Following the Parliamentary Joint Committee Inquiry into Impaired Loans – established to investigate whether lenders had ‘manufactured’ defaults to enable them to call in loans – one of the questions being asked in insolvency and restructuring circles was: what if the Australian government acts to ban receiverships, as happened in the UK?
Why ban receiverships?
The critics of receivership argue one or more of the following:
- Secured creditors ‘jump the gun’ and appoint too quickly – with the result that the business is either sold or closed, presumably whilst the owner still had a reasonable chance of turning it around.
- Receivers sell the assets without getting the best price.
- A failure to sell the business as a going concern means that jobs are lost and returns to creditors are lower.
The UK reforms
In 2003 the UK passed legislation to prevent secured lenders from appointing receivers to a business – apart from a specific exclusion for security created prior to the introduction of the legislation.
Although secured lenders with a charge over a business may not appoint a receiver, all other remedies remain unaffected. They may still:
- Decline to provide any further funding
- Take legal action to have the company wound up or have the court appoint a receiver
- Most significantly, appoint an administrator.
Administration in the UK does not completely align to Australia’s Voluntary Administration process (most notably, a UK administration runs for twelve months, and does not lead to a DOCA), but the two processes share many similarities, and in both countries the administrator has a duty to act in the interests of all creditors – as compared to a privately appointed receiver whose primary duty is to ensure repayment of the lender.
Whilst the secured lender retains priority to the proceeds of the assets subject to its security, the administrator may sell the business as if it were not subject to the security – except for property secured by a fixed charge, or subject to a hire purchase agreement, which requires the administrator to seek court approval. A secured creditor may appoint an LPA receiver to specific assets, but has no capacity to appoint over a business.
Jumping the gun
If we followed the UK model where secured creditors could appoint an administrator, but not a receiver, would that result in appointments being made at a later time?
It is hard to think of a reason why it would, and it is quite possible that the reverse is true.
Firstly, because secured creditors typically underwrite receivers’ fees and expenses they will sometimes decline to appoint, or delay an appointment, to avoid the additional liability. There is typically no indemnity provided to an administrator.
Secondly, secured creditors will sometimes hesitate to appoint a receiver for reputational reasons – not wanting to be seen as the party forcing an insolvency appointment. Because an administrator is an independent person appointed for the benefit of all creditors, the appointment of an administrator may be seen as a less difficult from a reputational perspective.
For both these reasons, in practical terms it may be less onerous to appoint an administrator, meaning that a prohibition on receivership appointments might in fact lead to earlier insolvency appointments in some cases.
Selling Assets too cheaply?
Until 1993, Receivers in Australia were subject to a duty to get the ‘best price reasonably obtainable.’ This sounds like a simple and straightforward test but in practice it became a battle of competing valuations, conducted after the sale had already taken place and the outcome known.
In 1993, the Australian Parliament implemented the Harmer Report recommendations that there should be a focus on process rather than outcomes. The result, section 420A of the Corporations Act requires receivers and mortgagees in possession exercising a power of sale to take all reasonable care to sell the property for market value (or the best price that is reasonably obtainable if there is no market value). It is important to note that this is not a requirement to obtain market price but a requirement to run a process that should deliver that outcome – in practice a test that is far easier to assess, and litigate if need be.
A breach of the 420A duty is not of itself a criminal offence capable of prosecution by ASIC – unless it is so egregious as to constitute a breach of the receiver’s general statutory duties – but it gives rise to a potential claim of damages for loss suffered, which is available to the borrower but not a guarantor.
Although the number of 420A cases has fallen more recently, arguably this shows the impact of early litigation. There are early examples where receivers were not able to show that they had taken all reasonable care to sell assets for market value, and they (and their appointors) ‘paid the price’. The 420A duty is now clearly front-of-mind, referred to and measured against by secured creditors and their appointors, and the fact that sales processes have improved should not be taken as a sign that 420A is ineffective.
In the UK the general duty of administrators to act in the best interests of creditors has been construed to require UK administrators to take steps to secure the best price reasonably obtainable, such as obtaining independent valuations and undertaking an appropriate marketing campaign. However there is no specific statutory duty in the UK for receivers or administrators, and no such duty for Australian administrators.
Australia now clearly holds receivers to a higher standard than administrators, and to a higher standard than UK receivers. To ban receiverships and place the asset sale process in the hands of an appointee with a lesser duty would not be a appropriate response to any concerns about the asset sale process.
If there is a view that there are 420A claims that could be pursued, but have not been, then that is far more likely to reflect an inability to fund a legal action – better addressed by providing funding and support through the Assetless Administration Fund which ASIC administers.
Failure to sell as a going concern
One of the challenges for secured creditors and the receivers that they appoint is the situation of a loss making business which may still be sold as a going concern, for example to a competitor that may have scope to further reduce costs by combining back-office functions. But this is a gamble – losing money knowingly in trading on, in the hope of a sale – and it often requires funding.
To Australian eyes one of the noteworthy aspects of a UK government proposals paper released in May 2016 (discussed in detail here) was identification of the need to promote the availability of ‘rescue finance.’ The proposals paper canvassed options to help administrators to obtain finance by mortgaging the assets of the company – effectively subordinating the prior mortgage held by the existing secured creditors – without their consent.
In Australia there is little need for a rescue finance regime – a secured creditor contemplating the appointment of a receiver will almost always make arrangements to provide the receivers with sufficient funding to allow the business to continue trading until at least the prospects of rehabilitation or sale have been explored.
In other words it seems that the UK reforms which stop secured lenders from appointing receivers may have made resulted in appointees that are less able to secure finance, because the party with the incentive and resources to provide rescue finance has been taken out of the picture – and the outcome in some of those cases is the earlier closure of businesses, and job losses.
What else can we learn from the UK experience?
In late 2013 a UK government adviser released a document that became known as The Tomlinson Report, named for its author.
There’s more detail about the report and its consequences here but in summary the report was highly critical of the conduct of the Loan workout team of the Royal Bank of Scotland and their advisers, in their dealings with borrowers post the GFC.
The report was arguably more an aggregation of bank complaints assembled by a person himself unhappy about his (earlier) treatment at the hands of RBS, rather than a structured review conducted by an impartial person. That said however, the complaints that it presents, and the public and political reaction to the report, far exceed the scope of complaints that lead to Australia’s 2015 Parliamentary Joint Committee Inquiry into Impaired Loans.
Discussion about whether all of the complaints were fully justified is beyond my scope here, but regardless, it seems that there are many UK bank customers who would say that they did not receive any better treatment at the hands of their banks as a result of the prohibition on receiverships!
The use of panels
The Wilmott Forests decision provides insight into another issue. In Wilmott Forests a sole practitioner accepted an appointment to a large agribusiness company, and later used his casting vote to defeat a resolution to replace him. An application to Court ultimately led to his replacement, with the Court determining that not only did the administrator lack relevant experience in the forestry industry, he lacked the financial resources to meet the costs of the business, and lacked professional indemnity insurance and staff resources to undertake such a large and complex assignment.
Directors confronting the appointment of an administrator are usually not well versed in assessing the capability and capacity of the proposed appointees. By contrast, as regular users of insolvency professionals, the major banks have panel arrangements which ensure appointees are free of conflict, appropriately resourced and experienced as to any industry issues, and holding appropriate professional indemnity insurance. For those concerned about the cost of insolvency proceedings it is worth highlighting that through the use of such panels, the banks have also negotiated discounted practitioner rates.
Lipstick on the pig?
Financial failure is devastating for the proprietors of a business, and often so for their employees, and their creditors.
Having a different title for the insolvency practitioner, and having them appointed by a different stakeholder, will have very little real impact – and a lesser duty of care, and additional costs imposed by an administrator’s mandatory investigation, may in fact be backward steps.
There is no doubt that insolvency and restructuring law is due for reform, but we need real reform that will improve returns and restore equality – measures such as those identified here, rather than the adoption of measures from overseas jurisdictions which may not in fact impact the issues that we are trying to address.