As we work through the effects of COVID-19 Creditor Schemes, or a Deed of Company Arrangement (DOCA), may need to be included in our scenario planning. Both are opportunities to work with creditors to come to an agreement that will provide a greater level of certainty and a basis on which planning for safe harbour better outcomes can be made.
Recently we prepared an independent expert report for a Creditor's Scheme and have been asked by ASIC to contribute to a consultation on expert reports in DOCA’s which include a proposal for the transfer of shares, either with the shareowners' consent or via application to the Court for expropriation (ASIC Consultation Paper 326: Chapter 6 relief for share transfers using s444GA of the Corporations Act). The independent expert approaches for these mechanisms are vastly different from each other so we have outlined both below.
A court-approved compromise or arrangement between a company and its creditors
Creditors Schemes require the involvement of ASIC and the Court and are considered more expensive and time-consuming than a DOCA. Unlike a standard DOCA however, they are initiated outside of the appointment of an administrator or insolvency and generally by a company itself, or its creditors.
For a Creditor's Scheme, the independent expert is likely to be asked to opine on the outcome of the following scenarios.
Before the Proposed Creditors Scheme
- Whether shareholders have an economic interest in the Scheme Company.
Proposed Creditors Scheme Proceeds
- The value of the Scheme Company’s assets relative to outstanding debts immediately following implementation;
- The solvency of the Scheme Company immediately following implementation;
- The expected dividend that will be paid to scheme creditors and shareholders immediately following implementation. This is determined by assessing surplus cash (if any) after settlement of the Scheme Company’s liabilities, and
- Whether shareholders will have an economic interest in the Scheme Company following implementation of the scheme.
Should the Proposed Creditors Scheme Not Proceed
- The value of the Scheme Company’s assets relative to the debts owing;
- The expected dividend that would be payable to scheme creditors and shareholders assuming an orderly realisation of assets over a period of 6 months. This assessment is conducted by determining the surplus cash available (if any) to distribute to shareholders after settlement with the Scheme Company’s secured and unsecured creditors, and
- The consequences for the Scheme Company and creditors.
A DOCA is a binding agreement between a company and its creditors that aims to maximise the chances of the company continuing to exist or provide a better return for creditors and shareholders than liquidation.
On entering voluntary administration a DOCA can be used for many different purposes including to compromise the claims of unsecured creditors, recapitalise, reorganise the company’s business and affairs, and/or implement changes in control.
A DOCA Under s444GA Corporations Act 2001
Before COVID-19 ASIC was consulting on the requirements for Expert Reports accompanying a DOCA proposal that included a transfer of shares under s444GA Corporations Act 2000. A transfer requires ASIC relief from Chapter 6 of the Corporations Act 2001 if the transfer results in a party increasing their voting interest beyond the 20% threshold. As a condition of the relief, ASIC has required an Experts Report to opine on shareholder value and have generally only granted relief if it can be shown that the shares have no value under a going concern or liquidation basis.
ASIC’s consultation centred around who can prepare these expert reports (the administrator or other party such as an independent expert), the valuation approach to be taken by the report author (a going concern or liquidation basis), and whether the expert report should be prepared under ASICs independence guidance RG 112 Independence of Experts.
ASIC has not yet provided its response on the consultation however has recently foreshadowed that the proposed relief to Chapter 6 (when required) will include conditions that the deed administrator makes available to shareholders materials including an expert report prepared:
- By an independent expert (rather than the administrator or other associated party);
- Consistent with the current independent expert report regime, and
- On a liquidation basis.
Under a liquidation analysis, assets and liabilities are measured at their liquidation value. That is for assets, their net realisable value on disposal less restructure and liquidation costs. For liabilities, it is their expected settlement amount.
Thus ASIC’s position varies from current practice which has been that the experts' report be prepared:
- By either the DOCA Administrator (who is operating in the best interests of the DOCA creditors), parties associated with the Deed Administrator, Administrators not licenced to provide a conclusion to retail shareholders, or independent experts, and
- On the basis of both going concern (employing the appropriate methodology for the assets) and liquidation, including commentary on alternative proposals available. Share value on completion of the DOCA may have also been provided.
ASIC intends to finalise its position later in 2020 and we look forward to the clarity as the standard of expert reports accompanying these DOCAs has been of inconsistent and at times very poor quality. Further, the effects of COVID-19 may also mean that s444GA DOCAs become viable options for many companies.