Insolvencies hindered by the legal advice
Paul Garvey
The Australian Financial Review
2 Feb 2009 Page 5
The dismal rate at which Australian companies successfully restructure after entering voluntary administration or formal insolvency will only worsen following a controversial report from the federal government's corporations law adviser, industry experts have warned.
The Corporations and Markets Advisory Committee last week affirmed the High Court's controversial Sons of Gwalia decision, which ruled that the claims by shareholders can in some cases rank equally alongside those of other unsecured creditors when companies go into administration.
Cliff Sanderson, the chief executive of restructure advisory group Restructuring works, warned that the ruling would not help arrest the steady decline in successful company restructurings and described CAMAC's recommendation as "simply wrong".
"What was a low restructuring success rate in the late 1990s is getting materially worse," Mr Sanderson said.
"The Gwalia case is one of the complicating factors in restructuring a company. Legislators should be looking to simplify the process, not reinforce existing hurdles."
The Australian Financial Markets Association warned that the ruling would make it harder and costlier for Australian companies to source finance from overseas institutions.
"If the government will not act, overseas lenders will not invest in unsecured debt issued by Australian companies or they will seek a higher credit spread for these unsecured debt transactions," AFMA executive director Duncan Fairweather said.
Recent research by restructuring Works found that only 5.5 per cent of companies that entered some form of insolvency administration successfully restructured in 2008, down from 14 per cent in 1999, while only 22 per cent of companies that entered into voluntary administration were successfully restructured.
The value of the insolvencies last year hit $13.3 billion, triple the $3.7 billion average of the previous five years, while the number of companies entering some form of insolvency administration was up 25 per cent in the five-year average.
