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University of Adelaide Associate Professor David Brown on Corporate Rescue One of legal academic David Brown‟s key areas of interest and expertise is corporate rescue. In this article he shares what it is, why it is vital, and his involvement in this area. David‟s expertise includes corporate law and insolvency law. He was kind enough 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 informal processes, 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 to avoid 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 to prevent 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 responses 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 factor that caused them to go bust.” “Often, corporate rescue does not succeed and the company ultimately goes into liquidation, but it does 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 to fail. “We do have to acknowledge that if companies are in trouble it may be due to bad management or fraud, 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 theory involved in this area of law, particularly behavioural economics. It is important to understand the nature 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 viable business 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 failed businesses to go into liquidation, or both? Do we need a menu of possibilities? How far should the law support 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 best laws, and seeing how we may want to copy from or improve upon them. Associate Professor Brown says, “We have international standards about how we deal with 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 several countries, particularly Australia, New Zealand and England, is key to this comparative aspect of his work. For example, he helped to establish new laws relating specifically to corporate rescue during his years in New Zealand, based on English and Australian law, and with reference to Canadian law where they have been implementing this law for the longest time.
Understanding the laws of other countries is also vital, with increasing globalisation and international trade, 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 that is called cross-border insolvency. I just finished a book chapter on that topic for a textbook co-written by Christopher Symes and John Duns.1 I concentrate on the corporate rescue side of things – how to try 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 international agreements, produced by bodies such as the United Nations, which provide guides/standards of the best practice. International best practice standards may be enshrined in local Australian law or may just act as a guide, setting a standard.” 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 get everyone 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 we come 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 something differently 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. debt restructuring. For example, with regard to the debts to banks, suppliers and other creditors, plus existing share capital, an option could be to convert the debt into shares in the new business, instead of debt in the old company. “So if everyone around the table thinks that there is a viable business, they may be prepared to say we will waive some of our debt, defer it, or consider a range of options, to enable the company to have working capital so it that it can carry on in business and have some longer term stability.” 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 have taken 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 doing very well, so the decision was made to close the stores. The nature of the business was changed and they restructured the debt. That is an example of a corporate rescue that so far looks like it has been successful. Time will tell.” However, 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 sell the business to the directors – that may seem odd because they are selling the business back to the people 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 corporate rescue. 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 are you going to do about these directors who start up again? The public does see this as an issue. In many 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.
the fact that the company is separate from the individuals and say that we should punish the directors because the company has gone wrong. We can only do that if there has been some fraud, or if the directors have dragged the company down because they‟ve been grossly incompetent. Otherwise it is not wrong for them to set up again, because we want to encourage new businesses.” “If the directors have done something wrong, then we do want some way of stopping them and there are ways. ASIC,2 the regulator, has quite a lot of power to disqualify directors and if there has been transfer of property, there are also ways of dealing with that.” “Lately both Chris and I have been thinking about the implications of a business failing and the restrictions associated with that. There are restrictions on directors of companies. Basically, if directors have been involved in failed businesses, they can be disqualified – but it has to be shown that the previous company got into trouble because of the directors. It may have been some outside factor that they couldn‟t help, like the global financial crisis or a key supplier going bust, so it was not necessarily their fault. So it makes sense that directors will not be disqualified just because they were a director of a failed company.” This is where the balance has to be right – “There is always a tension in insolvency law as we want to encourage new businesses and entrepreneurs to use companies to raise capital. Against that we have to balance the risk of abuse, because if you are setting a company up, which is a separate thing from an individual, then we have to be careful that they don‟t abuse that separate company for their own purposes.” Reference: David Brown, Corporate Rescue.Wiley, 1996. law.adelaide.edu.au
ASIC is the Australian Securities and Investments Commission.