Our ‘Australian Restructuring and Insolvency Guide’, is a practical resource when facing distressed situations, enforcement options and insolvency processes in Australia. It brings together the key legal principles and the commercial considerations that typically arise when matters move from stability to stress.
The guide is presented as a series of focused sections, each designed to stand alone as a practical reference for live matters.
While the series focuses on Australian law, it is also relevant to overseas practitioners and stakeholders dealing with Australian restructures, insolvencies, distressed investments, cross-border recovery, and creditor strategy.
Series roadmap
Across 13 parts, the series covers:
Part 1 – General | Part 8 – Security |
Part 2 – Types of liquidation and restructuring processes | Part 9 – Clawback and related-party transactions |
Part 3 – Insolvency tests and filing requirements | Part 10 – Groups of companies |
Part 4 – Directors and officers | Part 11 – International cases |
Part 5 – Matters arising in a liquidation or restructuring – (this article) | Part 12 – Quick reference |
Part 6 – Creditor remedies | Part 13 – Update and trends |
Part 7 – Creditor involvement and proving claims |
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Part 5
Part 5 examines matters arising during a liquidation or reorganisation. It covers stays and moratoria, the continued operation and financing of the business, the sale of assets, the treatment of contracts, intellectual property and personal data, and the role of arbitration in resolving disputes.
Matters arising in a liquidation or reorganisation
Stays of proceedings and moratoria
- What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?
All unsecured claims are stayed in insolvency, subject to court approval being obtained to continue the claim (such leave is not lightly granted). Further, section 440J of the Corporations Act 2001 (Cth) prohibits a creditor from enforcing a director’s personal guarantee without leave of the Court.
While secured claims may generally be enforced in a liquidation, they are subject to limitations in a voluntary administration (Australia’s principal business rescue procedure) where secured creditors are generally prohibited from enforcing their securities unless:
- they hold security over all, or substantially all, of the company’s assets and enforce their security (usually by appointing a receiver) within 13 business days of the commencement of the administration;
- enforcement of their security had already begun before the administration;
- the approval of the court or the administrator is obtained; or
- the security interest is over perishable property.
Courts can also limit the powers of secured creditors, provided that their interests are adequately protected, except for secured creditors with security over the whole or substantially the whole of the company’s property.
Further, while a voluntary administration is on foot:
- application for an order to wind up the company will be adjourned if the court is satisfied that it is in the interests of the creditors to continue administration.
- owners and lessors generally cannot repossess property used by the company unless with the consent of the voluntary administrator or leave of the court, or if they have taken steps to recover the property prior to the voluntary administration, or if the property is perishable. The court can also limit the powers of owners and lessors provided that their interests are adequately protected, though the voluntary administrator may be personally liable for rent unless the voluntary administrator gives notice within 5 business days or the timeframe extended by the court that the company does not intend to use the property;
- inventory subject to retention of title interests also generally cannot be repossessed, and may be sold by the debtor in the ordinary course of business, or with the consent of the owners, or with the leave of the court), though the creditor is entitled to be preferentially paid out of the sale proceeds;
- claims cannot be brought against directors or their relatives pursuant to personal guarantees, though this does not prevent the continuation of claims commenced before the administration or after the administration period ends;
- ipso facto provisions in contracts are not enforceable unless the court lifts the stay if it is satisfied that this is appropriate in the interests of justice.
In practice, unsecured creditors usually accept the stay that follows from an insolvency appointment, as they may instead simply lodge their claim with the appointed external administrator without the need for further legal process. Most ordinary unsecured creditors have little to gain from evading that process.
Perhaps the most common exception in respect of unsecured claims is those that are wholly insured and so being defended in substance by the insurer. In such cases, the creditor may seek leave of the court to proceed notwithstanding the stay, as any judgment obtained against the company would ultimately be paid by the insurer in any event.
These stays ensure that not only the property, but the ‘going concern’ business of the insolvent debtor is able to be preserved while a restructuring plan is formulated and considered.
During a receivership, there is no general moratorium, except on the enforcement of ipso facto provisions.
Doing business
- When can the debtor carry on business during a liquidation or reorganisation? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?
A company may continue to carry on business during an informal workout or scheme of arrangement. In these contexts, directors retain control unless otherwise agreed with creditors. However, during external administration, management powers will shift from the company’s directors to the appointed liquidator, administrator or receiver, who will then be responsible for decisions such as carrying on business.
In voluntary administration, the administrator may carry on the company’s business if it is consistent with the administration’s purpose. Creditors who supply goods or services after commencement may be paid by the administrator in preference to ordinary unsecured claims. The administrator’s conducts are under the supervision of the creditors or committee of inspection who has the power to remove the administrator, approve remuneration determination, and apply for court directions or orders.
A receiver may operate the business where consistent with the purpose of realising secured assets and where the appointor’s security instrument allows. Expenses incurred are treated as receivership costs and preferential payment of these costs are provided for in the appointment document. The receiver’s conduct is supervised by the creditors and the court which includes a review of the receiver’s decisions, giving directions or declarations, and removal from office.
In liquidation, a liquidator may carry on the business if necessary for the beneficial disposal or winding up of that business. Debts incurred post-liquidation are treated as liquidation expenses and rank above ordinary unsecured debts. Creditors may supervise by giving directions and approvals, removing the liquidator, participating in a committee of inspection, and applying for court orders or directions in relation to the liquidator’s conduct.
Post-filing credit
- May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?
Yes. A company in liquidation or undergoing reorganisation may obtain credit, with the availability and priority of such credit determined by the applicable regime.
Voluntary administration: Debts incurred are treated as administration expenses. The administrator is personally liable for these under section 443A of the Corporations Act 2001 (Cth) and entitled to an indemnity out of company assets under section 443D of the Act, effectively giving such claims priority over unsecured debts.
Liquidation: A liquidator may continue to incur debts in the course of carrying on the company’s business if necessary for the beneficial winding up. Where such debts are properly incurred in preserving or realising the company’s property or carrying on its business, they may be treated as priority expenses in the winding up.
Receivership: Receivers may borrow if permitted by the security instrument or under their general powers. Such borrowings are typically treated as receivership expenses and may be paid out of secured assets, subject to the original security agreement.
Schemes of arrangement: Financing under a scheme depends on the terms negotiated with creditors. There is no statutory framework governing the priority of such credit; it is contractually agreed.
DOCA: Whether a deed administrator has the power to raise loans will depend on the terms of the DOCA. The repayment of this credit will usually be treated as an expense of the deed administration and will be given priority over distributions to creditors.
Sale of assets
- In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?
In voluntary administration, an administrator may sell assets but must not dispose encumbered property except with the relevant party’s written consent, leave of the court, or if the disposal is in the ordinary course of business. Court leave will be granted if the relevant party’s interests are adequately protected.In receivership, a receiver may sell secured assets to satisfy the appointing creditor’s claim. The receiver must take reasonable care to obtain market value or the best price reasonably obtainable. Assets are typically transferred free of security, subject to any intercreditor arrangements. Consent of subordinate security holders may be needed if automatic release is not triggered.
In liquidation, a liquidator may sell or dispose of unencumbered company property in any manner necessary for the winding up. The purchaser generally acquires the assets free of unsecured liabilities. Encumbered assets may only be sold with the encumbrancer’s consent or court approval. The liquidator must act in the best interests of creditors and obtain a proper return on assets.
In schemes of arrangement, sales of assets and any associated security releases depend on the terms of the scheme. Releases require agreement or terms built into related financing documents.
In informal workouts, asset sales are governed by contractual negotiations with creditors.
Negotiating sale of assets
- Does your system allow for ‘stalking horse’ bids in sale procedures (where an interim sale agreement is negotiated but the debtor is able to continue to seek better bids) and does your system permit credit bidding in sales (ie, can a creditor seeking to purchase assets make payment of the purchase price by reducing the amount of its claim against the debtor? What factors will a court consider when assessing a credit bid? What if the credit bidder is an assignee of the original secured creditor?)?
Australia does not prohibit the use of stalking horse bids, but they are rare in practice. There is no statutory framework for such bids, and their use depends on the discretion of the insolvency practitioner in light of statutory duties and the commercial viability of the process.Credit bidding is permitted. A secured creditor may offer to purchase assets by offsetting the value of their secured debt. Courts do not routinely review credit bids unless the sale is challenged or occurs within a scheme of arrangement. Where judicial oversight is required, the court may consider assessing the sale process.
Rejection and disclaimer of contracts
- Can a debtor undergoing a liquidation or reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?
Liquidators are given statutory power to disclaim contracts and onerous property under Division 7A of Part 5.6 of the Corporations Act 2001 (Cth). Most contracts may only be disclaimed with leave of the court, unless it is unprofitable or land burdened with onerous covenants. This section does not apply to certain contracts, such as share buy-back agreements and PPSA retention of title property.The procedure requires the liquidator to issue a written disclaimer and give written notice to interested parties as per section 568A of the Corporations Act 2001 (Cth) and comply with Commonwealth, territory and state laws. The disclaimer takes effect unless a person applies to set it aside within 14 days. Once effective, a person aggrieved by the operation of the disclaimer is taken to be a creditor of the company.
Administrators and receivers do not have specific statutory power to disclaim, although a voluntary administrator has the power to give notice to lessors or owners within 5 business days after appointment specifying that the company does not intend to use the property. Instead, they may elect not to perform a contract, which may give rise to unsecured damages claim against the company, not the administrator or receiver personally. If the voluntary administrator or receiver elects to proceed with a contract, he or she may be personally liable for debts incurred and have a right of indemnity out of the company’s assets.
If the contract is breached after insolvency commences, the counterparty may claim damages, in the form of an unsecured claim, against the company. The Court will give an order of specific performance only in limited circumstances.
Intellectual property assets
- May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganisation is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?
A licensor’s ability to terminate a debtor’s entitlement will depend on their pre-existing contractual agreements. However, by virtue of the statutory stay on the enforcement of ipso facto provisions, IP licensors are generally prohibited from exercising their termination rights purely on the grounds of insolvency of the licensee, unless the court lifts the stay if it is satisfied that this is appropriate in the interests of justice.An administrator has broad powers to carry on the company’s business and manage its property, including using licensed IP if the licence remains on foot. A receiver may also continue to use IP, provided the licence has not been validly terminated.
The enforceability and transferability of IP rights will generally depend on the contract and applicable statutory restrictions.
Personal data
- Where personal information or customer data collected by a company in liquidation or reorganisation is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?
Australian privacy law applies equally in insolvency. The Privacy Act 1988 (Cth) governs how personal information may be used and disclosed, including during the sale of a business. Insolvency does not override these obligations.
An administrator or receiver may use and transfer customer data in connection with managing the business under sections 437A and 420 of the Corporations Act 2001 (Cth), provided such use complies with the Privacy Act 1988 (Cth) and any contractual privacy terms.
Arbitration processes
- How frequently is arbitration used in liquidation or reorganisation proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganisation case is opened be arbitrated with the consent of the parties?
There are no provisions under Australian insolvency law that prevent a company in distress or its creditors from engaging in alternative dispute resolution (ADR), including arbitration or mediation. Whether parties choose to do so is a matter of commercial judgment and mutual agreement. However, ADR has limitations in this context. For example, arbitration outcomes cannot bind third-party creditors unless they have consented, and a creditor whose rights are directly affected may withhold such consent or object to the process. These limitations reduce the practical uptake of ADR mechanisms in the context of corporate insolvency.
Next, Part 6
Part 6 examines the remedies available to creditors seeking to recover or protect their position when a company is in financial difficulty. It covers secured creditor enforcement and the appointment of receivers, the recovery options available to unsecured creditors, freezing orders and judgments, statutory demands, the effect of insolvency moratoria on enforcement, and considerations affecting foreign creditors.
If you are a creditor, director, insolvency practitioner or adviser navigating a formal insolvency or restructuring process, decisions around enforcement, continued trading, funding, asset sales and contractual rights can materially affect value and recovery. We can help assess available options, navigate stays and moratoria, manage post-appointment transactions, protect contractual and proprietary rights, and resolve disputes as they arise. Our restructuring and insolvency work is designed to be commercial, evidence-disciplined, and focused on preserving value, protecting stakeholder interests, and achieving the best available outcome.
Further Information
For further information about stays and moratoria, post-appointment trading and financing, and asset sales and contractual rights in insolvency, please contact the author of this article:
