment and value of work performed

•Ability to gather objective evidence

Ability to gather objective evidence

• Direct payment of subcontractors •Right but not obligation

 Security Consider trigger event Notice requirements

•Extinguishes liability to Contractor  Termination

• Title

Notice requirements

•Clear drafting

Right to use plant and equipment

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Questions?

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