As you may be aware, on 1 June 2017, the Government introduced the Treasury Laws Amendment (2017 Enterprise Incentives No. 2 Bill) 2017 ('the Bill') into the Commonwealth Parliament. This Bill has now passed the Senate and is expected to come into effect on 1 July 2018.
The Bill contains two major reforms to Australia's insolvency laws:
1. A new 'safe harbour' protecting directors from civil liability for seeking to restructure financially distressed companies; and
2. Restrictions on the enforcement of ipso facto clauses to facilitate restructurings.
I SAFE HARBOUR
The safe harbour provisions will apply where directors start developing one or more courses of action that is/are reasonably likely to lead to a better outcome for the company (rather than the appointment of an administrator or liquidator). Directors will not be liable for debts incurred directly or indirectly in connection with the course of action.
The safe harbour period is taken to start when the director starts to develop one or more courses of action after starting to suspect that the company may become or be insolvent.
While the directors will have the evidential burden of demonstrating the safe harbour provision is available, the director only needs to demonstrate a reasonable possibility that the safe harbour applies. The person bringing proceedings will, as per the Explanatory Memorandum, have to bear the legal burden to show on the balance of probabilities that the course of action being taken was not one reasonably likely to lead to a better outcome for the company.
a) What is a better outcome?
The Bill sets out an indicative but not exhaustive list of indicia that will be considered in determining whether a course of action is reasonably likely to lead to a better outcome. Such factors include whether the director:
• properly informed themselves about the company's financial position
• took steps to prevent misconduct by the company's officers and employees
• took appropriate steps to ensure the company keeps financial records
• obtained advice from a qualified entity and
• developed or implemented a plan to restructure the company to improve its financial position
b) When will safe harbour not be available?
Directors will not be able to utilise the safe harbour provisions where:
• Employee entitlements have not been paid when due and
• Tax obligations have not been fulfilled (ie. Tax returns have not been filed)
II IPSO FACTO CLAUSES
An ipso facto clause creates a contractual right that allows one party to terminate or modify the operation of a contract upon the occurrence of an event, irrespective of the other party complying with their contractual obligations. The reforms aim to expand the scope for successful company restructures by placing a stay on the enforcement of such clauses.
Such reforms will have an effect in agreements taking place after 1 July 2018 – that is, ipso facto clauses in contracts entered into prior to commencement will remain enforceable. While directors should be cognisant of such reforms, the ramifications will remain to be seen for a while.
a) What is the period of the stay?
• In the context of an external administration, the stay period will commence from entry into administration until the administration ends.
• In the context of the appointment of a managing controller, the stay period will commence from appointment of the controller until their control of the company ends.
• In the context of an arrangement under Part 5.1 of the Corporations Act 2001 (Cth) ('the CA'), the stay period will commence from when an entity announces it will be making an application under s 411 of the CA for the purpose of avoiding being wound up in insolvency until either the:
- Application is withdrawn or the Court dismisses the application
- End of any arrangement approved as a result of the application under s 411 or
- The affairs of the body have been fully wound up following a resolution or order for the body to be wound up.
I hope the above summary of the Safe Harbour Law for Directors is helpful. As stated earlier this reform is likely to have significant impact on Credit Managers once the law becomes operational.
McMahon Fearnley Lawyers Pty Ltd
Tel: +61 3 9670 0966
December 2017 FNSCRD505 - Respond to corporate insolvency situations - FNS51520 Diploma of credit management