The Australian Financial Review Interview: Federal Treasury to fast-track rules to save struggling companies

The Australian Financial Review published an article on page 6 last week, which positions the TMA and AVCAL as two key industry supporters backing the proposed Safe Harbour provisions which form part of the Federal Government’s innovation agenda.

National Board director, Marcus Derwin, speaks on behalf of the TMA: “We want to keep the growth going and to do this we need to give people a little bit more protection at the board level, to encourage innovative solutions. It’s about trying to promote solvent solutions.”

Read the article below, by Australian Financial Review Legal Affairs editor, Katie Walsh:

The federal Treasury is expected to fast-track new insolvency laws to encourage entrepreneurialism and keep struggling companies alive as economic growth risks slowing and interest rates remain on pause.

The new rules will give directors breathing space to take reasonable risks by providing a “safe harbour” from insolvent trading liabilities, and prevent contractors from using “ipso facto” clauses to terminate contracts with struggling businesses if they are otherwise complying with the terms.

“There are some economic headwinds, obviously the world’s getting a bit harder in terms of growth and revenue generation,” said Turnaround Management Association director Marcus Derwin.

“We want to keep the growth going and to do this we need to give people a little bit more protection at the board level, to encourage innovative solutions. It’s about trying to promote solvent solutions.”

The industry expectation is Treasury will push to enable the fast passage of safe-harbour provisions through Parliament first, by releasing a redraft of the proposed legislation before the end of the month. The ipso-facto changes would follow, ideally passing by year-end.

This would be a quick turnaround, particularly given submissions on the existing draft laws are open until May 17. The draft laws were introduced to Federal Parliament by the Minister for Revenue and Financial Services Kelly O’Dwyer at the end of March.

TMA, which represents a broad cross-section of professionals focused on providing solvency solutions, including investment bankers, lawyers and accountants, is broadly supportive of the changes but would like to see guiding principles on the “qualified advisers” a director can turn to when relying on the provisions. The term is not defined in the draft.

The changes fall short of the restructuring rules that apply in the UK and the US, but Mr Derwin said they were an “advance forward” and supported.

Urgency building

Mr Derwin, a senior managing director at FTI Consulting, said the market was beginning to see “a little bit more volatility”, evidenced in profit downgrades, mergers and acquisitions activity and companies being pulled from the IPO market.

The setting created an urgency for the new insolvency provisions.

Australian Private Equity & Venture Capital Association CEO Yasser El-Ansary said there were always businesses grappling with financial difficulty.

“It’s important that, as an economy, we get on and bring these reforms in, so we can do everything possible to give those businesses the best opportunity of working their way through that and surviving,” he said.

“You have to try to put your arms around those businesses and carry them through rather than simply tossing them to the side.”

While broadly supporting the draft laws, AVCAL has asked Treasury to consider capturing other contractual clauses beyond ipso facto “which can similarly hamper companies facing financial distress”, such as on change of control and termination for convenience.

The stay on ipso-facto clauses applies to entities that have entered a scheme of compromise or arrangement. AVCAL wants it to extend to other scenarios, such as the appointment of a restructuring adviser or entering liquidation.

A spokesman for Treasury said the government was “looking to pass legislation before the end of the year”. He did not comment on the possible expedited timeline for the safe-harbour provisions.

A trend towards salvaging companies is already emerging. The latest FTI Consulting analysis of insolvency statistics showed a downward trend in formal appointments of external administrators, which reflected more companies were “working closely with advisers to restructure their affairs to change debt arrangements and avoid formal insolvency”, FTI’s Stefan Dopking said.

Backing the proposed safe-harbour rules in its latest submission to Treasury, AVCAL notes the current directors’ duties around insolvent trading can lead to “perverse outcomes” by creating an “unnecessary focus” on a director’s own personal liability.

“The proposed legislation would help to alleviate the pressures that directors of companies going through financial stress may face, and aid them in being able to preserve the value of their companies if they have the ability to trade out of their financial difficulties. This would create positive outcomes not only for company directors, but also for employees, customers, suppliers, creditors and the broader economy.”