While there have been a number of high profile companies undergoing restructuring or in voluntary administration, for the most part those companies were already experiencing significant financial distress in early or mid 2008 - ominously, before the global economic downturn fully took effect. The implication is that the current batch of restructurings and corporate collapses are victims of the credit crunch and the full effects of the economic downturn remain to be seen.
"Companies such as Babcock & Brown, Allco and Centro were heavily geared and the credit crunch was enough to get them," said Henry Davis York partner Roger Dobson. "In Australia, the economic downturn is only just getting underway." Exactly when we will see the next wave of restructuring is guesswork, although Dobson says that it is likely that there will be more activity by the third or fourth quarter of this year. "I would be surprised if it didn't happen. There are a lot of companies that will need to refinance significant amounts of debt in the next 12 to 24 months, asset prices are under pressure and revenues are dramatically impacted. It is almost inconceivable that we will not see some more highly geared companies forced to undergo a major restructure or go into voluntary administration."
Restructuring v insolvency
A feature of the Australian market has been the absence, thus far, of any high profile company going into liquidation. Babcock & Brown, Allco, Centro and PBL have all thus far been on the restructuring or administration side of the equation and although they are not out of woods just yet, they have evaded liquidation to date.
"Banks are all about maximising returns," said Dobson. "In every instance I've seen, banks will try where they can to assist in a restructure. There may, of course, be more cases in future where a restructure is not feasible."
It's a contrast to the situation in Asia, where lawyers report that distressed companies have been heading for the insolvency stage more rapidly. Stephen Eno, head of Baker & McKenzie's Asia Pacific banking & finance practice group, said that the current climate is seeing struggling companies go from restructuring to insolvency far more quickly than they did during the last financial crisis to hit Asia. Part of the reason is that banks are less tolerant in the current climate because they have other, bigger, challenges: "If you look at some of the companies which have recently faced financial difficulties, it is remarkable - and slightly disturbing- how quickly provisional liquidators have been appointed."
But Australia is in a slightly different situation, said Roger Dobson: "In Australia, directors can be held liable for insolvent trading and that's in contrast to a lot of Asian jurisdictions which don't have such legislation. Most of the time it's the directors themselves who are appointing administrators and the banks don't have a say in the decision to pull the pin - other than to then take steps to protect their own position as best they can."
Some have gone so far as to suggest that Australia's insolvent trading laws are contributing to the rate of corporate failures. McCullough Robertson partner Scott Butler recently called for Australian regulators to provide greater flexibility to directors, pointing to initiatives in Britain where directors have a greater opportunity to continue trading if there is a reasonable prospect of avoiding insolvency.
"The [current Australian] legislation means that directors are walking a legal tightrope if they attempt to keep their businesses afloat rather than declaring insolvency," he said.
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