Australia is part of the global economy and, since the mid-1980s; global influences have been instrumental in bringing about revolutionary change in the Australian business environment. (Halliburton 213) Some of these global influences include:
• Increasing globalisation and a changing international business environment. Businesses face considerable uncertainty as competition has increased. Australia's business practices and operations are undergoing fundamental change to accommodate changes in the external environment.
• Changes in protection policies. Until the 1980s, Australian businesses operated in a protected and regulated environment. (Halliburton 214) However government industry reforms over the past decade have promoted policies that increasingly expose business to foreign competition. Australia is now a much more open trading nation, with businesses rapidly improving in efficiency and international competitiveness.
• Overseas market opportunities. More Australian businesses, both small/medium enterprises (SMEs) and large-scale organisations, are looking at ways of increasing their export-readiness to maximise their export potential. (Campbell 125-131) This is evidenced by Australian businesses achieving an export record of S152.2 billion in 2002 — about 9 per cent more than the previous year and a huge 48 per cent increase on 1996. (Campbell 125-131)
Australia: a trading nation
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Even though Australia is not one of the world's main trading nations, trade is crucial to the performance of many Australian businesses, the economy and the wealth of the Australian people. Australian businesses export sales have grown rapidly over the last twenty years. (Australian Trade Commission)
Australia's population and therefore our domestic market are small in comparison with many other countries. (Australian Trade Commission) Consequently for the many Australian businesses that wish to expand, exporting to overseas markets is often their only option. Australian businesses now export a huge variety of goods and services, including coal, wool, foodstuffs, passenger motor vehicles, crude petroleum, education services and tourism. Australian businesses are able to sell to a global market of over five billion people. (Australian Trade Commission) The paper briefly discusses the Australian corporate structure and talk about laws for business. The report also highlights the business strategies and interests towards stakeholders.
Of all the small/medium sized businesses operating in Australia, only 4 per cent export compared to a third of all large businesses. (Frost 3-9) This reflects the historical situation where a few large businesses have done the majority of exporting. However, the federal government has recently initiated a number of policies to double the number of exporters by 2006. (Frost 3-9) In particular it wants to encourage a new generation of Australian exporters, especially amongst SMEs.
The number of SMEs exporting has been steadily increasing during the past decade. This has been brought about by one of the most dynamic changes to the Australian small/medium business culture in recent years. There is an increasing awareness of the need to service overseas markets. Evidence of this is the fact that, in 2000, around one in eight small manufacturing businesses were exporting. (Frost 3-9) Ten years previously the figure was approximately one in twenty.
There is a growing band of enthusiastic and successful exporters. Research shows that these successful exporters rely on advice and support from a diverse range of individuals and organisations. (Dorrian 34) They have developed a network of business contacts ranging from family members to professional business associations and government agencies. SMEs are often more successful at exporting than large businesses. This is because SMEs are more adaptable and flexible. This makes them more responsive to the needs of overseas markets.
Need for Voluntary Administration in Corporate World
Voluntary Administration is a positive innovation in the suite of mechanisms available to the scores, if not hundreds of Australian companies that are placed into liquidation each year. (Garriga 51-71) While VA may not be the answer for all, it does provide a workable solution for those with a sound business who have simply lost their way.
Before VA a company suffering solvency issues really only had two options, assuming their secured creditors had not appointed a receiver. They could either appoint a liquidator, which was the death knell for the company, or they could enter into a scheme of arrangement with their creditors. The latter was frequently found to be a cumbersome and expensive process with little recorded success. (Garriga 51-71) If a liquidator is appointed there is always a somewhat remote prospect that they can sell the business so that it may continue, in a different legal entity and potentially in a different form. More typically though the result is the closure of the business and this usually results in significant casualties within the ranks of the various stakeholders. While secured and priority creditors may see some return, a meaningful liquidation dividend paid to unsecured creditors is rare and stakeholders generally get nothing. (Garriga 51-71)
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VA is effectively a halt-way house. It allows a company in financial distress to appoint an administrator, who has a window to opportunity during which all claims are suspended, to assess the ongoing viability of the business and a rescue plan is considered. If, after due consideration, the conclusion is that there is no way of rescuing the company, a liquidator will be appointed. (Haigh 59-71) As a result, the company is given an extra lifeline and more importantly time to try and address the needs of the stakeholders. Anecdotal evidence from Australia, Canada and the UK, where such regimes have been operative for some years now, point to more favourable outcome tor stakeholders than that achieved by putting companies straight into liquidation. (Haigh 59-71)
New Zealand has opted to align with the Australian model, which makes sense given the similarity of our markets, our CER agreement and geographical proximity. (Haigh 59-71)However, this does bring with it a few shortcomings that practitioners and businesses are coming to grips with as the practicalities of the law take shape.
The issue is that in the VA regime directors remain in office but cannot function as such without the express consent of the administrator. That creates a situation where the 'friendly' administrator will grant the directors the right to continue to run the company and often it is those very directors who have caused the problems in the first place. There needs to be a framework whereby people who seek to take such appointments are made accountable to an authority other than the High Court. (Haigh 59-71) For some years we've recognised that Australia has had the potential to benefit from a more flexible insolvency framework. For VA to work here it requires a shift in mindsets, particularly amongst creditors and more time to address the issues that need to be resolved.
Australian Corporate Law
In the late 198O's and early 199O's, there was extensive academic analysis in the Australia of the whether corporate law rules did or should facilitate opting out, and many states in that country introduced reforms to their corporations law to allow companies to adopt opt out arrangements (mainly in relation to fiduciary duties of directors), usually through making alternative arrangements in the constitution, or through ratification of director's actions by stakeholders. (Hall 345)
This is explored in more detail in Part Three below. While some commentators in Australia, in particular Ian Ramsay and Michael Whincop, have incorporated and applied some of this analysis from an Australian perspective, it could not be said that opting out has been a major or even contentious issue in Australian corporate law- either from an academic perspective or at a practical level. (Mcconvill 191) Companies in Australia have been exploring opportunities to avoid the operation of particular provisions of the Corporations Act, just as companies in the United States were faced with stronger rules in relation to directors' duties in the late 198O's and were considering how they could sidestep the strictures of the law. (Mcconvill 191)
Corporations Regulations- A Means of Opting Out?
Another interesting feature of the Corporations Act which has not been considered before in Australian commentary on opting out of corporate law is the availability of Regulations to modify the operation of particular provisions under the Act. (Donaldson, Preston 65-91) Regulations to the Corporations
Act are normally drafted upon instruction by the Government and only need to be tabled in Parliament rather than following the same process of approval in both Houses of Parliament which is required for an actual amendment to the Corporations Act. (Donaldson, Preston 65-91) That is, the power to make Regulations does not give the Government carte blanche to amend the Act as they please. All Regulations are capable of being disallowed by way of a resolution of either House of under the Corporations Act; some provisions contain a clause authorizing Regulations to be made to modify the operation of the provision in some way. (Donaldson, Preston 65-91) This regulation-making power is particularly prominent in Part 2G.2 of the Act which provides stakeholders with some important participatory rights, including to requisition an extraordinary general meeting (section 249D (1)) and to propose a resolution at a general meeting (section 249N) with the support of 100 members. (Engwall, Kipping 243-253) The 100 member rule contained in these provisions can be modified through the passage of Regulations relating either to a particular company or a class of companies. (Sullivan 9-25)
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Thus, this power could also be described as another mechanism in the Act facilitating companies to opt out of what could otherwise be described as mandatory provisions. (Engwall, Kipping 243-253) However, as will be discussed later in this article, the ability to make Regulations is quite different to private arrangements between the company and its stakeholders, or arrangements where the organization is involved, to opt out of statutory provisions. Can it really be said that having to approach the Government to make Regulations for a provision to be modified in some way really provides for contractual freedom in corporate law?
Opting Out of Stakeholder Rights
Rights can be waived by Right Holders, commentary to date on opting out of corporate law has almost exclusively related to opting out of fiduciary duties and director liability. Rarely do we see academic commentary exploring the desirability of opt out arrangements in relation to stakeholder rights, (Nes 404-437) or practical examples of opt out arrangements applying to statutory provisions containing stakeholder governance rights. (Nes 404-437) An important characteristic of a 'right' is that the holder should be able to choose whether or not they want to exercise that right, and if the strict application of the right will actually operate contrary to the best interests of the holder of the right, they should have the opportunity to waive that right. This follows from a basal aspect of the nature of rights.
Rights by their very nature are controversial; this is so at several different levels. There is considerable uncertainty not only in relation to the scope and content of rights, but also to rudimentary issues regarding the definition of a right. (Nes 404-437) There is no shortage of definitions which have been advanced. There is a fundamental gulf between traditional private ordering and 'contracting out' of a corporate law rule by obtaining the approval of stakeholders within the corporation, and the operation of a dispensation power by the public regulator outside of the corporation. The former involves opting out of a corporate law rule, the latter does not involve opting out of corporate law, but instead entails an alternative form of corporate law rule- abide by the procedure of obtaining approval by the regulator to be received from complying with a specific obligation or procedure in the Act. (Nes 404-437) Put simply, opting out of corporate law must be a strictly private affair- once there is the 'public' involvement of the regulator, the arrangement cannot be described as 'opting out' but rather compliance with an alternative form of corporate law rule. (Nes 404-437)
Another explanation that may be raised for why the organization 's relief powers do not apply to stakeholder participatory rights, is that such rights relate to the internal governance arrangements of the corporation, and provisions dealing with these arrangements are included as 'replaceable rules', which stakeholders can essentially 'opt out' of already. Section 141 provides quite an extensive list of the provisions in the Act which are 'replaceable rules'. (Michelson, Wailes 239-262) The company can 'opt out' of a replaceable rule by including alternative arrangements in the company's constitution, which requires the approval of a special resolution of stakeholders. Only provisions which are designed to assist companies in organising the internal governance arrangements within the organization are 'replaceable rules'. (Michelson, Wailes 239-262) Accordingly, the argument would be as stakeholder participatory rights do relate to the internal governance relationship between companies and its stakeholders, if it is felt that there should be some avenue for companies to 'opt out' of a stakeholder right if it produces difficulties or unintended consequences, the provision should simply be amended to become a replaceable rule, rather than attaching a dispensation power to be exercised by the organization.
The nature of most governance rights included in the Corporations Act (the main exception being the procedure for removing directors of public companies under section 203D) is that they do not automatically apply; rather stakeholders are given the opportunity to choose whether or not they will exercise a particular right. (Michelson, Wailes 239-262) Accordingly, for most governance rights, an opt out arrangement will not be required, as the relevant provisions containing these rights are not mandatory provisions- rather, they are essentially in the form of 'enabling' provisions which stakeholders can opt into or chose not to do so. For example, stakeholders are not forced to exercise their right to inspect the register of members. (Michelson, Wailes 1-10) That said stakeholders' governance rights must be considered in the context of the overall operation of the corporation, which exists not to sprinkle rights upon individual stakeholders but rather to benefit stakeholders as a whole. The governance rights of stakeholders are not solely the concern of individual stakeholders; rather we must consider the impact of these rights on the corporation and the majority of stakeholders. (Michelson, Wailes 1-10) The utilization of a governance right may benefit an individual stakeholder or small group of stakeholders, but ultimately be detrimental to the interests of stakeholders as a whole.
Therefore, it is reasonable to argue that if the utilization of a governance right by an individual stakeholder would be detrimental to the interests of the overriding majority of stakeholders, the majority should have some avenue to avoid or modify the application of that right. Using simple parlance, the majority should rule. Thus we see that there is an avenue for extending the organization's dispensation powers to the governance rights of stakeholders expressed in the Act. (Moir 16-22)
Due to the complexity of corporate regulation, stakeholders will not always be appropriately placed to make an assessment of the full ramifications associated with opting out of a stakeholder governance rights provision. (Moir 16-22) The impartiality and knowledge that the organization will bring to the process will ensure that a decision by stakeholders to opt out of such a law will be not be self defeating.
A timely and cost-effective rehabilitation plan makes possible the realization of increased business value and, from the creditors' point of view, increases the amount of potential debt repayment. (Moir 16-22) As such, tax costs are an important factor and the development of a tax structure that complements the overall rehabilitation plan best is critical. Additional considerations must be given attention in the case of M&A-type business rehabilitations where new investors such as investment banks, investment funds or strategic corporate partners in the same business gain management control over the rehabilitated company. (Moir 16-22) In these cases, it is necessary to form a plan that not only enables the rehabilitating company to avoid taxation on debt forgiveness income but also gives sufficient consideration to the appropriate method for acquiring the management rights and other costs of the rehabilitation and so on.
In a private reorganization, the debt forgiveness may be carried out based on an agreement reached by the debtor and creditors. (Morgan 1-4) In the cases where there is no third-party intervention, the creditors should take particular care that the debt forgiveness is not treated as a non-deductible donation for tax purposes. Moreover, the debtor should give careful consideration to the tax consequence on any debt forgiveness income.
The Guideline on Private Reorganizations was created in September 2001 to serve as a tool for banks to use when trying to reach agreements in typical restructurings and rehabilitation cases. (Morgan 1-4) However, in most cases it has proven difficult to obtain the consent from the debtor's semi-main banks. As a consequence, the debtor's main banks have generally had no option but to accept a larger share of the debt forgiveness than the semi-main banks. For this reason the guideline has proven to be unpopular.
There are two types of legal reorganization rehabilitation procedures: the Civil Rehabilitation Law and the Corporate Rehabilitation Law. (Sparkes 45-57) In a legal reorganization, a large administrative burden is placed on the debtor corporation and the company's image may also be negatively impacted.
Under the Civil Rehabilitation Law, it is possible for the existing managing directors and stakeholders to remain unchanged. (Sparkes 45-57) However, in practice the existing managing directors are usually replaced by new managing directors and the shares are also often transferred to other parties. The merits of the Civil Rehabilitation Law are that the court is involved in a relatively modest capacity and the procedures can be carried out quickly. (Sparkes 45-57) It has therefore proven to be popular not only among small and medium-sized companies (as was originally expected) but also by large companies as well.
On the other hand, the Corporate Rehabilitation Law has the legal force to reform the management and organization of the company by changing all the pre-rehabilitation managing directors and stakeholders. (Orlitzky 403-441) In addition, by using the Corporate Rehabilitation Law, a company can carry out mergers, corporate splits, capital increases and capital reductions without the legal obligation to follow the procedures provided in the commercial code significantly streamlining the process. (Orlitzky 403-441)
Key points in tax planning Debt forgiveness income and bad debt deductions
As most companies undergoing business rehabilitation are burdened with excessive leverage, the debt is either forgiven by creditors or written off through the legal reorganization procedures. In such cases, the debtor must recognize debt forgiveness income which is taxable under Australian tax principles. (Sahlin-Andersson 102) As such, the debtor will be subject to corporate income taxes for the amount of the income unless there are either current losses or loss carry forwards available. The tax liabilities arising from debt forgiveness income are undesirable as they complicate the prospect of successful business rehabilitation. (Sahlin-Andersson 102-105) Therefore, the most common tax planning issue in an Australian business rehabilitation is to minimize the tax liabilities arising from debt forgiveness income.
From the creditor's perspective the amount of loans that are written off are treated as bad-debt losses and are only deductible for corporate tax a purpose if the creditor has written off the loans based on a legal reorganization procedure or has forgiven the loans based on a reasonable turnaround plan. (Sahlin-Andersson 102-105) For example, debt forgiven carried out in the following manner is considered to have followed a reasonable turnaround plan (as such, the creditor can take a bad debt deduction for corporate tax purposes). (Sahlin-Andersson 102-105)
In many cases the companies undergoing rehabilitation have unpaid national/local taxes or other public dues (for example, social insurance and unemployment insurance). In general, unpaid national/local taxes are senior to other public dues and private receivables. Unfortunately, the Civil Rehabilitation Law does not suspend the collection of unpaid taxes during the rehabilitation procedures. (Tilt 190-212) The authorities can therefore collect these unpaid taxes and execute seizure at any time without any restrictions under the Law. For unpaid national taxes, forcible execution and seizure are permitted. (Tilt 190-212) Therefore, it is necessary to deliberate the option of postponing either the timing of the payment or the timing of the conversion of assets into money. Tax receivables are treated as reorganization receivables in the Corporate Rehabilitation Law and, as for general creditors; the repayment of these receivables outside of the reorganization procedures is prohibited. (Tilt 190-212)
Sales of Business Assets
One method for rehabilitating an organization is by selling non-core or core operations to a new company and then liquidating the prior organization. (Vogel 19-45) Examples of the methods for such reorganizations include business transfers and corporate split-ups. These transactions can be completed as either taxable or tax-free transactions (assuming the requirements are met). (Üsdiken 255-270) Although the corporate split-up is the more advantageous method considering registration & license taxes and other transaction taxes, the company may nevertheless opt for a taxable business transfer for reasons such as its inability to pay its debts after the corporate split up or its inability to retain all the employees of the transferor company. (Vogel 19-45)
When carrying out a corporate split-up or a business transfer as a means of rehabilitation, it is necessary to consider the joint tax liabilities and secondary tax liabilities. If the corporation is to carry out a spin-off type corporate split, the transferee company must assume part of the tax burden of the transferor company. If the transfer of operations is carried out between related parties, the transferee company must bear certain secondary tax liabilities. (Sullivan 9-25)
To clarify the stakeholder responsibility of the rehabilitated company's pre-rehabilitation stakeholders, it is common for the rights of the previous stakeholders to be extinguished through a 100% capital reduction without distribution. (Üsdiken 255-270) However, for corporate tax purposes, the amount of the paid-in capital and capital surplus (paid-in capitals) are not affected because the transaction merely involves the transfer of paid-in capital to capital surplus. (Üsdiken 255-270)
Therefore, if the sponsors make an additional investment in the company later, the total amount of paid-in capitals increases, and accordingly the per capital levies and the new enterprise taxation basis for capital amount also increase. However, there is also a special measure that allows for the deduction of the amount of capital reduction without distribution from the amount of paid-in capitals for the following two years regarding the calculation for the capital amount of the new enterprise taxation. Many individuals representing diverse people and organizations constitute a stakeholder group. (Zutshi, Sohal 335-357)
While this diversity is strength of collaboration, it also appears to produce complacency about community involvement. Stakeholder groups often view themselves as representatives of the community (i.e., democratically elected) rather than representative of the community (i.e., a sample of people reflecting the range of interests in the community). Unlike elected officials, stakeholders are selected because they mirror the set of interests in the community. (Zutshi, Sohal 335-357)
As stakeholders identify common goals, they formulate a new perspective that is not necessarily formulated in the community. Furthermore, representatives of organizations will sometimes agree to decisions at the stakeholder table that were not agreed to by their organization. Therefore, stakeholder groups must constantly communicate their newly acquired knowledge and understanding to the organizations they represent and to the "general public." It is important for stakeholders to gain an appreciation of community views and to gain support for strategies and implementation actions. (Zutshi, Sohal 335-357)
Australian stakeholders often cited inadequate public involvement as a significant shortcoming of their process. There are several limitations to a joint decision making approach. First, stakeholder groups cannot coordinate all the decisions that occur on a day-to-day basis because it would make the implementation process too cumbersome and complex. Therefore, they must identify the most interdependent and important decisions that should be done jointly. Second, organizations must be willing to withstand higher transaction costs. (Sullivan 9-25) Decisions involving more consultation will require more time, and may require more personnel and resources. Finally, for participating organizations--particularly government ones--joint decision making requires that they give up some of their autonomy and share decision making powers. (Sullivan 9-25) These organizations will be able to make fewer decisions independently; instead they will have to consult with other stakeholders.
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