Thinking | 23 August 2017
Shelter from the storm is near – An update on the director safe harbour / ipso facto regime
The Senate Economics Legislation Committee has recommended that the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Bill) which provides a ‘safe harbour’ defence and automatic stays on certain ipso facto clauses be passed. We expect that the Bill will be passed by Parliament this year, giving company directors more flexibility when dealing with financial distress.
In March this year, the Federal Government released draft legislation and an accompanying explanatory memorandum that sought to introduce a ‘safe harbour’ defence for directors faced with insolvent trading claims, and automatic stays on certain ipso facto clauses which allow a party to terminate a contract for the sole reason of an insolvency event. Hall & Wilcox considered these proposed amendments in our article in April 2017.
Following receipt of submissions from industry and the profession, on 1 June 2017 the Bill was introduced by the Government into the House of Representatives. The Bill proposed amendments to the Corporations Act 2001 (Cth). The Bill was referred to the Senate Economics Legislation Committee for inquiry and report. On 8 August, the Committee, chaired by Victorian Senator Jane Hume, released their report and findings.
Recommendation and Findings of the Committee
The Committee recommended that the Bill, in its current form, be passed. There is presently no indication of when the Bill will next be considered by Parliament, but given the bipartisan support the Bill has received, and the recommendation of the Committee, we expect it will be passed by Parliament this year. If passed, the safe harbour regime will take effect immediately and the ipso facto reforms will begin on the later of 1 July 2018, six months after the Bill is passed or as otherwise proclaimed.
The Committee noted the broad support for the Bill received in the various submissions. The Committee agreed with many of the submissions that indicated Australia had some of the ‘harshest’ insolvency laws in the world. The Committee found that by:
‘encouraging company directors to take responsible and measured steps to turn around businesses in financial distress, [the committee is confident that] the reforms in the bill will support effective company restructuring and, in turn, promote innovation and entrepreneurship for the benefit of all stakeholders, and the Australian economy overall’.
The Committee noted some of the general concerns expressed regarding the operation of the Bill but found that those concerns would be best clarified in regulations accompanying the legislation. The regulations have not yet been released.
Of particular interest was the Committees’ consideration of the following matters:
Safe Harbour Regime
Carve out v Defence
The ‘safe harbour’ in the Bill was drafted in the form of a legislative carve-out from liability, as opposed to a defence to insolvent trading. The submissions generally favoured this model, which shifts the evidential burden away from the director, to the party alleging the safe harbour does not apply. This is said to be line with the policy objectives of facilitating honest and genuine business turnaround attempts.
Appropriately Qualified Entity
The reforms in the Bill require a director to obtain advice from an ‘appropriately qualified entity’ before the safe harbour takes effect. The broad wording ‘appropriately qualified’ received mixed views. Some submissions called for a minimum qualification requirement (such as being a registered liquidator), while others preferred the broad view, recognising that companies face unique circumstances and what is appropriate for one company, may not be necessarily appropriate for another.
If the Bill is passed adopting the term ‘appropriately qualified’ which seems likely, it is expected that the pre-insolvency advisory sphere will open to a wider range of advisors. The regulations, when drafted, may provide further guidance in considering whether an entity is ‘appropriately qualified’.
Stay on Ipso Facto Clauses
Most submissions supported the stay on ipso facto clauses, which would have the effect of prohibiting a party from terminating a contract due solely to the counter party entering into a form of insolvent administration.
Application to new contracts only
The submissions expressed concern that the stay only applies to new contracts. It was noted that the practical effect of the stay would not be achieved for many years, as parties would simply renegotiate their existing contracts and not enter into new contracts. One submission called for a transitional period of between 1 and 2 years to address this concern.
Period of Stay
As currently drafted, the stay operates both during the administration period and during a subsequent liquidation, until the affairs of the company are ‘fully wound up’.
The operation of the stay during liquidation was criticised in submissions, noting that there was no reason the stay should continue when a restructure has been unsuccessfully attempted and that if the stay applied during liquidation, creditors could be forced to continue to supply a company during its liquidation.
One submission queried why the stay did not apply in the event a company entered into a DOCA following an administration. It was noted that a DOCA was the primary mechanism for implementing a restructure through the administration process. It was suggested that the absence of a stay during a DOCA would counter the objectives of the Bill.
There is presently no indication as to when the Bill will back before Parliament, though that may occur as soon as the September or October sittings. Hall & Wilcox are closely following the progress of the Bill.
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