Class Warfare In Debt Restructuring: Does Australia Need Cross-Class Cram Down For Creditors’ Schemes Of Arrangement?

Publication Type:
Journal Article
The University of Queensland law journal, 2017, 36 (1), pp. 73 - 97
Issue Date:
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The corporate insolvency landscape is changing. While the numbers of formal insolvency appointments have not increased dramatically since the Global Financial Crisis,1 the dialogue surrounding financial distress and the methods to address it have moved away from formal insolvency appointments to restructuring and turnaround before financial distress becomes insolvency. 2 Insolvency proceedings, such as receivership, liquidation and even voluntary administration (which has a stated purpose of trying to save businesses)3 carry a stigma of failure,4 which makes trading on as a business more difficult and reduces creditor confidence in the potential to save the business through a formal restructuring. Schemes of arrangement have been used to restructure companies for more than 160 years.5 A scheme may be used by creditors to address financial distress, and offers numerous advantages over other formal mechanisms (such as liquidation and voluntary administration) because it applies to secured creditors 6 and can be used to bind dissenting minorities of both secured and unsecured creditors.7 The ability to bind minorities within a specific class of creditors or members is sometimes referred to as a ‘cram down’. A creditors’ scheme of arrangement may be proposed between a company and one or more classes of creditors. Where the scheme targets multiple classes of creditors it must be approved by a majority of each class. If one class of creditors dissents, then the scheme fails. The ability of a majority of creditor classes to bind one or more dissenting classes is referred to as ‘cross-class cram down’ and is the focus of this article.
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