Australia. I. Generally

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1 Australia Texas New York Washington, DC Connecticut Dubai Kazakhstan London I. Generally Australian bankruptcy procedure is regulated by its Corporations Law, which is a single statute that governs almost all aspects of a corporation's legal existence. The Australian Corporations Law provides for both a traditional liquidation or "winding up" of a corporation, as well as a reorganization procedure titled "corporate voluntary administration" ("CVA"). Australian law not only permits a corporation to reorganize through a CVA, but also permits the conversion of a liquidation into a CVA under certain circumstances. While generally "creditor friendly," Australian law does provide for reorganization through a quick and relatively effective reorganization procedure. Debt to equity restructurings are rare in Australia, and restructurings typically involve the orderly sale of a business and a distribution of proceeds by administrators. Out-of-court restructurings are common in Australia; however, the issue of director liability, discussed in more detail below, often complicates out-of-court negotiations. In response to the Australian High Court's decision in Sons of Gwalia holding that certain shareholder claims rank pari passu with claims of general unsecured creditors, in January 2010 the Rudd government announced a series of insolvency reforms that includes a legislative reversal of the Sons of Gwalia decision. The effects of the Sons of Gwalia decision, and the announced legislation, are discussed in more detail below. II. Liquidation There are two basic procedures for liquidating corporations in Australia, namely voluntary and involuntary liquidation. A. Voluntary Liquidation Voluntary liquidation of a company may be commenced by its members and may take two forms. In a "Members' Voluntary Liquidation," a solvent company's members may resolve in a general meeting to wind up the company if the majority of directors have made a written solvency declaration, attesting that, after due inquiry, they have formed the opinion that the company will be able to pay its debts in full within 12 months of commencing the liquidation. By deciding to wind up the company while it is still solvent, the directors and members have greater control in the liquidation process. Alternatively, in a "Creditors' Voluntary Liquidation," an insolvent company's directors may resolve to seek a member resolution to place the company in liquidation in which the company's creditors play a more active role in the winding up, and the directors and members have almost no control over the process. A member resolution for voluntary liquidation requires at least 21 days notice unless 95% of the members otherwise consent. Upon resolving to voluntarily wind up the company, the members select a liquidator. NEWYORK\17404

2 As part of a voluntary liquidation, the liquidator has authority to sue directors for insolvent trading and seek restitution for the company's voidable transactions. B. Involuntary Liquidation Involuntary liquidation is initiated by creditors who apply to the court because a company is insolvent and unable to pay its debts. A court may order a winding up of a company if it is proved that the company is insolvent, i.e., unable to pay "all" its debts" as and when they become due and payable." The court may grant an involuntary liquidation request by entering a provisional liquidation order, which almost immediately triggers the appointment of a provisional liquidator by the court. A hearing on the provisional liquidation usually takes place within a few days of the request for the commencement of liquidation proceedings, and a final hearing will take place at a later date for a final order. A company's directors also may request a provisional liquidator be appointed if they fear that the company will be mismanaged in the process of preparing to wind-up operations. The provisional liquidator's job is to safeguard the company's assets pending a final hearing by the court as to why the company should not be finally wound up. The provisional liquidator takes control of the company and its operations and divests management of its control. Following a final order for the winding up of the company, a final liquidator will be appointed by a majority of creditors at a general meeting. The provisional liquidator is often selected as the final liquidator. III. Private Receivers Australia, similar to England and Canada, uses a system of mortgages and fixed and floating charges to record security interests in favor of secured creditors. If contractually agreed to by a corporation under the terms of the security documents, upon the default of the corporation, a secured creditor can appoint a private receiver to realize its security for the benefit of the secured creditor somewhat like a private liquidator. The private receiver operates outside of the court system and can immediately take control of the assets subject to the mortgage or charge. A receiver usually acts as agent for the company. Although the receiver is generally personally liable for debts incurred for services rendered or goods purchased, the receiver will almost always have a right of indemnity against the assets of the company subject to the relevant security. Where a company enters into a CVA, described below, the secured creditors with an enforceable charge over substantially all of the company's assets may decide within 10 business days of the commencement of the CVA to appoint a receiver instead of allowing the administrator to control the company's assets. IV. Reorganization A. Generally The Corporations Law Reform Act of 1992 introduced the CVA as a new reorganization procedure. The CVA has certain similar aspects to Chapter 11 of the U.S. Bankruptcy Code. In practice, this procedure has been relatively effective, but expensive, in restructuring corporations in Australia. -2-

3 CVA is a reorganization procedure for administering the affairs of an insolvent or nearly insolvent company in order to maximize the chances of its continued existence or, if the company cannot survive, to result in a better return to creditors and shareholders than immediate liquidation. Any corporation that is insolvent, or that is likely to become insolvent, may avail itself of CVA. CVA usually is initiated by the company itself, although it is possible for a large secured creditor or liquidator to commence a CVA. B. The Administrator CVA has several appealing aspects. Very little court involvement is required and, in fact, it is possible to pass through the whole CVA procedure without a single court hearing. In practice, the court is consulted periodically during the process. All that is required to commence a CVA is written appointment of an administrator by the company's directors, with notice to the Australian Securities Commission. The company-appointed administrator has control over the company, investigates its affairs, and calls meetings of creditors. In practice, since the administrator is appointed by the company, the administrator will allow management to continue running the business on a day-today basis under the supervision of the administrator. The administrator can be replaced at a meeting of creditors, although this is rarely done. The administrator can continue to trade on the business of the company but must exercise caution in doing so as the administrator is personally liable for any losses suffered by the company after the appointment of the administrator. C. Creditors Committee While there are meetings of creditors and the selection of a creditors committee, the committee is consultative in nature and does not play a role similar to the official creditors committee in U.S. Chapter 11 proceedings. For example, an Australian creditors committee does not have the right to hire professionals to be paid by the estate. D. The Deed of Company Arrangement At a meeting of creditors, a Deed of Company Arrangement ("DOCA") is crafted pursuant to which debts are restructured. A DOCA offers the company's directors protection from potential trading liability. The insolvent trading provisions can lead to directors' personal liability and, therefore, there is a strong incentive for the directors to ensure that the company fulfils its obligations under the proposal. The DOCA can be varied consensually at creditor meetings and must be approved by a majority of creditors both in number and principal amount. In the event that a DOCA vote is approved by a majority in principal amount, but not number, or vice versa, the company-appointed administrator will cast the deciding vote. There is no other "cramdown" mechanism. If the parties ultimately fail to approve a DOCA, the CVA gives way to winding-up procedures. However, once the DOCA has been executed, it binds the company, its officers and members, the administrator, and all unsecured creditors, but only those secured creditors who have voted for the DOCA. -3-

4 E. The Moratorium (Automatic Stay) The appointment of the administrator automatically commences a moratorium (or stay) on actions to enforce claims against the company and its property, except with consent of the administrator or leave of the court. The stay is subject to certain exceptions. Most significantly, a secured creditor holding a charge over all, or substantially all, of the company's assets may "opt out" of the CVA by exercising the rights under the charge within 10 business days, often appointing a receiver and effectively liquidating the corporation and thwarting the CVA. The moratorium continues until a final decision is made by executing a DOCA, winding up the company or, rarely, terminating the administration. The creditors must meet to decide the company's future within 20 business days after the administrator is appointed (25 business days if during December or over Good Friday), which meeting of the creditors may be adjourned for no more than 45 additional business days. This means that the entire CVA procedure must be fully completed in no more than about three months of its commencement. V. Miscellaneous Issues A. Priority of Shareholder Claims In Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v. Margaretic [2007] HCA 1, the Australian High (i.e., Supreme) Court concluded that a shareholder's claim against an Australian issuer for damages caused by defective disclosure practices should not be subordinated to the claims of legitimate unsecured creditors in insolvency proceedings. Following the rule in Houldsworth v City of Glasgow Bank, the High Court affirmed the lower courts' rulings, which concluded that such claims were not brought within the shareholder's capacity as a shareholder, and, therefore, are not subject to subordination pursuant to section 563A of Australia's Corporations Act In a recent creditor vote on the sale of the business in the Sons of Gwalia case, shareholders, with their pari passu claims, were permitted to vote on a DOCA even though such fraud claims had only been alleged and not yet proven. A clear majority in amount of claims (mostly held by typical debt or trade creditors) opposed the sale of assets, while a clear majority of claimants (mostly shareholders) voted in favor of the sale, following the administrator's recommendation. The administrator, in his role of tie-breaker, followed his own recommendation, supported by the majority in number of creditors (shareholders), and cast the deciding vote in favor of the sale despite the overwhelming opposition of traditional creditors. In response to extensive criticism of the Sons of Gwalia and Houldsworth decisions in business and legal circles, the Australian Parliament announced in January 2010 that it would enact legislative reforms to overturn the Sons of Gwalia decision and abrogate the rule in Houldworth. Following the delay of mid-year elections the Australian parliament finally passed the amendment (Corporations Amendment (Sons of Gwalia) Bill 2010) in November To become effective the legislation still requires "Royal Assent", however this typically occurs in the weeks following passage by the Parliament. Once the legislation becomes effective, the claims of defrauded shareholders will return to being postponed (subordinated) to the claims of legitimate unsecured creditors, including the holders of private placement notes and public debt securities. The Amendment also amends the law so that (1) the right of subordinated shareholder -4-

5 claimants to vote as creditors in insolvency proceedings is removed, unless the Court permits otherwise; and (2) any requirement for an administrator or liquidator to provide reports to creditors to such claimants is removed, except where a claimant makes a specific request for a copy of a particular report. The legislation is retroactive and, therefore, does not affect preexisting shareholder claims in current proceedings. B. Director and Officer Liability Directors have a duty to prevent insolvent trading by the company. A director will be personally liable if at the time the debt was incurred either (1) the director was aware that the company was insolvent, or (2) a reasonable person should have been aware or suspected insolvency. Australian law imposes civil and criminal liability on directors who allow an Australian corporation to continue trading in insolvent circumstances with no reasonable expectation that the corporation will be able to meet its debt obligations. Concerns of personal liability understandably drive directors and officers to conservatively assess company solvency, which can complicate out-of-court restructurings in Australia. Even if a company is not yet in default on its debt, debt approaching default may be deemed current debt for purposes of the directors' insolvency analysis. Without appropriate forbearance agreements in place, directors may commence a voluntary liquidation or CVA proceedings to avoid personal liability, often prematurely from the perspective of creditors attempting to reorganize the company. In response to this value-destructive impediment to outof-court restructurings, the Australian government is considering possible legislation to introduce "safe harbor" provisions granting additional comfort to directors and officers of nearly insolvent companies. C. Corporate Groups and the Deed of Cross Guarantee Australian law provides that Australian public companies may report their financials on a consolidated basis and thereby avoid certain individual entity reporting and audit requirements, provided that the consolidated affiliates execute a cross-guarantee ("Deed of Cross Guarantee") whereby each company within the consolidated corporate group guarantees each other member's debt. The rationale for such requirement is that a creditor is presumed to have relied on the consolidated financials of the corporate group when deciding to conduct business with one of its members. While the cross-guarantee provisions are, on their face, only relevant in liquidation, the provisions are frequently applied in CVA proceedings as well, where they can significantly alter the expected distribution scheme. VI. Recognition of Foreign Insolvency Proceedings In 2008, the Australian Federal Parliament enacted the UNCITRAL Model Law on Cross-Border Insolvency by passing the Cross-Border Insolvency Act. The UNCITRAL Model Law, as adopted by the Act, (1) provides access to Australian courts to a person administering a foreign insolvency proceeding for the purpose of seeking a temporary stay of proceedings in Australia against assets of an insolvent debtor; (2) permits a foreign representative to commence an insolvency proceeding in Australia where the debtor is subject to a foreign proceeding, and participate in an Australian insolvency proceeding in relation to that debtor; (3) allows most -5-

6 foreign creditors the same rights as Australian domiciled creditors regarding the commencement of and participation in insolvency proceedings in Australia; (4) applies the concept of a "center of main interest" to allow a court to determine whether a proceeding is a "foreign main proceeding" or a "foreign non-main proceeding"; and (5) provides a legislative framework for cooperation and coordination between courts and insolvency practitioners of different jurisdictions. The Cross-Border Insolvency Act modified the UNCITRAL Model Law so that (1) references to the laws of the enacting state are treated as a reference to Chapter 5 of the Corporations Act in the case of corporate insolvency; (2) Australia can except certain entities or classes of entities from the ambit of UNCITRAL Model Law; (3) whenever the UNCITRAL Model Law refers to a person or body administering a reorganization or liquidation under the law of Australia, it is deemed to reference a registered liquidator in accordance with Section 9 of the Corporations Act; and (4) a foreign representative applying in Australia for recognition of a foreign proceeding is obliged to provide continuous information about all foreign proceedings concerning the debtor and must report any appointment of a receiver or any insolvency proceedings under the Corporations Act. The UNCITRAL Model Law does not apply to receiverships or a Members' Voluntary Liquidation but is applicable to a CVA. With respect to countries that have not adopted the UNCITRAL Model Law, Australian courts follow the common law principles of comity, whereby foreign judgments and insolvency proceedings can be recognized in Australia. In addition, a foreign judgment may be enforced in Australia either under the common law or the Commonwealth Foreign Judgments Act This Acts enables the foreign judgment creditor to apply to register that judgment in the appropriate court. These provisions extend only to countries that are determined to satisfy a reciprocity of treatment standard. -6-

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