2. Join the conversation: #CPAcongress @cpaaustralia 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

3. 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

4. 4 Overview How to deal with a key supplier or contractor in financial distress 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

5. 5 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

6. 6 Signs of insolvency What to watch out for : Industry rumours ASX announcements and profit warnings Financial difficulties of parent companies Late material deliveries Complaints by subcontractors How to deal with a key supplier or contractor in financial distress High turnover of staff Unusually high level of claims Sudden resignations of key members of management of the board The “domino effect” – eg Ansett and Gate Gourmet Multiple legal proceedings (searches can be done)

7. 7 THE INSOLVENCY PROCESS How to deal with a key supplier or contractor in financial distress

8. 8 Common types of corporate insolvency administrations How to deal with a key supplier or contractor in financial distress Receivership Administration Liquidation Deed Administration

9. 9 Receiverships Receivership Contractual – private appointment General Security Agreement (fixed and floating charge) over substantially whole of the assets = “receiver and manager” How to deal with a key supplier or contractor in financial distress 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)

10. 10 Voluntary Administration How to deal with a key supplier or contractor in financial distress First creditors’ meeting Restore to directors Deed of Company Arrangement (DOCA) Second creditors’ meeting Administrator appointed Liquidation

11. 11 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 How to deal with a key supplier or contractor in financial distress

12. 12 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

13. 13 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 How to deal with a key supplier or contractor in financial distress

14. 14 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 How to deal with a key supplier or contractor in financial distress

15. 15 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 How to deal with a key supplier or contractor in financial distress 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

16. 16 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. How to deal with a key supplier or contractor in financial distress

17. 17 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 How to deal with a key supplier or contractor in financial distress

18. 18 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 How to deal with a key supplier or contractor in financial distress

19. 19 Liquidation How to deal with a key supplier or contractor in financial distress Liquidation ss459A - 600 Members’ voluntary liquidation S495 - 496 Creditors’ voluntary liquidation s497 - 500 Court appointed liquidator Provisional liquidator S472(2)

20. 20 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

21. 21 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 How to deal with a key supplier or contractor in financial distress

22. 22 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 How to deal with a key supplier or contractor in financial distress

23. 23 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 How to deal with a key supplier or contractor in financial distress

24. 24 Forewarned is Forearmed How to deal with a key supplier or contractor in financial distress

25. 25 Overview Contractual techniques to manage the risk of insolvency with Contractors Three key groups of clauses: Value for money Security Escape Contract administration How to deal with a key supplier or contractor in financial distress

26. 26 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 How to deal with a key supplier or contractor in financial distress

27. 27 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 How to deal with a key supplier or contractor in financial distress

28. 28 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 How to deal with a key supplier or contractor in financial distress

29. 29 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 How to deal with a key supplier or contractor in financial distress

30. 30 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 How to deal with a key supplier or contractor in financial distress

31. 31 Security Parent Company Guarantees Solvency of parent Enforcement issues Retention Rate at which retention should be withheld Status of retention monies How to deal with a key supplier or contractor in financial distress

32. 32 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 How to deal with a key supplier or contractor in financial distress

33. 33 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 How to deal with a key supplier or contractor in financial distress

34. 34 Signs of insolvency  Payment Link between payment and value of work performed Ability to gather objective evidence  Direct payment of subcontractors Right but not obligation Extinguishes liability to Contractor  Title Clear drafting How to deal with a key supplier or contractor in financial distress  Pay when paid Link between payment and value of work performed Ability to gather objective evidence  Security Consider trigger event Notice requirements  Termination Notice requirements Right to use plant and equipment

35. 35 How to deal with a key supplier or contractor in financial distress Questions?

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