In insolvency circles, the word "success" is definitely a relative term. Often it only means that a complete meltdown of the company's business has been averted, or that employees have at least received their statutory entitlements on their way out the door.
The ABC Learning Centre story has, however, definitely been a success by any measure – including some measures which are not generally part of the metrics of insolvency. In order to see why this insolvency administration deal was both unique and uniquely successful, it is necessary to understand some of the background.
Listed corporate childcare provider ABC Learning Centres Limited (ABC) enjoyed a market share of 25 percent of all childcare services provided in Australia. It was at the time Australia's largest single provider of childcare services. It owned more than 1,200 childcare centres in Australia and New Zealand (plus 1,000 in the US) and had more than 16,000 employees in Australia.
ABC had grown from a single childcare centre in 1998 to a major corporation with a market capitalisation of $3.4 billion. This was due to a number of factors, some of which played a key role in the subsequent rescue plan:
changes in demographics (over the past 20 years, the labour force participation rate for females in Australia has increased from 48.7 percent to 57.6 percent, while around 60 percent of Australian families have both parents working);
large increases in government subsidies for childcare; and
very limited provision of childcare by the public sector agencies
It is not totally inaccurate, therefore, to describe ABC as a private sector public utility. It provided childcare in Australia for around 120,000 children (from almost 95,000 families).
Another key factor in ABC's growth (and, perhaps, its fall) was a very highly leveraged acquisition strategy. That fall came about in November 2008 when receivers were appointed by ABC's secured creditors, a consortium of banks (Bank Receivers), and voluntary administrators were appointed by the boards of ABC and 38 of its related entities.
It was clear fairly quickly that this was not just another corporate collapse. By themselves, the high number of childcare businesses operated by ABC (the majority from leased premises) and large number of employees would have been problematic enough for ABC's receivers and administrators. That picture was immeasurably complicated by the nature of ABC's business and its place in the social fabric.
The collapse of ABC was, therefore, more than just another corporate insolvency: it had the potential to severely and adversely affect 16,000 employees and 95,000 Australian families throughout all sectors of the Australian community and workforce.
By early December 2008, the extent of the problem became clear. On 5 December 2008, the Bank Receivers determined that up to approximately 400 (40 percent) (subsequently revised to 262) of ABC's childcare centres were unprofitable and "unviable" in the ABC model. Since selling the centres as a going concern would take time and involve additional costs, standard insolvency practice would have seen those centres closed down almost immediately. The practical adverse effect of such a development on parents, families and employees was obvious.
Those social consequences resulted in a unique collaboration between the Bank Receivers, the secured creditors, the Federal Government and the insolvency firm PPB. Negotiations were started with two objectives in mind:
to ensure, as much as possible, the continuation of childcare for children currently enrolled in the "unviable" centres, as well as the continuation of the employment of their staff; and
pending the outcome of the negotiations, to keep the "unviable" centres afloat, rather than subjecting. them to an immediate asset "fire sale".
The second objective – short-term maintenance of childcare services provided by the "unviable" centres – was secured through the provision of special Government subsidies. However, all parties recognised that this was not a permanent fix. What was required, and ultimately achieved, was a long-term solution that rendered the "unviable" centres viable or provided alternative childcare services for the affected families.
The result of the negotiations was a Heads of Agreement to establish an insolvency structure unique in Australia and, perhaps in the world. Some 262 "unviable" centres would be transferred – for nominal consideration – to a non-trading subsidiary of ABC (ABC2 Group Pty Limited (ABC2)), an entity which, the Bank Receivers warranted, had never traded and had no creditors or liabilities.
The Federal Government's Department of Education, Employment and Workplace Relations (DEEWR) would apply to the Supreme Court of New South Wales for the appointment of PPB as receivers and managers (Court Receivers) of the assets and undertaking of ABC2 (in essence, the "unviable" centres).
The Government would then commit to fund the continuing operation of the ABC2 centres, on a temporary basis, while the Court Receivers attempted to find suitable buyers for them (or, if not possible to do so, to find alternative child care services for the affected families within a five kilometre radius of the relevant centre).
This structure addressed and attempted to balance a number of concerns.
The process of hiving-off the "unviable" centres into a Government-supported company permitted the Court Receivers the breathing space necessary to attempt to find buyers for the non-viable centres and avoided their immediate closure.
For parents with children at the "unviable" centres, this averted the threat of immediate closure of the Centres, thus providing them with, at worst, a longer period of notice to make alternative childcare arrangements and, at best, the possibility of the long-term survival of the specific childcare centre which their children attended.
The result of the negotiations was a Heads of Agreement to establish an insolvency structure unique in Australia and, perhaps, in the world.
The creditors of ABC were not burdened with the day-to-day costs of operating and running those centres since they were quarantined from the viable centres as effectively as if they had been shut down by ABC's receivers.
From the Government's point of view, there were several advantages to the proposal:
it avoided turning a major potential childcare crisis into a real and present one;
the special subsidies for the "unviable" centres would not be required once new operators had been found for "unviable" centres; and
by finding new operators for the "unviable" centres, the pool of childcare providers could be expanded.
The mechanics of transfer
How was the transfer of the "unviable" centres to ABC2 to be structured?
The transfer of the centres to ABC2 had several components: for a nominal consideration ($1), ABC sold the centres' goodwill to ABC2, the Court Receivers operated and managed the ABC2 centres on premises which remained leased by ABC, and ABC granted a licence to ABC2 and the Court Receivers to use ABC's equipment on the relevant child care centre premises. The childcare licences necessary for the operation and management of the unviable childcare centres were also preserved and maintained.
The Court Receivers, funded by the Commonwealth Government, met the rent and outgoings arising under the leases of the relevant premises and met the costs of employment of the staff employed in the unviable centres during the period of the ABC2 receivership.
As noted above, ABC was in voluntary administration as well as in receivership. Under Pt 5.3A, the rights of landlords are subject to a moratorium while a company is under administration. A landlord can only take possession of property by obtaining the consent of the voluntary administrator or applying for the leave of the court. There were no attempts by landlords to take such actions. This was probably due to a number of factors:
the specialist fit-out required for childcare centres;
the fact that the ABC2 structure held out the promise of continuity and a new long term tenant for the existing fit-out;
the fact that all rental and outgoings continued to be met while ABC2 occupied the childcare centres;
the fact that the ABC2 receivership was only intended to last for a limited period of time, rather than constituting a long-term imposition upon landlords; and
the co-operative and collaborative approach taken by the Court Receivers, DEEWR, the Bank Receivers, landlords, prospective purchasers, employees and affected families, to find solutions for the affected centres. Exemplified by the electronic data room, website and "hotline" maintained by the Court Receivers, the approach also included the Court Receivers' involving the landlords in the process of identifying and negotiating with prospective purchasers of the ABC2 centres at an early stage.
Appointing the receivers
The business structure of ABC2 and its hiving-off from ABC were not the only unique aspect of this deal.
The Court has long had an inherent protective jurisdiction to make temporary appointments of receivers. However, that inherent jurisdiction was fortified in the ABC2 application by the power of the Court under a little-used provision of the Act: section 447B(2). Under that subsection, the Court can make orders to protect a creditor's interests while a company is in administration. In this case, there was a creditor in the form of DEEWR (the creditor relationship arising out of DEEWR's previous advances to ABC). While appointing the ABC2 receivers, the Court did note that this reliance on a voluntary administration power might mean that the order would have to be revisited if ABC itself came out of voluntary administration while ABC2 was still in receivership. It provided for that eventuality by including in its orders a requirement for the ABC2 Court Receivers to apply to the Court for directions "very promptly after the end of the administration". As events transpired, this never became an issue, because the Court Receivership of ABC2 ended before the voluntary administration of ABC.
Potentially more significant was the question of whether the application for appointment of the Court Receivers should be subject to the usual undertaking as to damages. This requirement was highlighted by the High Court in the Bond Brewing case in 1990 and has proved to be a significant deterrent for prospective applicants for the appointment of a receiver.
In the application for special leave to appeal to the High Court from the Supreme Court of Victoria, a joint judgment of Chief Justice Mason, and Justices Brennan and Deane found that an undertaking as to damages was an essential condition to the making or continuation of an order appointing receivers in that case. Their Honours reasoned that where a receiver is being appointed and certain damage is apprehended to result, courts should give consideration to requiring an undertaking as to damages:
"The damage to be apprehended by the making of an order for the appointment of a receiver and manager is not so much that the receiver and manager may so exercise his powers as to occasion loss in the business to which he has been appointed. It consists of the consequences flowing from the fact of appointment and of the defendant's loss of 'its title to control its assets and affairs' (the phrase of Viscount Haldane LC in Parsons v Sovereign Bank of Canada  AC 160 at 167). 
Where damage of those kinds is to be apprehended as flowing from the appointment of a receiver by interlocutory order, consideration must be given to requiring, from the party seeking the order, at least some appropriate undertaking as to damages in the event that the appointment is ultimately shown to be unjustified."
In the ABC2 proceedings, Justice Barrett recognised that appointing a receiver to a company which has an established business operating as a going concern will "usually be drastic, intrusive and invasive", and hence recognised the need for the Court to turn its mind to whether an undertaking as to damages should be required.
In the case of ABC2, the Court agreed with the applicants that the "very special circumstances" of this case warranted a departure from the usual course:
"Such going concern as there is cannot continue to accommodate the unprofitable centres. ABC's title to control that aspect of its affairs is tenuous and the title of [ABC2] will be, from the outset, a title to disadvantageous property that does not in its present form represent a viable enterprise. Those circumstances set this case apart. There is also the point that this is not an adversarial proceeding and, as I have said, all interested persons, or their representatives, can be taken to have been put on notice of the application and to be of a frame of mind such that they do not wish to be heard."
Of course, this does not mean that an undertaking as to damages is no longer required in any application for the court appointment of a receiver. Nevertheless, this judgment does make it clear that such an undertaking will not necessarily always be required.
Notwithstanding that the sale process involved (amongst all of the other challenges) navigating the legislative minefields in respect of privacy of personal information, child care licensing at State and Federal level and satisfactory police checks of incoming owners – all to be in place prior to purchase, less than nine months after the Court Receivers were appointed, it was announced that they had found buyers for 236 of the 262 "unviable" centres.
As well as ensuring the continued provision of childcare for the overwhelming majority of children in the ABC2 centres, this outcome:
secured continued employment for ABC's workers (over 89 percent of ABC2 employees were retained);
provided a return for ABC's creditors from the sale of plant and equipment to the buyers of the ABC2 centres;
saw the transfer of most of the "unviable" ABC2 centres to a diverse group of 79 for-profit and not-for profit purchasers.
As well as the economic and commercial benefits which flowed from the deal, this last outcome was a societal good, in that it strengthened the diversification of childcare providers. Whatever legal and commercial precedents the ABC2 deal may ultimately provide, therefore, it stands out as a landmark development in social and educational policy.
Declaration of interest - the authors acted for DEEWR and PPB in relation to the Court Receivership.
 A key component of that success story – the ABC2 receivership – received the ALB Australasian Law award for Restructuring & Insolvency Deal of the Year.
 National Australia Bank Ltd v Bond Brewing Holdings Ltd  HCA 10; (1990) 169 CLR 271.
 Ibid at 277.
 Ibid at 277.
 The Commonwealth of Australia v ABC2 Group Pty Ltd  NSWSC 1383 at .
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