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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 pmThursday 21 November 2013

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

Presenters:

David Yates and Bree LudlowCorrs Chambers Westgarth

21 November 2013

9927654/1

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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

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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

• ASX announcements and profit warnings

• Financial difficulties of parent companies

• Late material deliveries

• Complaints by subcontractors


• High turnover of staff

• Unusually high level of claims

• Sudden resignations of key members of management of the board

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

• Multiple legal proceedings (searches can be done)

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THE INSOLVENCY PROCESS


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Common types of corporate insolvency administrations


Receivership

Administration

Liquidation

Deed Administration

http://en.wikipedia.org/wiki/File:Allco_Finance_Group_Logo.png

http://en.wikipedia.org/w/index.php?title=File:Ansett_logo.svg&page=1

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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


First creditors’ meeting

Restore to directorsDeed of Company

Arrangement (DOCA)

Second creditors’ meeting

Administrator appointed

Liquidation

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• 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



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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



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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


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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


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Liquidation


Liquidation ss459A - 600

Members’ voluntary

liquidation S495 - 496

Creditors’ voluntary

liquidation s497 - 500

Court appointed liquidator

Provisional liquidator

S472(2)

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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•Link between payment and value of work performed

•Ability to gather objective evidence

• Direct payment of subcontractors

•Right but not obligation

•Extinguishes liability to Contractor

• Title•Clear drafting


Pay when paid

Link between payment and value of work performed

Ability to gather objective evidence

Security

Consider trigger event

Notice requirements

Termination

Notice requirements

Right to use plant and equipment

35How to deal with a key supplier or contractor in financial distress

Questions?

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join the conversation: #cpacongress @cpaaustralia l2: how to deal with the collapse of a key...

Documents

financial distress slide

creditors administrator

liquidation slide

secured creditors

financial distress hotspots

financial distress presenters

routes administration

deed administrator