The Commonwealth Parliamentary Joint Committee on Corporations and Financial Services Corporate insolvency in Australia was released on 12 July 2023.

The Report states that the construction industry is experiencing one of the highest rates of insolvencies compared to other sectors. The Report cited ASIC data which shows that the number of companies entering external administration has increased relative to the same month in the previous two financial years, with the construction industry being the most highly represented.

The U.S. Court of Appeals for the Second Circuit quietly affirmed a bankruptcy court’s dismissal of an involuntary petition because the petitioners’ “claims were the subject of bona fide disputes within the meaning of” Bankruptcy Code (Code) §303(b)(1) (petitioner may not hold claim that is “the subject of a bona fide dispute as to liability or amount”). In re Navient Solutions, LLC, 2023 WL 3487051 (2d Cir. May 17, 2023).

“Sophisticated financial titans engaged in a winner-take-all battle. There was a winner and a loser. Such an outcome was not only foreseeable, it is the only correct result. The risk of loss is a check on unrestrained behavior.”

On May 30, 2023, the U.S. Court of Appeals for the Second Circuit affirmed a bankruptcy court’s confirmation of a chapter 11 reorganization plan containing nonconsensual releases of direct claims against third-party non-debtors, including the debtor’s controlling owners, the Sacklers.

Is an insolvent debtor’s pre-bankruptcy termination of a commercial lease a fraudulent transfer? The Third Circuit said no when it held that a lessor’s pre-bankruptcy termination of the debtors’ lease and purchase option “was not a transfer under Bankruptcy Code §548(a) (1)(B).” In re Pazzo Pazzo Inc., 2022 WL 17690158 (3d Cir. Dec. 15, 2022). But the Seventh Circuit held that a chapter 11 debtor’s pre-bankruptcy “surrender of [two] … leases to [its landlord] could be regarded as a preferential [or fraudulent] transfer.” In re Great Lakes Quick Lube L.P., 816 F.3d 482 (7th Cir. 2016).

In a recent decision, Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88, lenders to the Arrium Group, a company that collapsed, have lost their appeal regarding the personal liability of the Chief Financial Officer and Group Treasurer. The NSW Supreme Court had previously dismissed the lenders' claims, and the Court of Appeal has now affirmed that decision.

Sometimes a debtor is liable for fraud that she did not personally commit,” held the U.S. Supreme Court on Feb. 22, 2023, when the debtor’s business partner had deceptively obtained money by fraud, thereby making the innocent partner liable for a nondischargeable debt under Bankruptcy Code (Code) §523(a)(2)(A) (“any debt from money “obtained by … fraud” not dischargeable and survives debtor’s bankruptcy). Bartenwerfer v. Buckley, 2023 WL 2144417 (Feb. 22, 2023).

Current economic conditions and market instability are likely to see more Australian companies fall into distress in 2023 — creating both opportunities for proactive restructuring as well as distressed asset sales.

That's one of the predictions in this year's edition of From Red to Black, Clayton Utz's annual review of the dynamics of Australia's Restructuring and Insolvency (R&I) market.

Welcome to the 2023 edition of "From Red to Black", our annual review of significant developments and topical issues in the Australian restructuring and insolvency market.

Restructuring and insolvency professionals are showing real ingenuity when restructuring insolvent businesses, and landlords need to keep up.

Economic downturns create opportunities for the restructuring or acquisition of challenged assets, and we anticipate increased activity in this space in 2023. The indicators pointing in that direction are: