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Solving the Puzzle of Corporate Rescue

Solving the Puzzle of Corporate Rescue

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Adelaide Law School Associate Professor David Brown shares his expertise in corporate rescue, corporate law and insolvency law.
Adelaide Law School Associate Professor David Brown shares his expertise in corporate rescue, corporate law and insolvency law.

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Published by: Faculty of the Professions on Feb 08, 2012
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Solving the Puzzle of Corporate Rescue
University of Adelaide Associate Professor David Brown on CorporateRescue
One of legal academic 
 key areas of interest and expertise iscorporate rescue. In this article he shares what it is, why it is vital, and hisinvolvement in this area.
David‟s expertise includes corporate la
w and insolvency law. He was kindenough to take the time to explain the concept of corporate rescue in a
layperson‟s terms.
What is corporate rescue?
Corporate rescue is the term used to describe the legal processes, or informalprocesses, to try to prevent corporate insolvency. So, what is insolvency?
Associate Professor Brown explains that insolvency is a general inability to pay one‟s due debts. In
terms of legal procedures, for individuals we have bankruptcy, and some alternatives which try toavoid it. However, bankruptcy is for people.
 “When companies go bankrupt, in Australia we use procedures such as liquidation and talk about
corporate insolvency.
 “What are the options in that situation when you are getting into that difficulty, and can we do
 anything to prevent it? Should we do anything to prevent it? In which cases should we do something toprevent it? And what are the legal structures that we need to facilitate? You have the law, then the
people who do the work are the accountants.” 
 Corporate rescue encompasses of a range of possible
to the threat of insolvency.
 “Liquidation is not necessarily desirable, so if we can stop people going bankrupt, we can rescue the
business and therefore save jobs and keep the business together, because an ongoing business is
worth more. We don‟t want businesses to fail if they are viable businesses. For example, if they‟ve
been hit by the global financial crisis and they were doing everything else OK, it is some outside factorthat caused them to go b
ust.”  “Often, corporate rescue does not succeed and the company ultimately goes into liquidation, but itdoes provide a last chance to see if the company can be saved.” 
To save or not to save
If a company does not represent a good business model, then it may be preferable for that business tofail.
 “We do have to acknowledge that if companies are in trouble it may be due to bad management orfraud, so we need to balance that against the need to encourage entrepreneurial activity.” 
 This is not an exact science. Associate Professor Brown says that there is a lot of economic theoryinvolved in this area of law, particularly behavioural economics. It is important to understand thenature of the creditors and the company directors as well as the business itself.Are the creditors risk averse? Should we stick with a business that is failing? Is it ultimately a viablebusiness and should there be assistance to save this company?There is also the doctrinal side
do we want laws to facilitate rescuing businesses, or to facilitate failedbusinesses to go into liquidation, or both? Do we need a menu of possibilities? How far should the lawsupport that and how far should we facilitate people to reach their own contractual arrangements?
Lessons from best practice
Part of being a legal academic is to look at what is happening in the rest of the world, who has the bestlaws, and seeing how we may want to copy from or improve upon them. Associate Professor Brownsays,
 “We have international standards about how we deal w
ith companies or individuals in financial trouble.
A lot of my work is comparative, looking at what is done in other jurisdictions.” 
Associate Professor Brown‟s in
-depth knowledge and understanding of commercial law across severalcountries, particularly Australia, New Zealand and England, is key to this comparative aspect of hiswork. For example, he helped to establish new laws relating specifically to corporate rescue during hisyears in New Zealand, based on English and Australian law, and with reference to Canadian law wherethey have been implementing this law for the longest time.
Understanding the laws of other countries is also vital, with increasing globalisation and internationaltrade, since in those situations where companies (and less so individuals) are in financial distress,there is often an international element or they may be part of a multinational group.
 “If there are creditors in different countries, and assets in different countries –
how you deal with thatis called cross-border insolvency. I just finished a book chapter on that topic for a textbook co-writtenbyChristopher Symes and John Duns.
I concentrate on the corporate rescue side of things
how totry to prevent the failure, which is also an important aspect of cross-
border insolvency work.” 
 “There is also international cooperation as well as international bodies making so
called „soft law‟ where it‟s not the law in Australia but there might be inte
rnational agreements, produced by bodiessuch as the United Nations, which provide guides/standards of the best practice. International bestpractice standards may be enshrined in local Australian law or may just act as a guide, setting a
How? The practicalities of corporate rescue
The first issue to face is that there are creditors who want to be paid. The first step forward is to geteveryone around the table, including the creditors (banks, suppliers, etc.), shareholders and directors,and see whether
if this business goes bust
are we going to get anything or not very much. If wecome to some agreement and carry on, and trade out of our difficulties then the parties may get more,the business may survive and retain ongoing customers. Of course, this requires doing somethingdifferently from what you are doing.There are a range of options, specific to each company in this kind of situation. Options are generally:1. directors buying it back; 2. getting additional investment from somewhere; and 3. debtrestructuring.For example, with regard to the debts to banks, suppliers and other creditors, plus existing sharecapital, an option could be to convert the debt into shares in the new business, instead of debt in the
old company. “So if eve
ryone around the table thinks that there is a viable business, they may beprepared to say we will waive some of our debt, defer it, or consider a range of options, to enable thecompany to have working capital so it that it can carry on in business and have some longer term
A recent example is provided by the retailer Colorado which went bust. “They have since restructured
the debt, and established a new company called Fusion Retail. Some of the original creditors havetaken shares in the new company. The Colorado brand has been retained but has largely gone online.Some other brand lines have been retained, including Jag and RM Williams, but some were not kept.Overall they were very successful businesses but it was just that the Colorado stores were not doingvery well, so the decision was made to close the stores. The nature of the business was changed andthey restructured the debt. That is an example of a corporate rescue that so far looks like it has been
successful. Time will tell.” 
er, ultimately, the best option may be to sell the business. “Often when a company gets into
trouble and goes into insolvency, a liquidator or receiver will be appointed and the best bet is to sellthe business to the directors
that may seem odd because they are selling the business back to thepeople who got it into trouble in the first place
but the best offer on the table is from the directors,because they want their business to carry on. Employees are kept on
this is an example of corporaterescu
e. At least if the business is sold to a new purchaser people keep their jobs.” 
Dodgy dealings
 “When I tell people that I am involved with insolvency law, one thing they often ask me is –
what areyou going to do about these directors who start up again? The public does see this as an issue. Inmany ways it is perfectly legitimate, because companies fail often for reasons which are nothing to do
with wrongdoing by the directors, so why shouldn‟t they be able to start up a new company?” 
Does this really happen? If so, how can it persist?
 “Yes it does go on because once we say that a company is separate from the individuals behind it, then
 we have to acknowledge that. Having separate companies is good for enterprise. It enables people to
invest in shares in that company, and provide it with capital to do what it does. We can‟t then ignore
Symes and Duns,
 Australian Insolvency Law
, 2nd edition forthcoming Autumn 2012, LexisNexis.

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