Reforms to facilitate restructuring introduced

It is pleasing to see the culmination of ARITA’s thought leadership work with the introduction of safe harbour and ipso facto protection into Parliament today.

Safe harbour

The protection afforded by the new provisions will provide a 'safe harbour' for company directors from personal liability for insolvent trading if the company is undertaking a restructuring outside formal insolvency.

ARITA has long advocated an appropriately crafted safe harbour that balances the need to allow directors the opportunity to restructure financially troubled businesses outside of a formal insolvency appointment with safeguards against its potential exploitation.

We believe that the reforms as drafted largely achieve this goal.

We have consistently maintained our position that an adviser appointed by a director, as they seek the protection of the safe harbour, should be an appropriately qualified professional with the requisite professional indemnity insurance. We note that guidance to this effect has been included in the Explanatory Memorandum, though not into the law itself.

While we positively acknowledge that the Government has moved to provide that additional guidance, we will continue to advocate that the restructuring adviser should be a registered liquidator or a sub-class thereof. We believe that, to best protect the community as a whole, this role should be a regulated population subject to high professional standards, oversight and, critically, a demonstrable education and expertise in insolvency.

This is essential not because we expect the business to end up on insolvency, but because this expertise is required to navigate the complex legal framework in which we operate. We do not contend that a registered liquidator needs to be the lead of the turnaround team in all instances. But they need to be a key adviser to that team in order for safe harbour to be afforded.

We don’t accept that this is onerous on small business. We will continue to advocate that this requirement should be included in the legislation.

As with all reforms that create such a significant shift in approach, the devil is in the detail:

  • The protection provided by the safe harbour is limited to civil liability under the insolvent trading provisions. Directors must continue to comply with all their other legal obligations and duties.
  • Continuous disclosure requirements, if applicable, continue to apply.
  • The safe harbour protection is only available while directors:
    • develop or take a course of action that, at the time, was reasonably likely to lead to a better outcome for the company than immediate administration or liquidation (the course of action that is developed must be implemented within a reasonable period)
    • ensure that the company complies with its obligation to pay its employees (including their superannuation), and
    • ensure that the company meets its tax reporting obligations.
  • The safe harbour only extends to debts incurred directly or indirectly in connection with the course of action or its development.
  • Whether a course of action is reasonably likely to lead to a better outcome is assessed as at the time the decision is made, not with the benefit of hindsight.
  • The Bill provides a list of indicative factors to be considered in determining whether a course of action was reasonably likely to lead to a better outcome. These factors are whether the person has:
    • kept themselves informed about the company’s financial position
    • taken steps to prevent misconduct by officers and employees of the company
    • taken appropriate steps to ensure the company maintained appropriate financial records
    • oobtained appropriate advice from an appropriately qualified adviser, and
    • been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position. 
  • If the restructuring plan were to fail and the company entered liquidation, the safe harbour would only be open if the directors comply with certain formal obligations during the liquidation, such as completing a RATA and providing books and records. Failure to do so will mean the safe harbour will be deemed not to have existed.
  • A director that fails to provide access to books and records to a liquidator or administrator will be prevented from being able to rely on those materials as evidence of having complied with the safe harbour requirements – but the liquidator or administrator must ensure they advise the directors of this consequence when making the request.
  • The benefits of safe harbour can also extend to a holding company where the directors of the subsidiary had the benefit of safe harbour and the holding company was taking reasonable steps to ensure that that was the case.
  • The evidentiary burden lies with the director that is claiming the benefit of the safe harbour. However, it will be up to the liquidator to show, on the balance of probabilities, that the course of action taken was one not reasonably likely to lead to a better outcome.

The safe harbour provisions are scheduled to commence the day after Royal Assent and will apply to actions taken before, at or after the commencement of the provisions and to debts incurred at or after commencement of the provisions.

Ipso facto

Ipso facto clauses allow one party to a contract to terminate the agreement upon the occurrence of a specific event, often linked to insolvency and more particularly a formal insolvency appointment. The type of termination can occur regardless of the counterparty’s continued performance of its obligations under the contract. These types of clauses are regularly found in leases, supply agreements, licences etc.

Obviously, clauses such as this can make it near to impossible for the appointed insolvency practitioner to achieve a successful restructuring of the troubled business.

ARITA's first submission on the need for a moratorium on ipso facto clauses was made in 2003, and we have consistently put forward this view since that time, including as a cornerstone policy of our thought leadership work in 2014.

ARITA is delighted that the proposed reforms will see a moratorium on ipso facto provisions triggered by the company’s financial position extend to:

  • schemes for the purposes of avoiding being wound up in insolvency
  • managing controllers appointed to the whole or the substantially the whole of the company’s property ('managing controller'), and
  • voluntary administrations.

Some of the key points to be aware of in relation to the draft legislation are:

  • The new law will only apply to contracts, agreements or arrangements entered into after the commencement of the new law.
  • The ipso facto right will remain unenforceable against a company after the end of the stay:
    • for events that occurred before the end of the stay period, or
    • due to the company having been subject to a scheme, voluntary administration or having had a managing controller appointed.
  • The right to terminate or amend an agreement remains if the breach occurs for any other reason, such as non-payment or non-performance.
  • The stay can be waived in writing by the appointed insolvency practitioner.
  • A lender to the company cannot be forced to advance new money or credit under an existing agreement during the period of the stay.
  • The court can order that the stay not apply in relation to a particular contract.
  • The court can grant extensions of the period of the stay.
  • The stay will not extend to contracts entered into after the company enters into the scheme, voluntary administration or has a managing controller appointed.
  • The stay will apply to schemes for disclosing entities from the time that the company announces that it will be making an application under s 411. The company will then have three months, or longer if provided by the court, to actually make the application.
  • If a replacement managing controller is appointed over the whole or substantially the whole of the company’s property, there is continuity in the period of protection.
  • A stay on a right during a voluntary administration will extend into a subsequent winding up, but a liquidation commenced without a preceding voluntary administration will not have the benefit of ipso facto protection.
  • A secured creditor with security over the whole or the substantially the whole of the company’s property maintains its right to appoint a controller under s 436C where a voluntary administrator has been appointed, via amendments to s 441A.

The part of the Bill dealing with the stay on ipso facto clauses is scheduled to commence on the later of 1 July 2018 or six months after Royal Assent, or earlier as proclaimed by the Governor-General.