Scenario 1: Restructuring
Where there is a restructure of a company which might be showing signs of financial distress, apart from its creditors, directors and officers usually will consider other stakeholder interests or key participants, such as existing senior financiers, joint venturers, existing shareholders with varying percentages, key customers, new debt or new equity participants and seek to maintain existing key agreements with key suppliers and trade creditors. In most cases, some or all of these stakeholders will be aware of the distressed nature of the company and will primarily be concerned about their own risk exposure in the event of the failure of the business of the company. Each group of stakeholders will also have different objectives and priorities.
Determining which relationships are key usually comes down to a commonsense approach based on the company's commercial dealings ‒ in effect, the stakeholders in the firm's ongoing profitability. For directors, to ensure the success of a turnaround plan, the priority is to gain the support of the stakeholders which requires careful management, seeking their engagement and involvement in the development of any restructure/turnaround plan and ultimately, their agreement and approval of the plan.
In the wake of the Royal Commission along with the erosion of trust in corporates and a lack of faith in the regulators to control or even deal with unlawful behaviours, there now exist real challenges for directors and officers in any restructure in relation to corporate governance and the need not to just consider the financial risks of those stakeholders who are already in relationships with the company, but also to take account of non-financial interests and risks which are not necessarily the same as stakeholders' interests. These non-financial risks might include, for example, those to whom the company owes a legal obligation or broader social interests that become at risk as the business deteriorates, such as the community, the customer or supplier, employees or the environment, which interests will require proper management to ensure the future success of the business' reputation and brand value, which are critical in any restructure.
Does a broader vision of the company's role and responsibilities now mean that the interests of a multitude of stakeholders and others impacted by the firm's operations such as suppliers, customers or even community partners, should be considered as key relationships that must be preserved as part of the restructuring? Given their impact on the bottom line, this could be a challenge for any restructure that is seeking to reduce costs to improve the distressed firm's financial position.
Scenario 2: Reports to ASIC of possible misconduct
Administrators, receivers and liquidators are required to report to ASIC if it appears to them that:
"a past or present officer or employee, or a member, of the corporation may have been guilty of an offence in relation to the corporation; or a person who has taken part in the formation, promotion, administration, management or winding up of the company… may have been guilty of any negligence, default, breach of duty or breach of trust in relation to the corporation" (sections 422, 438D and 533 of the Corporations Act).
This raises the question: what now has to be reported to ASIC as a breach of directors' duties? This might no longer be quite a straightforward matter. While there is a statutory obligation on the insolvency practitioner who acts on behalf of all unsecured creditors of the company to report to the regulator those company directors and officers who have not acted with integrity and honesty, in the post-Royal Commission environment is the insolvency practitioner to encompass in any report a director or officer of a company who has acted with disregard of corporate social responsibility and community interests? Should poor information flows to Boards be reported? Or a failure to consider non-financial risks? All of these could raise potentially complex questions for the insolvency practitioner.
An insolvency practitioner may now also need to investigate how corporate culture was reflected in the company and whether there has been insufficient attention given by directors and officers to the management of non-financial risks, with an emphasis on compliance risks. There may also be an examination by the insolvency practitioner as to whether adequate corporate governance systems have been put in place, to ensure that directors and staff have acted ethically and in a socially responsible manner in addition to their acting legally and in accordance with their professional obligations.
The views of regulators are highly relevant. Since the commencement of the Royal Commission and the delivery of the Final Report, the regulators' expectations are that Boards will develop and maintain a good corporate culture and will act with integrity and fairness. The regulators have become increasingly proactive in assessing and supervising corporate culture where a key message from the Royal Commission is for regulators to adopt a "why not litigate" first enforcement strategy. This has resulted in:
- a new Corporate Governance Taskforce, whose focus, amongst other things, will be on the role of the board and the officers of a company in the oversight (and in the case of officers, the management) of non-financial risks;
- the appointment of Commissioner Dan Crennan QC as ASIC's "chief prosecutor";
- additional $400 million funding to ASIC (a 25% increase in its annual funding compared with 2017-2018) and an additional $150 million to APRA; and
- new increased penalties for civil and criminal breaches.
There is a clear message that the Australian public expects that companies, especially, the large companies, will act as exemplary corporate citizens wherever they operate. There is an expectation that directors and officers will be held accountable for corporate misconduct. In preparing any report to ASIC, an insolvency practitioner needs to be alive to the greater possibility of enforcement action being taken against companies and following that, against the directors.