This post compares the numbers of companies using corporate rescue laws across Australia, Canada, England and the United States.
The end of 2018 also brings the end of the first 25 years of voluntary administration (‘VA’). I’ve been working on my PhD at the Adelaide Law School for the past 8 years, assessing the effectiveness of VA and, as part of that work, I’ve undertaken a statistical study of the first 25 years of administration (using a 5% sample of all companies entering administration for each year, which totals more than 2800 companies in my sample). As I approach the end of my thesis I’ll be doing a series of posts this year based on my empirical work, as well as publishing articles in academic and practitioner journals. As I’m still writing up my final draft I’d welcome comments and suggestions on my research.
For the first post, I thought I’d compare the outcomes of voluntary administration with outcomes in other jurisdictions with corporate rescue laws. I’ve selected Canada, England and the United States for comparison as these jurisdictions all share a common law legal system that provides for long-standing corporate rescue laws. Let’s start with the United States, which is often held up as the ‘gold standard’ for corporate rescue laws.
The United States (Chapter 11)
The United States’ Bankruptcy Code of 1978 offers reorganisation under Chapter 11 (which applies to both companies and individuals) as an alternative to liquidation under Chapter 7. Statistics on bankruptcy filings are available for the US Federal Courts US Courts statistics. In 2017, there were 7,442 Chapter 11 cases filled in US Bankruptcy Courts, out of a total of 789,020 total bankruptcy filings (including both personal and corporate insolvency). Of the Chapter 11 filings made in 2017, 85.3% (6,350) were designated as ‘business filings’. Chapter 11 cases made up 27.4% of all ‘business filings’ made under the Bankruptcy Code and less than 1% of all bankruptcy cases filed that year. Research published in December 2018 in the American Bankruptcy Institute Journal (see Ed Flynn’s regular column, ‘Bankruptcy by the numbers” (2018) ABI Journal (December) p 44) reveals that for Ch 11 cases closed during the period 2008-2015, only 28% had their reorganisation plans confirmed by the court. Plan confirmation in Ch 11 cases comes after the creditors have voted in favour of the plan.
So only about 27% of all business bankruptcy cases are Ch 11 filings, and only 28% of those Ch 11 filings result in a confirmed reorganisation plan (approximately 1800 companies), with the remainder being dismissed or converted to another Chapter (such as Ch 7 liquidation).
For a summary of the Ch 11 procedure see my 2015 article: ‘Restructuring nirvana? Chapter 11 bankruptcy and Australian insolvency reform.’ (2015) 16(3) Insolvency Law Bulletin pp. 42-46.
England and Wales (administration and CVA)
In England and Wales, there were 17,243 companies that entered insolvency in 2017. The Insolvency Act 1986 (UK) has an administration procedure as well as a “company voluntary arrangement” (CVA) procedure. While a company may proceed from administration to a CVA, a CVA may also be proposed by the debtor company’s directors without going through administration first. This is different from Australia’s deeds of company arrangement (DOCA), which can only follow from a voluntary administration.
In 2017, there were 1,289 administrations in England and Wales (which made up 7.5% of all corporate insolvencies) and 292 CVAs (which made up 1.7% of all corporate insolvencies): source The Insolvency Service: Insolvency Statistics October to December 2017, p3 (which gives an annual snapshot for 2017). Of course, the low level use of CVA’s must be seen in the context of the popularity of using pre-pack administrations for restructuring rather than CVAs.
Canada (Part III proposals and the CCAA)
In Canada, there are two primary rescue procedures for companies in financial distress, a proposal under Part III Division I of the Bankruptcy and Insolvency Act 1985 (Can) (‘BIA’) or a case filed under the Companies’ Creditors Arrangements Act 1985 (Can) (‘CCAA’). Official insolvency statistics published by the Office of the Superintendent of Bankruptcy statistics (OSB) show that business bankruptcies (i.e. commercial entities or individuals who have incurred >50% of debts from operating a business) in 2017 consisted of 2,700 bankruptcies and 909 proposals under the BIA, with proposals making up 25% of the total number of business filings under the BIA (3,609). The CCAA, which is applicable to larger companies that have at least $5 million in liabilities, produced 23 CCAA filings during 2017.
What these filing statistics show, is that business rescue procedures in Canada, England and the United States are used for less than 1/3 of corporate insolvencies.
Australia (voluntary administration)
ASIC releases a limited range of insolvency statistics each year: Insolvency statistics. Series 1 sets out the numbers of companies that enter some form of external administration (under Ch 5) each year and includes only the first form of appointment, so if a company enters receivership or liquidation before entering voluntary administration then it would be recorded in the former but not in the latter appointment statistics. Series 2 provides details of all external administration appointments each month and this will include all companies that enter voluntary administration and those that enter deed of company arrangement. However, the statistics do not link which of the companies that entered administration also entered a DOCA in the same year for statistical purposes, so some companies entered into a DOCA will have entered administration in a prior year and some companies that entered administration in 2017 will go on to enter a DOCA in 2018.
The Series 2 statistics for calendar year 2017 show that 1,193 companies entered voluntary administration, and there were 340 DOCAs entered. If these 340 DOCA cases were based on 2017 appointments they would make up 28.5% of the administration appoints for 2017. The 340 DOCAs make up 2.9% of all corporate insolvencies in 2017, while 1,193 administrations make up 10.5% of all corporate insolvencies in 2017. The proportion that DOCAs make up of all administrations in 2017 (28.5%) is consistent with earlier years in the Series 2 statistics which range from FY99-00 to end of October 2018 (released in December 2018). The height of DOCA appointments in raw numbers was 756 in FY00-01 (which made up 29% of VAs that financial year) and reached a peak as a proportion of all VAs in FY11-12 with 552 DOCAs making up 34% of all VAs that year. So the number of DOCAs has never been more than 800 in a year and never represented more than just over 1/3 of all VAs.
My PhD statistics on VA
My PhD sample for 2017 involved a random selection of 60 companies that entered voluntary administration in 2017, of which 23 led to DOCAs (38% of the administrations in my sample for that year). 10 of the DOCAs that resulted from the administrations in 2017 in my 5% sample were actually executed in 2018. Of the companies that entered administration in 2017 in my sample, only 5 have the status of ‘registered’ (and all of those entered into a DOCA), with the remainder being in external administration or deregistered.
Of the 23 companies that entered a DOCA in my 2017 sample, 5 of the DOCAs terminated after achieving their purpose and the companies remained registered. 1 further company terminated its DOCA after it achieved its purpose, but then proceeded to a creditors’ voluntary liquidation, 1 further company proceeded to deregistration following the DOCA’s completion. A further company had the creditors terminate the DOCA before its ordinary completion. The remaining companies were still operating under a DOCA when my data was collected (in July 2018). The average length of the DOCAs that terminated was 4 months (min 1 month; max 7 months).
I collected my data using free ASIC Connect searches to identify documents lodged with ASIC from the date of administration, so I am unable to determine whether the companies registered are actually trading. I also don’t have copies of the DOCAs entered into, nor the s439A reports issued to creditors, so I am unable to determine more specific information relating to what payments (if any) were made to creditors under the DOCAs.
This short survey compared the rates of companies using corporate rescue procedures in 4 countries. With Australia’s voluntary administration passing the 25 year mark, it is useful to note that approximately 1/3 of companies that enter VA proceed to a DOCA and this has been fairly steady for at least the past 18 years. Whether this is a good or bad thing depends on what we expect from our corporate rescue laws. The data publicly available does not allow conclusions to be drawn on what these DOCAs were used for, and whether the outcomes were better or worse than expected or provided anything more than a potential liquidation.
However, this short survey demonstrates that complaints about the seeming low numbers of DOCAs need to be viewed with skepticism given that our rates of DOCA usage are relatively similar to other corporate rescue laws in Canada, England and even in the United States. The Harmer Report stated that if the voluntary administration procedure saved even a few more companies than were saved under the old system of Official Management (which saved very few companies and was little used), then it would be a success. The data from my sample for 2017 offers some perspective on that measure of success.
I’ll be preparing a full article to evaluate my PhD statistics in 2019. If you’d like a copy when it’s ready, please contact me either in the comments below or through my Twitter (@corporatelawAU) or LinkedIn accounts.