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A fast track sale occurs when a voluntary administrator arranges for the assets of an insolvent business to be sold quickly, before a voluntary administration is over. Here we look at the legality of this procedure and question whether it should be more common in Australia.
Overview of fast track sales
Where a business is in financial difficulty — where it is, or is likely to become, insolvent — the directors can resolve to appoint a voluntary administrator. A voluntary administrator is an independent professional appointed to attempt to arrive at a debt compromise with creditors known as a ‘Deed of Company Arrangement’. Where a DOCA is not agreed to, the company will either return to normal operations (exceedingly rare), or be wound up (very common).
Once appointed, the voluntary administrator takes over from directors and becomes an ‘officer’ of the company, has all their usual powers and duties under the Corporations Act 2001 (Cth), and is able to continue trading in the name of the company. A ‘fast track sale’ occurs where the voluntary administrator sells all or most of the business assets prior to the second creditor’s meeting.
This is similar to the more familiar concept of a ‘fire sale’. The difference is that a fire sale, by definition, means that the assets are heavily discounted. In a fast-track sale, the goods may not be heavily discounted. It is a matter for the voluntary administrator’s commercial judgment based on what they consider to be the fair market value for the assets at that time.
This could be a sensible option when the voluntary administrator does not plan on recommending a DOCA or the directors don’t want to propose a debt compromise. This commonly occurs where the voluntary administrator does not see a viable business at hand — for example, perhaps the owner/director is sick and unable to continue running the business. A fast sale of a functioning business’ assets will also sometimes be in the interests of the broader economy. The alternative may be a run-down and wound-up business resulting in unemployment, wasted intellectual property and a loss of the considerable knowledge built up in the operation of the business.
Is a fast track sale legal?
As the voluntary administrator takes on all the powers of directors, and directors can sell business assets, there is no barrier to fast-track sales under Part 5.3A of the Corporations Act 2001 (Cth). In setting out the powers of the voluntary administration, section 437A(c) explicitly states that the voluntary administrator “may terminate or dispose of all or part of that business, and may dispose of any of that property”. This possibility was considered by the Australian Law Reform Commission prior to the introduction of voluntary administration to the Corporations Ac 2001 (Cth), and not considered problematic (see para 87 of that report).
Nevertheless, while fast-track sales appear to be common in the UK, which has a reasonably similar voluntary administration regime, they are not in Australia. Fast-track sales do appear to be considered more acceptable in the case of large corporate voluntary administrations than they are in small-to-medium enterprise (SME) voluntary administrations. For example, in the voluntary administration of Virgin Australia a quick decision was made to sell the airline rather than go to a DOCA. The (reasonable) objective of the voluntary administrator was to ensure that employees were paid and to save operations. As is distinctive of a fast-track sale, creditors had no say in the sale.
Why are fast track sales unpopular in Australia?
Given that they appear to be legal, and an economically reasonable solution in many cases, why don’t fast track sales happen more often in Australia?
Recent research from Professor Jason Harris suggests that voluntary administrators are concerned about breaching their obligations as an officer. A voluntary administrator may be concerned that a non-public sales process could result in a discount, which breaches their obligation of due care and diligence. There may also be practical issues at play. The market for sale of SMEs is illiquid and much of the goodwill is controlled by owners/founders, so it can be difficult to effect a sale. It may also be difficult to effect a sale in the limited time frame for a voluntary administration alongside other required activities.
The Australian Restructuring, Insolvency and Turnaround Association (ARITA) has advocated for a new law permitting ‘pre-positioned sales’ in several public inquiries. This would allow directors to arrange a fast-track sale themselves, even before a formal insolvency appointment, with the insolvency professional (such as a voluntary administrator) only being able to overturn the sale where it could be shown not to be for reasonable market value. So far, the Government is yet to accept this policy recommendation that would stretch the law on fast-track sales considerably.
There is currently no empirical research into asset sales in voluntary administrations compared to liquidations, but it is likely that voluntary administration fast-track sales result in a higher asset sale price than liquidation. The voluntary administration process temporarily preserves the business structure so there is more value to sell, liquidations mean that the employees and all contracts are terminated.
The key reason that there are few fast track sales in voluntary administrations is likely to be the loyalty of administrators to their primary role of saving companies from liquidation. The purpose of many voluntary administrations is to enter into a debt restructure, and selling the business assets to a third party would cut the directors out of the benefits of a debt restructure. It is highly likely that any proceeds from a fast track sale would be paid towards unsecured debts and therefore no benefits would accrue to the directors and owners. They will not, for example, reclaim control of the business in circumstances where they persuaded the creditors to accept a debt compromise proposal. Also, it is very unlikely that any voluntary administrator would undertake a fast track sale to the company directors because they would be accused by creditors of underhanded dealings. Voluntary administrators are more inclined to temporarily licence business assets to the company directors to preserve the value of the business whilst the administration process plays out.
Should fast track sales be encouraged?
In many cases, yes, as it may well result in a better outcome for creditors. This is especially true where the directors have no interest in a DOCA (such as in the case mentioned earlier where a sole director is sick). The key is to promote fast-track sales in a way that doesn’t encourage illegal phoenixing, that is, the sale of business assets for less-than-market value. There is, however, no interest on the part of voluntary administrators in selling business assets to directors whilst the voluntary administration process plays out.
It is fair to say that there is less creativity in Australian voluntary administration practice than in the UK. For example, in the UK a ‘connected party sale’ is standard for SMEs as part of voluntary administration, and means that the business can be saved whilst being overseen by an insolvency professional. In Australia, due to the requirement that the voluntary administrator be independent, this can’t be done. There is certainly an argument that this only encourages phoenix activity.