The Government is tipped to enact new legislation later this year that will have a major impact on how directors and companies deal with insolvencies. The new laws will introduce:
Timeline of events
- a ‘safe harbour’ for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency; and
- a stay on the enforcement of ‘ipso facto’ clauses in contracts that are triggered by a company entering formal insolvency proceedings.
On 28 March 2017 the Federal Government released draft legislation - the Treasury Laws Amendment (2017 Enterprise Incentives No. 2 Bill) 2017 -
seeking to amend the Corporations Act.
On 1 June 2017, the Government introduced this Bill into Parliament.
On 15 June 2017, the Senate referred the provisions of the Bill to the Economics Legislation Committee for inquiry and report by 8 August 2017.
The Economics Legislation Committee has since recommended that the Bill be passed.
If passed, as expected later this year, it will give company directors more flexibility when dealing with financial distress.
Safe Harbour - The key changes
Under section 588G of the Corporations Act 2001
(Cth) a director may be liable if he or she causes their company to trade while it is insolvent.
The Bill, if enacted, will introduce a new section 588GA, under which a director will be offered a safe harbour from insolvency proceedings for “taking a course of action which is reasonably likely to lead to a better outcome for a company and its creditors”. More specifically, the safe harbour will be triggered if, at a particular time after the director starts to suspect the company may become or be insolvent, the director starts taking a course of action that is reasonably likely to lead to a better outcome for the company and the company’s creditors, and the debt is incurred in connection with that course of action. In determining whether a course of action will lead to a “better outcome”, one must have regard to whether the director:
- is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; and
- is taking appropriate steps to ensure that the company is keeping appropriate financial records; and
- is obtaining appropriate advice from an appropriately qualified entity who itself is given sufficient information to give that advice; and
- is themself properly informed of the company’s financial position; and
- is developing or implementing a plan for restructuring the company to improve its financial position.
The better outcome must be a better outcome for both the company and the company’s creditors as a whole. Directors will have the evidential burden of demonstrating that the safe harbour exception is available.
When will it take effect?
The safe harbour amendments will take effect the day after the amending Act receives the Governor –General’s Royal Assent (which is expected to occur this year).
Ipso Facto clauses - The key changes
An ‘ipso facto’ clause is a provision that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty.
The Bill, if enacted, will provide a stay on the enforcement of express rights that amend or terminate a contract (ipso facto clauses) because of the appointment of an administrator, the presence of a managing controller over all or the substantial portion of a entity’s property, or because an entity is subject to a compromise or arrangement. The stay will apply regardless of whether the right is self-executing or triggered by one of the parties to an agreement. The stay will not apply to rights prescribed by the regulations, declared in a Ministerial determination or in agreements made after the commencement of an administration, receivership, scheme or other managing controllership or voluntary administration.
When will it take effect?
The ipso facto amendments will take effect from the later of 1 July 2018 or the day six months after the Governor –General’s Royal Assent (which is expected to occur this year).
What these changes mean for Directors
If the new safe harbour clauses are enacted there will likely be a cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of simply placing the company prematurely into voluntary administration or liquidation.
Likewise, the operation of ipso facto clauses can reduce the scope for a successful restructure or prevent the sale of the business as a going concern. If the amendments to the operation of these clauses are enacted, businesses will be able to continue to trade in order to recover from an insolvency event instead of these clauses preventing their successful rehabilitation.