The Small to Medium Enterprise sector of the economy is full of examples of corporate insolvencies with no returns to unsecured creditors. Often, the appointment of the administrator means the end; not just for the company, but its creditors. However, this does not necessarily have to be the case. Clever restructuring techniques can be, and have been, used to achieve returns to creditors in circumstances where that would otherwise not be the case.
A recent example is the successful restructure of CBD Energy Limited. This Aussie clean energy company was initially listed on the ASX with a view of raising funds to support its solar and wind farm activities. It had interests in clean energy projects around the world, including Europe, the US and the ASIA Pacific region (together with valuable licenses to run a solar business in the US).
CBD experienced cash flow issues but raised funds through a bond issue in the UK, and then successfully sought listing on the US NASDAQ platform (after abandoning the listing on the ASX – the view taken that the Australian market was not ready for this type of investment) and raised funds through the US capital markets.
Problems emerged in respect of CBD's historical debt. Essentially, its business was deprived of working capital because of debt servicing commitments, and the cash burn associated with its business model. It was extended finance by its major shareholder (who took security over its assets) but it literally ran out of money to fund its ongoing operations.
Several problems then emerged. CBD became subject to a class action in Texas (in respect of its US capital raising), it was unable to raise further funds from the US market due to an irregularity in its accounts, it faced potential action from the NASDAQ and its key contractual counterparties commenced issuing breach and termination notices.
The Board of CBD then appointed Grant Thornton as voluntary administrators in November 2014. However, the cash position of CBD did not permit the administrators to continue to run the business, pay employees and a raft of termination notices from key counterparties began flooding in. Further, injunction proceedings in New York were commenced by one of its shareholders alleging misleading conduct in CBD's most recent rights issue. What looked like the inevitable value destruction had well and truly commenced.
Up till now, this, to the reader, would be an all too familiar story. However, all stakeholders refused to lay down.
CBD's major creditor extended emergency financing to allow it fund its essential operations during the administration and explore the prospect of a going-concern sale or restructure. The Administrators and the Board of CBD began looking for potential suitors for a sale and found BluNRGY (a US energy monitoring and management company) who were interested in taking over the US solar business (there were other potential buyers for the business but this offer was the one ultimately accepted by creditors). This left the balance of the businesses without a buyer. However, that was not the only concern. The funding for the operations of the company had run out just prior to the Christmas break and without any of the transactions read to complete at this time, there would have been no one to run the business post-Christmas, resulting in a complete destruction of any remaining value. Lawyers for the Administrators then proposed an arrangement in consultation with BluNRGY that involved:
- The major shareholder relinquishing its rights over certain securities to allow the business to operate pending the BluNRGY deal.
- The sale or transfer of the assets unwanted by BluNRGY to major debt holders on a debt-for-asset swap.
BluNRGY proposing a Deed of Company Arrangement1 which involved:
- The remaining unwanted assets of CBD being transferred to a trust;
- BluNRGY making a cash payment to the Administrators to be held in a trust;
- BluNRGY taking over the Company and raising the requisite cash to make the remaining CBD solvent;
- The Creditors of CBD Energy being issued a certain number of shares in CBD. All the cash and assets held in trust be distributed to creditors under the form of a creditors' trust2. The use of a creditors trust structure meant that:
- CBD would come out of administration immediately upon all the cash, shares and assets being transferred to the creditors' trust; and
- The Administrators then being able to distribute the cash, shares and assets to the creditors in accordance with their statutory entitlements.
The above would result in CBD Energy being restructured without its legacy debts, with sufficient working capital to fund the US solar operation giving creditors a chance to participate in the upside of any successful ventures that CBD would undertake.
However, there remained potential road blocks to implementing this arrangement. Briefly they were as follows:
- The transaction had to be concluded over the Christmas/ New Year period;
- The New York Injunction proceedings threatened the viability of the restructure; and
- CBD needed to maintain its NASDAQ listing in order to enable its creditors to monetise the shares proposed to be issued to them.
The Administrators, BluNRGY and the parties' lawyers were able to agree and negotiate the transaction documents over Christmas and release disclosures to the creditors of CBD Energy to allow creditors to vote in favour of the above proposal at creditors meetings held early in the new year.
The injunction in New York was temporarily halted and BluNRGY negotiated a settlement with the plaintiff. And CBD's US lawyers and the Administrators' Australian lawyers appeared before an administrative hearing in the US which found that CBD was entitled to maintain its NASDAQ listing.
The reader can be forgiven in thinking that the restructure table (below left) is highly unusual. However, despite the breadth and jurisdictions of its operations (and its public listing) CBD Energy was a classic SME insolvency. It represents the first successful restructure of an Australian NASDAQ listed entity in which all the key participants received both cash and shares. The learnings from restructures such as CBD Energy is important to all stakeholders in an insolvency; it's not all doom and gloom once the administrator is appointed.
1 Readers will no doubt be aware that a deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors governing how the company's affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
2 A creditors' trust in a DOCA is a mechanism used to accelerate a company's exit from external administration. To date, it has been used most commonly (but not exclusively) in connection with the rehabilitation of publicly listed companies. Usually, under the terms of the DOCA, a trust entity is created and the company's obligations to some or all of the creditors bound by the DOCA are compromised and transferred to the trust. Those creditors become beneficiaries of the trust.
Joseph Scarcella is a partner at Ashurst in the Restructuring & Special Situations Group in Sydney. Joseph is an expert in all aspects of all forms of insolvency administrations, security enforcement, insolvency related litigation, restructuring techniques and workouts. He is known for the commerciality and speed of his advice and his friendly approach. His experience spans complex insolvencies such as finance and insurance company collapses through to advising major banks on large syndicated and bilateral exposures as well as assisting corporate clients in respect of their exposure to financially precarious counterparties.