Effect of issuer insolvency on debenture holders
- How does insolvency affect me?
- What information will I receive and when will I be paid?
- What is the role of my trustee?
- Will I be able to write off my investment for tax purposes?
- What if my ability to withdraw or redeem my debenture investment has been frozen?
- What if my interest payments or distributions have not been paid?
With debentures, you lend your money to a business, usually for a fixed term. For this reason, debenture holders are usually creditors of a company. Debentures can be secured or unsecured.
The effect of the appointment of an external administrator or a receiver (or controller, receiver and manager or managing controller), will be to place a freeze on any payments to you. The external administrator or receiver will then oversee an orderly realisation of the assets of the company and distribute the net proceeds to creditors in the order of priorities set out in the Corporations Act 2001 (Corporations Act). The external administrator will undertake investigations and report to the investors (as creditors) detailing how the assets can be realised, the expected amount and timing of any return to creditors.
The freeze will generally extend to:
- your initial investment
- interest payments.
This means that you may not receive any future interest payments on the scheduled due date and your principal debentures may not be repaid on maturity.
You should seek financial advice about how a freeze will affect your personal circumstances.
In some instances, the external administrator may contact the Commonwealth Minister for Families, Housing, Community Services and Indigenous Affairs to request the investment be excluded from the Aged Pension Deeming Provisions and for the purposes of determining an entitlement to a pension from the Department of Veterans Affairs.
The external administrator may report to you directly. Alternatively, the external administrator may report to your debenture trustee who is obliged to report to you from time to time. You should be kept informed about how much of your investment you can expect to recover and when you will be paid.
If you change your address, you should advise your debenture trustee and the external administrator as soon as possible to ensure you continue to receive timely information about your investment.
If you are a secured debenture holder, you may be paid before unsecured creditors, however, the order of payment may be affected where there are other secured debenture holders. If you are an unsecured debenture holder, you will rank equally alongside all other unsecured creditors.
The trustee represents you. The role of the debenture trustee includes monitoring the issuer's compliance with the:
- terms of the debentures
- provisions of the Debenture Trust Deed, and
- applicable statutory obligations under the Corporations Act.
The debenture trustee also plays a key role in representing debenture holders when issuer companies get into financial distress by monitoring and enforcing the rights of debenture holders. If your debenture trustee forms the view that the issuer company is insolvent and unable to meet its obligations to you and other debenture holders, it may, in certain circumstances, appoint an external administrator in its capacity as trustee under the Debenture Trust Deed. Your trustee will then liaise directly with the external administrator in order to maximise the returns to debenture holders.
In certain circumstances after appointing an external administrator, your debenture trustee may write to you and convene meetings from time to time.
You should seek advice specific to your personal circumstances about the tax treatment of any loss on your investment.
A withdrawal (or redemption) freeze on your investment does not necessarily mean the company you have invested in is insolvent. If you have been informed that your ability to withdraw your investment has been frozen and you are concerned, you should contact your investment company for further information. The investment company should be able to tell you why your investment has been frozen and for how long. You may find the freeze is only temporary and for a defined period of time (e.g. six months).
If it becomes apparent there are insufficient funds available to meet withdrawal claims from investors, it is possible the investment company may be wound up.
If you are concerned about a freeze on redemptions of an investment company, you can obtain a copy of the most recent prospectus. You should be able to obtain a copy directly from your investment company or their website.
The prospectus should be able to tell you:
- whether your investment is secured or unsecured
- whether you are entitled to claim early redemption and under what circumstances. Some investments only allow early redemption where you can demonstrate, for example, that you are faced with unforeseen or exceptional circumstances of hardship — even then you may only be entitled to redeem your investment at the sole discretion of the scheme or investment company
- under what circumstances the investment company is in default in accordance with the terms of the debenture. For example, the investment company may only be in default after it fails to pay your original investment and interest on maturity and this failure continues for a period of three months.
- who to contact to raise any concerns or complaints you may have about your investment.
You should consider seeking financial advice about how a freeze on withdrawing your investment will affect your personal circumstances. This will ensure you are able to make an informed decision about your financial future.
If you have not received your interest payment or an anticipated distribution from your investment by the due date, you should contact your investment company and seek financial advice on how the non-payment of your investment income will affect your personal circumstances. This will ensure you are able to make an informed decision about your financial future.
The most recent prospectus (for debenture holders) or the product disclosure statement (for a managed investment scheme) will tell you who to contact if you have any concerns or complaints about your investment.
If you are experiencing financial hardship you may be eligible for a temporary exemption or other assistance, contact Centrelink or the Department of Veterans Affairs for more information.