Research just published has looked at the relation between board turnover and the likelihood that a company that enters a deed of company arrangement under Part 5.3A of the Corporations Act produces a better outcome for creditors than a liquidation.
Controversially, the research questions the long-held view that voluntary administration (VA) under Part 5.3A is suitable for large and complex insolvencies.
The paper, Board Turnover and Reorganisation Outcomes: Evidence from Voluntary Administration, by Chapple and Routledge, offers and econometric analysis of VAs, a perspective sadly lacking in the narrower legal focus that generally applies. The research is drawn from publicly listed companies that entered VA from 2009 to 2016.
The results show that
‘A signiﬁcant positive relation is found between a deed outcome and the percentage of director turnover and turnover of a CEO or managing director. However, the turnover beneﬁt is reduced as company size increases and the complexity of the administration becomes greater’.
The authors say that this has implications for the Australian voluntary administration regime because it suggests that there are difﬁculties applying it to large and complex corporate insolvencies.
The authors comment on Australia’s new ‘safe harbour’ law which is based on the view that management departures can negatively affect the resolution of ﬁnancial distress. The law therefore is meant to prompt directors to stay on and proactively manage their company’s problems rather than prematurely put their business into voluntary administration.
Debtor in possession and administrator control
The paper refers to the two distinct legal policy approaches that exist internationally.
One allows existing management to control the company, which is reﬂected in debtor-in-possession type insolvency regimes such as the US Chapter 11 reorganisation legislation.
The other removes control of the company from existing management, and places it under the supervision of an insolvency administrator, being the approach taken in Australia’s VA law.
Our safe harbour law therefore moves Australian law somewhat towards the US approach.
Which approach results in better insolvency administration outcomes remains an open question, with a difficulty being that, ‘for both cases, the alternative outcome is unobservable’.
The need to adjust VA laws
The paper suggests that
‘at least for large companies for which administration is complex, it would be appropriate to consider adjusting the VA legislation to provide for board continuity’.
That is, a ‘bifurcated debtor-in-possession approach’ where monitoring is provided by the administrator working alongside ‘knowledgeable incumbent managers’ during the insolvency administration.
The authors see their ﬁndings as timely because, as they say,
‘the motivations of directors of insolvent companies are on the national agenda with the recent introduction of the insolvent trading safe-harbour laws, on which, to date there has been very little empirical evidence available on what motivates directors’.
They see their results agreeing with the general underlying premise of safe-harbour that in some circumstances incumbent managers are best placed to address insolvency, and that board turnover can lead to worse outcomes. Given the sample, these results are not generalisable to the numerous smaller private companies that enter VA.
CAMAC’s 2004 Report – ‘little or no empirical analysis to support [its] conclusion’
The paper refers to the 2004 CAMAC report on the suitability of VA for large and complex enterprises which concluded that there were no fundamental difﬁculties in applying VA.
On the authors’ review of submissions to CAMAC and its reports, the authors found
‘little or no empirical analysis to support this conclusion’.
The limitations of the research
The authors acknowledge the limitations to their study and its ﬁndings, including the relatively small sample size, often the case with studies attempting econometric modelling related to ﬁnancial distress or insolvency. The lack of available data and other information is another limitation.
‘Enhancing the consistency of information around VA companies could play a valuable role in identifying ways to improve the legislation’.
The paper bears at least close consideration of its findings.
My two comments, for the moment, are these.
One, restructuring an insolvent company through a ‘debtor in possession’ model has been too readily rejected in Australia, the industry pejoratively dismissing it as ‘US Chapter 11’. This is done without regard to its benefits, supported for example by behavioural economics, and its possible variations in application, safe harbour being one.
Second, I have previously commented on the limited law focussed approach of insolvency reform. The law is the end result of what should be an initial deeper assessment of what is required from the perspective of economics, accounting and other related disciplines found among some lawyers but as much among insolvency practitioners themselves. In fact, they hold the data and information which should be the subject of analysis. The last useful analysis on VAs offered by ARITA, under what was the Terry Taylor Scholarship, by a lawyer, was in 2013.
Whether CAMAC’s evident lack of any empirical analysis affected its 2004 findings may be open to dispute but that is now irrelevant; any findings of 14 years ago must be questionable. But the reality is that CAMAC would have suffered from the reality that Australian insolvency law reform works in the dark, assisted only somewhat by anecdotal and ‘industry’ perspectives that do not necessarily address all the issues.
Neutral and high-quality academic research such as this report, and Melbourne’s phoenix research, as another example, with industry input, should be supported.
 Board Turnover and Reorganisation Outcomes: Evidence from Voluntary Administration, Australian Accounting Review, 2018, by Larelle Chapple, Queensland University of Technology (QUT), Brisbane, Australia; and James Routledge, Hitotsubashi University, Tokyo, Japan
 See for example the 2015 Productivity Commission Report – Business Entry and Exit. See Keay’s Insolvency, 10th ed 2018, [1.225]
 Keay’s Insolvency, [1.230]
 See The Dark figures of Insolvency  INSLB 7, Murray