When a company is in financial distress, creditors must consider whether to place the company into a formal external administration process. If they do so, the publicity and disruption that accompany a formal appointment may worsen an already fragile situation. Conversely, if no action is taken, the company may continue to burn cash, leaving creditors with little or no prospect of recovery.
In commercial reality, these are not the only options. Between immediate enforcement and inaction lies a middle ground in the form of a standstill. This article explains how a standstill can be used by creditors to stabilise a distressed company and create breathing space for the company to pursue a viable restructuring outcome.
What is a standstill?
A standstill is a consensual and time-limited forbearance arrangement under which key creditors agree not to accelerate debt or enforce their security while the company works towards an agreed restructuring outcome. In Australian practice, a standstill is usually documented as a deed of forbearance or moratorium.
A standstill can be mutually beneficial to both debtors and creditors. For debtors, the deferral of enforcement action by creditors provides critical breathing space to stabilise operations and pursue a turnaround of the distressed situation. For creditors, a standstill may be conditioned on enhanced transparency, discipline and momentum, achieved through more rigorous reporting, clearly defined milestones, and closer engagement with management and key stakeholders.
Senior secured creditors most commonly initiate standstills. These creditors typically sit at or near the value break and therefore have the strongest commercial incentive to stabilise the business and preserve enterprise value, rather than pursue premature enforcement. In certain sectors, particularly where operational continuity is critical, contractors may also lead standstills. In those circumstances, major contractors may agree to temporary pricing relief or contractual accommodations to maintain operations while the parties negotiate a longer-term solution.
As part of a standstill agreement, creditors usually incorporate oversight mechanisms calibrated to execution risk and the capability of incumbent management. At the lighter end of the spectrum, creditors may appoint an investigative accountant to test liquidity, interrogate business plans and monitor compliance with agreed milestones. Where execution demands more focused leadership, creditors may appoint an independent chief restructuring officer to drive delivery while management focuses on day-to-day operations. In more complex structures, secured creditors may appoint receivers to a non-operating parent entity while leaving trading subsidiaries outside formal appointment, a structure commonly referred to as a headstock receivership. Each approach can enhance creditor confidence and execution discipline without tipping the operating business into a value-destructive external administration.
Why do creditors need a standstill?
The primary advantage of a standstill is value preservation through the avoidance of formal insolvency appointments. Entry into voluntary administration or the small business restructuring process triggers a statutory moratorium that largely prevents creditor enforcement, together with an accompanying ipso facto stay that restricts many contractual termination rights. Formal appointments also carry significant costs, including administrators’, receivers’ and legal fees. By contrast, a well-constructed standstill can replicate much of the practical effect of a moratorium by agreement, in a more flexible and cost-effective way.
A further advantage of a standstill is privacy. Subject to any continuous disclosure obligations for listed entities and any visibility from a headstock receivership, a standstill allows stakeholders to avoid the disruption that often follows a public insolvency event. This privacy helps stabilise revenue and commercial relationships, allowing recovery actions to be pursued at fair value rather than at the discounts typically seen in formal processes. Compared with court-supervised restructurings, a standstill also avoids the stigma commonly associated with insolvency appointments.
A final advantage is flexibility and reduced judicial intervention. Court-supervised administrations and schemes bring procedural rigidity, potential challenges and reliance on court timetables. By contrast, a standstill allows for bespoke solutions, alignment among creditors, and decisive action at a pace dictated by the business. Court involvement can be confined to targeted approvals, if and when required, preserving the company’s control with the stakeholders most incentivised to protect and enhance value.
What can a company do when a standstill is in place?
Turning around the distress within a safe harbour
With the breathing space created by a contractual standstill, directors have a wider range of options to address the company’s distressed position. However, that discretion must be exercised within the scope of the safe harbour provided by the Corporations Act 2001 (Cth), which is intended to limit directors’ exposure to insolvent trading liability.
Safe harbour limits directors’ civil liability for debts incurred while they are developing and implementing a course of action that is reasonably likely to lead to a better outcome than immediate external administration. The protection is conditional. It is usually unavailable where employee entitlements are unpaid or taxation lodgement obligations are not substantially complied with. Directors must remain appropriately informed, maintain proper books and records, obtain suitable advice, and continually reassess whether the strategy remains reasonably likely to produce a better outcome. If these conditions are not met, the protection falls away, significantly narrowing the scope for action during a standstill.
Turning around distress through refinancing
With the directors’ liability controlled, the standstill period can be used to refinance the balance sheet. Australian restructurings illustrate how this can operate in practice. In 2017, Boart Longyear stabilised a distressed capital structure involving approximately US$700 million of group debt through a standstill-like arrangement under which creditors agreed to suspend enforcement while a refinancing was negotiated. That enforcement pause preserved liquidity and provided the runway to reduce leverage, extend maturities and re-profile debt.
Turning around distress through asset sales
Additionally, a standstill period can be used to execute targeted asset sales at going-concern values as part of a broader stabilisation plan. Australian restructurings illustrate the point. In 2012, Fitness First announced the sale of 24 of its 97 Australian clubs as part of a restructuring aimed at reducing group debt of almost $900 million, a rationalisation designed to preserve the viable core while shedding non-essential sites. Similarly, in Billabong’s 2013 turnaround, the group completed the sale of its DaKine business for A$70 million, with the proceeds, together with new funding, applied to repay and stabilise its syndicated debt facilities and working capital position. The standstill paused enforcement long enough to run a controlled divestment process, keeping counterparties engaged and applying sale proceeds into the capital solution.
Turning around distress through de-leveraging
A standstill may also provide the necessary runway to implement de-leveraging strategies where enterprise value has migrated into the secured debt. In those circumstances, creditors may pursue debt-for-equity outcomes, including loan-to-own strategies. Loan-to-own involves a creditor exchanging its debt claim for an equity interest in the company, converting a right to repayment into ownership. By doing so, the company reduces leverage and resets its capital structure. The standstill is critical because it provides the time needed for creditors to negotiate and implement the debt-equity exchange while the business continues to trade.
What are the key risks during a standstill?
Despite these opportunities, material risks persist during any standstill and must be managed deliberately.
Confidentiality is foundational to the viability of a standstill agreement. Information leaks can destabilise staff, suppliers and customers and may prompt enforcement by non-participating creditors. Robust non-disclosure arrangements, controlled data rooms and disciplined communications are therefore essential. However, for listed entities, safe harbour does not displace continuous disclosure obligations. Boards must take care not to cross the legal boundaries of continuous disclosure merely by giving commercial weight to the desire to maintain confidentiality.
Voidable transaction risk also requires ongoing attention. Payments to selected creditors, the granting of new security, set-offs or asset transfers during a standstill may later be challenged if a liquidation follows. The risk is mitigated, but not eliminated, by ensuring transactions are undertaken on arm’s-length terms, supported by contemporaneous commercial justification and properly documented as part of a genuine restructuring attempt.
For creditors and other stakeholders supervising a standstill, shadow director risk remains a live issue. Where a creditor’s instructions or wishes become the effective decision-making of the board, Australian courts may characterise that creditor as a shadow director, exposing it to directors’ duties and potential accessorial liability. In practice, creditors should be confined to approval and consultation rights rather than directives, and directors must retain genuine decision-making autonomy.
Finally, debt trading during a standstill introduces additional compliance risk. Participants who receive non-public information may face insider trading exposure if they deal in the debt or related securities. Clear wall-crossing protocols and trading restrictions are therefore necessary to preserve the integrity of the process and avoid regulatory breaches.
What should be negotiated and contained in the standstill agreement?
The standstill agreement should be drafted with precision as to who is bound, what conduct is being forborne, and the circumstances in which forbearance will end. Obligations imposed on the borrower side must be clear, objectively measurable and aligned with the chosen restructuring pathway, whether that involves refinancing, targeted asset disposals or a balance-sheet reset. Correspondingly, creditors’ rights should be comprehensively preserved, including the ability to move quickly to enforcement if agreed triggers occur. Because a standstill operates in the shadow of potential external administration, the agreement should also address practical risks such as voidable transaction exposure, information leakage, continuous disclosure for listed entities and the risk that supervisory involvement crosses into shadow directorship. This section outlines some of the key clauses typically negotiated and included in a standstill agreement.
Acknowledgments
Standstill agreements typically begin with acknowledgements that frame the parties’ legal and commercial position. These usually identify the parties, relevant finance documents, existing and anticipated defaults, outstanding indebtedness, and the status and priority of security and guarantees. Companies commonly acknowledge that no default is waived and that prior reservations of rights remain effective, preserving creditors’ enforcement position if the standstill fails.
Forbearance and carve-out
The core of a standstill agreement is the forbearance of creditors’ rights to enforce their debt. The agreement should specify a defined forbearance period aligned to the restructuring timetable, together with a clear expiry date and any extensions tied to objective milestones. During that period, creditors typically agree not to accelerate debt, enforce security or commence recovery proceedings in respect of specified defaults.
Equally important is precision around what is not forborne. The agreement should preserve creditors’ rights to take protective or non-adverse actions, including maintaining or perfecting security, protecting collateral and enforcing against non-participating obligors. Careful delineation of scope reduces the risk that routine protective steps are later characterised as a breach of the standstill.
Milestones
Milestones are the operational backbone of a standstill agreement. They translate the restructuring strategy into defined deliverables with clear timeframes, creating accountability and providing early warning if the plan begins to drift. Typical milestones include delivery and regular updating of a 13-week cash flow forecast, engagement of agreed advisers, commencement of a refinancing or sale process on defined terms, execution of binding transaction documents within a specified period, and completion of the restructuring by a longstop date.
Milestones should be calibrated to be realistic but stretching, with limited scope for discretionary extension. The agreement may allow short automatic extensions where objective progress has been made, such as execution of a binding commitment shortly before expiry. Conversely, failure to meet a milestone will commonly constitute a default, entitling creditors to terminate the standstill. Clear and disciplined milestone drafting helps maintain momentum and avoids enforcement being triggered by avoidable ambiguity.
Information undertakings and oversight
Enhanced information undertakings are central to maintaining creditor confidence during a standstill. The agreement should require regular and timely reporting on progress against agreed milestones. These information rights enable creditors to monitor performance against the restructuring plan and assess whether continued forbearance remains justified.
The standstill will often also provide for proportionate oversight mechanisms. Creditors may be granted inspection and audit rights, including access to premises, books and records, and the ability to appoint or continue an investigative accountant or an independent chief restructuring officer with a defined mandate and reporting lines. However, these oversight arrangements should not displace the board’s responsibility for managing the business.
Security, priority and intercreditor alignment
A standstill agreement is also an opportunity to address security, priority and intercreditor alignment issues that may undermine the restructuring if left unresolved. The agreement should include reaffirmations of existing security and guarantees and, where necessary, corrective steps to remedy perfection gaps, deficiencies in collateral descriptions or missing guarantees. Addressing these issues during the standstill helps stabilise creditor positions and reduces execution risk if the restructuring falters.
Where additional liquidity is required to support ongoing trading, the standstill may also address the priority and security to be afforded to new funding. This commonly involves granting super-senior or priming security on terms agreed with existing secured creditors and reflected in amended intercreditor arrangements. Alignment across intercreditor documents is critical to avoid inconsistent enforcement rights, payment waterfalls or consultation obligations, and to minimise the risk of value-destructive creditor conflict during or after the standstill.
Triggers, defaults and remedies
Clarity around what brings a standstill to an end is essential. The agreement should clearly define forbearance defaults that entitle creditors to terminate early, including missed milestones, breaches of information undertakings, unauthorised disposals or encumbrances, material deterioration in liquidity, or the commencement of litigation challenging the debt or security. It is also common to provide for automatic termination upon specified insolvency events, such as the appointment of an administrator, liquidator or receiver, or the commencement of winding-up proceedings not stayed within a defined period.
The consequences of termination should be explicit and immediate. Upon expiry or early termination of the standstill, creditors should be entitled to exercise all enforcement rights without further notice, including acceleration of debt, enforcement of security and appointment of receivers. Clearly articulated triggers and remedies minimise uncertainty, reduce the scope for dispute at a point of stress, and ensure creditors can act decisively if the restructuring fails.
Shadow director guardrails
To mitigate the shadow director risk identified earlier in the article, a creditor-supervised standstill must be structured to avoid crossing the line into management control. Where deeper oversight is necessary, the use of independent roles such as an investigative accountant or chief restructuring officer can provide discipline and transparency without displacing the board or converting creditor influence into de facto control.
When should creditors take immediate enforcement instead of standstill?
First, a standstill should give way to enforcement where the risk of imminent external administration increases. If employee entitlements are unpaid or taxation lodgement obligations are not met, directors cannot rely on safe harbour protection. The legal runway to continue trading then narrows rapidly, and the likelihood of external administration increases significantly. The same concern arises where standstill milestones are missed. In these circumstances, creditors should consider immediate enforcement.
Second, enforcement may be required where the value of the company’s assets is likely to fall quickly. This commonly affects businesses dependent on perishable stock, seasonal inventory or short-term receivables, where delay can result in rapid value erosion. Similar urgency arises where key licences are at risk, customers are leaving, or cash levels have deteriorated to a point where recovery is unlikely. In these situations, extending the standstill may worsen outcomes rather than preserve value.
Third, a standstill may cease to be workable where creditor behaviour becomes unstable. This can occur if one or more creditors threaten winding-up proceedings, seek provisional liquidation or commence litigation that disrupts the business or undermines agreed priority arrangements. Repeated breaches of confidentiality can have the same effect by unsettling staff, suppliers and customers and accelerating value loss.
Fourth, immediate enforcement is usually justified where there is credible evidence of fraud, asset stripping or phoenix activity. Indicators such as misappropriation of funds, falsified records or deliberate dissipation of assets undermine any basis for continued forbearance. In those circumstances, swift enforcement, and, where necessary, urgent court action, may be required to protect assets and preserve recoveries.
What enforcement options are there for secured creditors?
When a standstill ends or enforcement triggers are met, secured creditors are generally able to act quickly to preserve value. In Australia, the most common enforcement pathways include a receivership sale funded by a credit bid, a hive down of the business, and, less commonly, foreclosure.
Credit bids
A credit bid allows a secured creditor to acquire the secured assets through a receivership sale by applying some or all of its secured debt as consideration, rather than paying cash. In practice, the receiver and the secured creditor must remain at arm’s length, as the receiver is required to comply with its duty to take reasonable care to obtain market value, or otherwise the best price reasonably obtainable in the circumstances.
Despite the receiver’s autonomy, a secured creditor is often in a more advantageous position in a credit bid. First, the creditor does not need to inject additional cash where the bid does not exceed the face value of its secured debt. Second, a secured creditor may be able to block a sale to third parties by withholding consent to release its security, giving it significant leverage in the sale process.
Hivedowns
A hivedown is a way for secured creditors to take control of a distressed business without selling it straight away. It usually happens through a receiver, who moves the viable business and operating assets out of the distressed company and into a new subsidiary that is solvent and has new or restructured funding.
This approach is often attractive for three reasons. First, because the new subsidiary is solvent and not in receivership, the business can keep trading, enter new contracts and deal with customers and suppliers without the disruption or stigma of insolvency. Second, a hivedown gives creditors flexibility: they can later sell either the business assets or the shares in the subsidiary when conditions improve, rather than being forced into an immediate sale. Third, because a hivedown is not a conventional sale at the point of transfer, it can ease duty-of-sale pressure and may, in some cases, avoid stamp duty.
Foreclosure
Foreclosure is a remedy by which a secured creditor extinguishes the borrower’s right to redeem the secured property and takes ownership of the assets outright. It is rarely used in Australia because it usually requires court involvement and lacks the flexibility and value protection of receivership-based enforcement.
What are enforcement options for unsecured creditors?
Unsecured creditors do not have proprietary rights over assets and cannot appoint receivers. Their primary enforcement tool is the statutory demand regime. A valid statutory demand for a due and payable debt, if not complied with within the prescribed period, creates a presumption of insolvency that can support a winding-up application. This pathway is relatively quick and cost-effective but is only suitable where the debt is undisputed and the demand is technically sound. Unsecured creditors may also pursue judgment and execution processes or seek interim court relief, such as freezing orders, where there is a risk of asset dissipation.
However, once an external administration has commenced, unsecured enforcement is generally stayed, and recoveries are determined by statutory priorities. These constraints, together with the absence of asset-level remedies, often place unsecured creditors in a passive position when a company becomes distressed. In practice, creditors need to be conscious of these limitations when extending credit and managing exposure.
Further information
For further information about liquidator claims and recoveries, public examinations, asset preservation tools (including freezing orders and warrants), funding or assignment of insolvency claims, and recovery strategy planning in liquidations, please contact the author of this article:
Blake Shaw
PARTNER
