Navigating Safe Harbour

Will Safe Harbour make Australia a restructuring destination of choice, when compared to regimes in other jurisdictions?The reforms might be a step in the right direction, but if Australia truly wants to embrace restructuring law reform it should look to follow Singapore's lead.

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United states
chapter 11
Australia
Safe Harbour
United Kingdom
Administration
Singapore*
Judicial Management
Court InvolvementCourt Controlled process.None.Not necessary if commenced out of court by the company, its directors or a secured creditor holding a "qualifying floating charge" by simply filing the requisite papers at the court.

Otherwise, a court application is necessary.
The company (including a foreign one with the requisite nexus to Singapore), its directors or its creditor(s) may apply to court to appoint a judicial manager.

The court has general supervisory oversight over the judicial manager upon appointment.
Creditor compromises and cram downCreditors vote on the reorganisation plan. Impaired classes of creditors must accept by 2/3 in the dollar amount and more than half in number of the voting creditors in that class.

If class is deemed to vote against the turnaround plan, the company may seek to effect a “cram down” to confirm the plan.
Creditors do not vote on the turnaround plan. Creditor compromises will be by express agreement only. There is no formal “cram down” mechanism.An administrator can use the statutory “cram down” procedures of a scheme of arrangement or a company voluntary arrangement.Possible. Judicial managers often attempt to reach an arrangement or compromise with creditors to restructure the company’s debts.

The arrangement or compromise may be implemented by way of a statutory “cram down” using a court-sanctioned scheme of arrangement.
Moratorium on creditor enforcementAutomatic stay provisions (including secured creditors).No. Business as usual.

Notably, secured creditors with security over the whole/substantially the whole of the assets of the company will be able to appoint a receiver. For this reason, it will be critical for the company to actively engage with its secured creditors. Practically the turnaround plan will likely require secured creditor approval.
Yes. The moratorium stays all legal proceedings, and prevents the enforcement of judgments and security (other than under security financial collateral arrangements) without the leave of the court or the consent of the administrator.

The moratorium does not, however, prevent the enforcement of contractual rights (such as the right to terminate the contract upon insolvency of the company).
Automatic stay starting from the date on which the application is made to the court for the appointment of the judicial manager.

Save with leave of court and consent of the judicial manager, the moratorium stays all legal proceedings, prevents the enforcement of judgments and security, and prevents forfeiture or re-entry under any lease of premises occupied by the company.

The moratorium also prevents the company from being wound up.

However, the moratorium does not prevent the enforcement of self-help remedies such as contractual set-off.
Super priority for fresh debtDebtor may seek Court approval for “DIP” financing that provides for the granting of “priming” liens on encumbered assets, new liens on unencumbered assets and super priority claim status.No.No. Whilst an administrator has the power to borrow and encumber assets, no special priority is given to post-administration lenders. Borrowing by an administrator will be an administration expense and will rank above the claims of floating charge holders and behind the claims of fixed charge holders.Yes, for rescue financing.
Notice to creditorsCreditors are able to obtain notice of entry into Chapter 11, by reason of the requirement for a petition to be filed for entry into Chapter 11.With the exception of publicly listed companies who will need to comply with continuous disclosure requirements (discussed in Weekly Digest [5]), there is no formal requirement to notify creditors.

In practical terms, standstill arrangements may need to be negotiated with secured creditors, which will involve informal notification of the company’s position.
Yes. The administrator must publish their appointment and send a notice of such appointment to each known creditor of the company as soon as reasonably practicable.Yes. An application for judicial management must be publicised. Creditors secured by a floating charge which entitles them to appoint a receiver of the whole (or substantially the whole) of the company’s property must also be notified.

In addition, upon appointment of the judicial manager, the company’s invoices, purchase orders and letterhead must all contain a statement informing of the judicial management.
Employee EntitlementsAs a general rule, all members in a class must be treated equally. Limited priority status for certain employee wage claims only.Along with tax reporting obligations, the company must be able to pay employee entitlements (including superannuation) throughout the duration of Safe Harbour.Employment contracts do not terminate automatically.

Administrators have 14 days from their appointment to “adopt” an employment contract or to dismiss the employee.

If the employee is dismissed, any redundancy costs are an unsecured claim (subject to a capped preferential claim). If the employee is kept on, his salary (but not any subsequent redundancy costs) will be an expense of the administration and be paid in priority to the administrator’s own remuneration.
The company’s employees must be paid their salary and entitlements during the course of the judicial management, but this is not done in priority to other payments. However, in practice, an order of court is usually sought to give employees preferred creditor status with respect to their pre-judicial management claims.

Contributors: Meredith Bennett (Partner, Australia), Michael Sloan (Partner, Australia) and Jean Woo (Partner, Singapore); Anna Langton (Counsel, London); Dawn Tan (Managing Director, Ashurst ADTLaw), Lifen Tang (Director, Ashurst ADTLaw) and Adriel Chia (Senior Associate, Ashurst ADTLaw).

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This publication is co-written by ADTLaw LLC and Ashurst LLP who together form Ashurst ADTLaw in Singapore. Ashurst LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary. The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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