L2: How to deal with the collapse of a key
supplier of contractor
Bree Ludlow, Corrs Perth
Victoria MacMillan, Corrs Perth
2.50 pm – 3.40 pm
Thursday 21 November 2013
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How to deal with a
key supplier or
contractor in
financial distress
Presenters:
David Yates and Bree Ludlow
Corrs Chambers Westgarth
21 November 2013
9927654/1
Overview
• Hotspots in the current market
• Signs of Insolvency
• The Insolvency Process
Receiverships
Administrations
Liquidations
• Practical tips - dealing with Administrators and Receivers
•
ROT claims
•
Unfair preferences
• Questions
How to deal with a key supplier or contractor in financial distress
4
Hotspots in current market
•
Commercial property - Oracle, Soul, Southport Central on Gold Coast
•
Retail – Colorado, Darrel Lea, Allens Music, Fletcher Jones
•
Mining services and Construction – Hastie Group, D&G Cranes, Drilling &
Grouting Services
•
Manufacturing – HP Industries, several car component manufacturers
•
Agriculture –Great Southern, Willmont and Gunns, Tamar Valley Dairy
How to deal with a key supplier or contractor in financial distress
5
Signs of insolvency
• What to watch out for:
• Industry rumours
• High turnover of staff
• ASX announcements and profit
warnings
• Unusually high level of claims
• Financial difficulties of parent
companies
• Sudden resignations of key
members of management of the
board
• Late material deliveries
• The “domino effect” – eg Ansett
and Gate Gourmet
• Complaints by subcontractors
• Multiple legal proceedings
(searches can be done)
How to deal with a key supplier or contractor in financial distress
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THE INSOLVENCY PROCESS
How to deal with a key supplier or contractor in financial distress
7
Common types of corporate insolvency
administrations
Receivership
Administration
Deed Administration
Liquidation
How to deal with a key supplier or contractor in financial distress
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Receiverships
Receivership
• Contractual – private appointment
• General Security Agreement (fixed
and floating charge) over
substantially whole of the assets =
“receiver and manager”
• Receivers are agents of the
company with primary duty to “pay
out” secured creditor
(appointor/chargee)
• Receiver’s powers – very wide
powers
• Receiver must take reasonable care
in exercising power of sale
• Realisations from “circulating
security interests” (floating charge
assets) to priority creditors
(employees)
How to deal with a key supplier or contractor in financial distress
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Voluntary Administration
Administrator appointed
First creditors’
meeting
Second creditors’ meeting
Restore to directors
Deed of Company
Arrangement (DOCA)
How to deal with a key supplier or contractor in financial distress
Liquidation
10
Voluntary Administration
•
First notice to creditors – declaration of relationships
•
First creditors’ meeting
•
within 8 business days of appointment
•
creditors can vote to change the Administrators
•
committee of creditors will be formed
•
Administrator investigates company’s affairs and prepares a report to the creditors
•
Second meeting held – normally within 20 business days of appointment (can be
extended by Court order)
•
Creditors decide company’s future at the second meeting
•
Exit routes out of administration
•
administration ends – restore company to directors; or
•
deed of company of company arrangement (DOCA); or
•
liquidation
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Voluntary Administration
Main key features
•
Appointment by company’s board when a company is insolvent or
likely to become insolvent
•
Secured creditor (with full charge) can also appoint Administrator,
or Receiver
•
Purpose is to maximise company’s chances of survival or a better
return to creditors
•
Administrator takes control of the company
•
Secured creditor has option to appoint receiver in first 13 business
days
How to deal with a key supplier or contractor in financial distress
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Voluntary Administration
Main key features
•
Statutory moratorium – claims are frozen
•
Lessors and ROT Suppliers cannot recover possession of property or goods
without Administrator’s consent or permission of the Court
•
During an administration, cannot enforce guarantees provided by directors
•
Administrator owes a duty to all creditors (secured and unsecured)
•
Administrator is personally liable for:
•
services rendered, goods bought, property hired, leased, used or occupied
during an administration; and
•
for the repayment of money borrowed by the Administrator
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Voluntary Administration
Outcome of Administration
•
Business is sold or restructured
•
Fate of company is determined by creditors voting at second meeting – Majority
in value AND number and secured creditors can vote
•
Casting Vote by Administrator if there is a deadlock – must exercise in best
interest of creditors
•
Exit routes
• Administration ends
• Deed of Company Arrangement (DOCA)
• Liquidation
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Deeds of Company Arrangement (DOCA)
Key Issues
• Contractual
• Administered by deed
administrator
• Needs to deal with secured and
priority creditors
• Binds all creditors except secured
creditors and lessors who did not
vote in favour of the DOCA
• Ends when conditions in DOCA
satisfied or a resolution is passed
by the creditors that the company
be wound up
• Needs the support of secured
creditors and a majority in value
and number of other creditors
• Suppliers should carefully monitor
companies that have been
restructured through DOCAs
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Dealing with receivers and administrators
•
Day One – notify the Administrator and/or Receiver of any ROT claim or claim to
equipment held by company
•
Day One – provide Administrator and/or Receiver with your contact details and
reserve your rights – provide one key contact
•
Assist the receiver or administrator where possible
•
Normally receivers (or administrators) are in full control of the company, its assets
and business operations
•
If a company is in both receivership and administration – the receiver is normally in
control because secured assets take priority
•
Receivers and administrators will try and continue to trade business if able to do so
•
Receivers and administrators are personally liable for services rendered, goods
purchased or property hired, leased, used or occupied, which is why it is important to
get fresh purchase orders from them and not rely on previous POs granted by the
Company.
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Dealing with receivers and administrators
•
Ensure you obtain the receiver’s (or administrator’s) purchase order before you
supply a company in receivership (or administration)
•
Alternatively, continue to apply the terms of the contract and deal with requests
by Administrator to vary terms and have Administrator adopt contract.
•
Continuation of supply – major issue
•
While operations may continue - there can be no guarantee of supply
•
Start preparation for “Plan B” – alternate suppliers
•
Manage your internal stakeholders – they will be frustrated at lack of
information and lack of access to decision makers
•
Communication to your customers – what is impact? Eg. Change in timelines
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Dealing with administrators – rights of creditors
•
Creditor meetings and proofs of debt
• Complete proof of debt and proxy form
• Accepted for voting purposes
• Creditors cannot vote for unliquidated or contingent debts or
debts where the value cannot be established
• Take extra care if you are a secured creditor (not to disclaim your
rights – eg to appoint your own Administrator or Receiver)
• Set Off
• Statutory right of set off (section 553C of Corporations Act)
• Broad right of set off
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Liquidation
Liquidation
ss459A - 600
Members’
voluntary
liquidation
S495 - 496
Creditors’
voluntary
liquidation
s497 - 500
Provisional
liquidator
S472(2)
How to deal with a key supplier or contractor in financial distress
Court
appointed
liquidator
19
Court Appointed Liquidator
Main key features
•
Sufficient grounds - insolvency or other general grounds (eg just and equitable)
– onus on petitioning creditor
•
Insolvency ground - statutory demand procedure to partially reverse onus of
proof
• 21 days to comply with statutory demand or apply to have it set aside
• “Genuine dispute” - statutory demand will be set aside
• If not set aside (or amount not paid) then a presumption of insolvency forms basis of a winding up application
• When to use?
How to deal with a key supplier or contractor in financial distress
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Liquidation generally
•
End of the road for the company
•
Liquidator realises assets, determines proofs of debt (creditors’ claims) and
pays dividends to creditors
•
Shareholders usually receive nothing
•
Determines priority creditors
•
Only a liquidator can take proceedings for insolvent trading and voidable
transactions eg, unfair preferences
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Unfair Preferences
•
What to do if you suspect debtor is in financial difficulties
•
“Cash is king!”
•
Elements of an unfair preference:
i.
Company in liquidation;
ii.
Payment was made by company within 6 months of its collapse;
iii. Company was insolvent when payment made;
iv. Payment resulted in creditor receiving more than in a winding up;
v. Creditor (or reasonable person) had reasonable grounds for suspecting
company was insolvent
•
Dealing with preference claims
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Pre-existing Contracts
•
Not automatically terminated by an insolvency appointment
•
Liquidator – power to disclaim
•
Administrator – no express power to disclaim
•
Receiver – can ignore pre-existing contracts, with exceptions
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Forewarned is Forearmed
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Overview
•
Contractual techniques to manage the risk of insolvency with Contractors
•
Three key groups of clauses:
• Value for money
• Security
• Escape
•
Contract administration
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Value for Money
•
Payment clauses
• Key objective: To link payment to the value of the work performed.
• Milestone vs monthly payments
• Evidence of completion
• Right to inspect works
• Right to audit
• Right to withhold payment
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Value for Money
•
Direct payment of subcontractors/employees
• Key objective: Ensuring that the direct payment discharges the liability of
the Company to the Contractor.
• Right vs obligation to make payment
• Evaluating the subcontractors claim
• Avoiding liability to unlawful interference in contractual relations
• Recovery of payment by liquidator
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Value for Money
•
Title
• Ensure that provisions in relation to passage of title are clear
• Consider position in relation to off-site works and materials
• Equitable liens
•
Pay when paid clauses
• Prohibited if the Construction Contracts Act (WA) applies
• Draft very clearly as usually construed strictly by the courts
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Security
•
Bank guarantees
• Key objective: To limit any conditions that affect your ability to call on the
bank guarantee.
• Form of the guarantee:
• Conditional vs unconditional
• Expiry date
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Security
•
Contractual provisions in relation to security
• Timing of provision of security
• Consequences if security is not provided
• Trigger event for right to call on the security
• “Company may call on the security at any time…”
• “Company may have recourse to the security where it has become
entitled to exercise a right under the Contract…”
• Prohibition on injunction
• Status of proceeds of security
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Security
•
Parent Company Guarantees
• Solvency of parent
• Enforcement issues
•
Retention
• Rate at which retention should be withheld
• Status of retention monies
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Escape Clauses
•
Termination
• Key objective: To obtain a right to terminate or take over the works early in
the insolvency process.
• Trigger events
• Notification requirements
• Take over vs termination
• Novation of subcontracts
• Retention or use of plant and equipment
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Contract Administration
•
Financial investigations prior to contract award
•
Indications of possible insolvency during performance of contract:
• Industry rumours
• Late material deliveries
• Low productivity
• Complaints by subcontractors
• High turnover of staff
• Unusually high level of claims
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Signs of insolvency
• Payment
 Pay when paid
•Link between payment and value
of work performed
Link between payment and value of
work performed
•Ability to gather objective evidence
Ability to gather objective evidence
• Direct payment of
subcontractors
•Right but not obligation
 Security
Consider trigger event
Notice requirements
•Extinguishes liability to Contractor  Termination
• Title
Notice requirements
•Clear drafting
Right to use plant and equipment
How to deal with a key supplier or contractor in financial distress
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Questions?
How to deal with a key supplier or contractor in financial distress
35
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