News that Australia’s third-largest pizza chain Eagle Boys has been placed in administration suggests a bleak future may lie ahead for the company.
Administrators have indicated they “are in the process of identifying restructuring measures”. But research by ARITA’s Mark Wellard (formerly from QUT) on the effectiveness of voluntary administration indicates that a sustainable rescue is generally achievable in only a minority of cases.
Indeed ASIC has reported that failure rates of companies entering into voluntary administration are high, with 78% of companies being de-registered within five years.
The Corporations Act 2001 (Cth) makes it clear that the main objective of voluntary administration is to rescue an insolvent company, or as much of its business as possible.
Successful rescue of the company or its business is in the interests of a wide range of stakeholders, including the company’s employees, creditors, shareholders as well as the community in general.
If a company or its business cannot be rescued, then the voluntary administration regime is designed to achieve better outcomes for the company’s stakeholders than would otherwise be achieved if the company was immediately wound up.
The notion of rescue is commendable. But the second objective of voluntary administration of salvaging better outcomes for all stakeholders is more achievable.
Wellard suggests that the weighted average dividend paid to unsecured creditors is generally much higher than would otherwise have been achieved if the company was wound up.
When tested on a sample of Deed of Company Arrangements (DOCAs), the average dollar median dividend return was 5.4 cents in the dollar, compared to an expected dividend of zero had the companies surveyed been wound up. It is not surprising, therefore, that most voluntary administrations appear to be of a “quasi-liquidation” nature.
Within the insolvency profession there is a view that Australia’s insolvency regime tends to punish and stigmatise corporate failure, resulting in a lack of restructuring culture in Australia. This is exacerbated by companies waiting too long before entering into voluntary administration, meaning there is little remaining of a company’s trading or income-producing business to rescue.
Additional factors that also put at risk the successful rescue of a company or its business include the actions of receivers in enforcing priority debt claims by selling key company assets, the company’s inability to access financial support to trade out of corporate insolvency, and the risk of personal financial liability in attempting corporate or business rescue.
The fate of two recent high profile voluntary administrations give us some insight into how these factors interrelate.
Dick Smith Holdings Ltd
Dick Smith was placed into voluntary administration on 4 January 2016. Shortly after this, Ferrier Hodgson was appointed as receiver and manager by the company’s secured creditors with the aim of selling the business as a going concern.
By 25 February 2016, Ferrier Hodgson announced the closure of all remaining Dick Smith stores in Australia and New Zealand as the business sale process had resulted in no acceptable offers. The closure of Dick Smith stores meant job losses for 3,300 employees and effectively ended any opportunity for the voluntary administration to achieve any corporate rescue objectives.
Arguably the most controversial aspect of the Dick Smith saga was the post-Christmas announcement that pre-purchased gift cards could not be honoured by the Dick Smith stores. Unfortunately, the Senate inquiry established to examine the issue lapsed due the federal election’s double dissolution. However, as the Turnaround Management Association Australia Ltd noted in its submission to that inquiry, the most effective way of protecting the holders of gift cards, and indeed all stakeholders of distressed companies, is to maximise the possibility of business rescue.
Queensland Nickel was placed into voluntary administration on 18 January 2016. At that time QN was insolvent and its administrators determined the company had been so since at least 27 November 2015. This was the date that QN’s key logistics supplier withdrew from debt negotiation arrangements and issued a demand for payment of its total debt of $11.9 million.
Delay in entering voluntary administration impacted QN’s ability to access financial support. This led to QN’s administrators recommending that it was in the interests of creditors for QN to be liquidated.
Placing QN into liquidation ensured that a number of questionable transactions made by QN with related parties could be investigated. It also meant that insolvent trading provisions could be pursued against the company’s directors (which include former politician Clive Palmer). With the benefit of hindsight, liquidation was the more efficient outcome for QN creditors than voluntary administration.
The Productivity Commission recently recommended that Administrators must convert a voluntary administration to a liquidation if, within a month of their appointment, the Administrators do not reasonably believe that the company or a significant part of its business is viable.
This recommendation is meant to encourage directors to enter into voluntary administration sooner when corporate rescue is more achievable. In the interests of achieving sustainable company or business rescue early adoption of this recommendation should be considered.
As for Eagle Boys, the first creditors meeting will be held later this week. Until then, it is far too early to predict with any certainty as to whether voluntary administration will result in a successful business restructure.