Safe harbour and Ipso facto clauses Law Reform: Bill introduced into Parliament

 

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What you need to know

On 1 June 2017, the Government introduced the Treasury Laws Amendment (2017 Enterprise Incentives No. 2 Bill) 2017 (the Bill) into the Commonwealth Parliament.

The Bill contains two major reforms to Australia’s insolvency laws:

– a new safe harbour from civil liability for insolvent trading for directors seeking to restructure financially distressed or insolvent companies

– restrictions on the enforcement of ipso facto clauses to facilitate restructurings through voluntary administrations and schemes of arrangement, as well as the conduct of receiverships.

In a previous legal update we reported on the release of an Exposure Draft of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Exposure Draft).

This update summarises the key features of the Bill introduced into Parliament.

 

Safe Harbour

Key features

The safe harbour from insolvent trading liability will have the following features:

– it will apply where directors start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or a liquidator to the company

– the directors will not then be liable for debts incurred directly or indirectly in connection with the course of action

– the safe harbour period will 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

– the safe harbour period will end at the earliest of the following times:

– the end of a reasonable period after a person starts to suspect the company’s insolvency if the person fails to take the required course of action within that period

– when the course of action ends

– when the course of action ceases to be reasonably likely to lead to a better outcome for the company

– the appointment of an administrator or a liquidator of the company.

 

Factors in determining better outcome

The Bill sets out an indicative, but not exhaustive, list of factors that may (not must) be considered in determining whether a course of action is reasonably likely to lead to a better outcome for a company, namely whether the directors:

– 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 that the company is keeping appropriate financial records

– obtained advice from an appropriately qualified entity (who was given sufficient information to give appropriate advice)

– developed or implemented a plan to restructure the company to improve its financial position.

 

Proving safe harbour

Directors will have the evidential burden of demonstrating that the safe harbour exception is available. It seems that the directors must produce evidence that suggests a reasonable possibility that the safe harbour applies, and then the person bringing proceedings will (according to the Explanatory Memorandum) “bear the legal burden to show to the balance of probabilities that the course of action being taken was one not reasonably likely to lead to a better outcome for the company”.

 

Governance prerequisites for safe harbour

The safe harbour will not be available to directors where:

– employee entitlements have not been paid when due; and

– tax returns or other documents required by taxation laws have not been given;

where the relevant governance failure:

– amounts to less than substantial compliance; or

– is one of 2 or more failures during the previous 12 months.

The safe harbour will also not be available to directors who fail to provide information or documents to controllers of company property or liquidators if the failure amounts to less than substantial compliance.

The court will have a power to order that a failure to satisfy these governance prerequisites does not preclude safe harbour if:

– the failure was due to exceptional circumstances, or

– it is otherwise in the interests of justice to make the order.

Further, directors may not be entitled to rely on books and records in supporting their entitlement to use the safe harbour if the directors:

– fail to provide administrators or liquidators with access to books or other material following an appropriate request, unless:

– they did not have the materials and there were no reasonable steps that they could have taken to obtain them, or

– they were not notified of the consequences of failure to provide them

– have concealed, destroyed or removed books of the company.

The court can also override this restriction where there are exceptional circumstances or it is otherwise in the interests of justice.

 

Extension of safe harbour to holding companies

The Bill provides a safe harbour for holding company liability for the insolvent trading of a subsidiary.

 

Commencement date

The safe harbour amendments will take effect the day after the amending Act receives Royal Assent.

 

Ipso facto clauses

Key features

Types of external administration affected

There will be a stay on enforcement of contractual rights in:

– schemes of arrangement (proposed to avoid the company being wound up in insolvency) (schemes);

– receiverships and other managing controllerships over the whole or substantially the whole of a company’s property

– voluntary administrations (VAs).

 

Triggering events

The stay will be on the enforcement of contractual rights because:

– a company publicly announces that it will apply for, in fact applies for or enters into a scheme (but only where the company’s application to commence the scheme states that it is being made to avoid being wound up in insolvency); or

– a receiver or other managing controller of the whole or substantially the whole of a company’s property is appointed or exists

– a company enters into VA.

A stay will also apply if the company is under one of the stipulated forms of external administration and enforcement of a right would be:

– because of the company’s financial position

– for a prescribed reason.

 

Beginning and end of stay

In the case of a scheme, the stay:

– begins when the public announcement or the scheme application is made

– ends:

– if the company fails to make the announced application – at the end of the longer of three months after the announcement or any period ordered by the court

– when the application is withdrawn or rejected by the court

– when the compromise or arrangement finishes, unless this occurs because the company is to be wound up, in which case

– when the company’s affairs have been fully wound up.

In the case of a receivership or managing controllership, the stay:

– begins when the receiver or other managing controller is appointed

– ends when:

– the receiver’s or managing controller’s control ends, or

– the last of any court orders extending the stay ends.

In the case of VA, the stay

– begins when the company enters into administration

– ends at the latest of:

– when the administration ends

– when the last of any court extension orders made in the interests of justice ceases to be in force (any application for an extension order must be made before the administration ends)

– when the company’s affairs have been fully wound up.

There is provision for a right to remain unenforceable indefinitely after the end of the stay period where the reason for enforcing the right is:

– the company’s financial position, or

– the company’s entry into formal insolvency before the end of the stay period, or

– a prescribed reason relating to circumstances in existence during the stay period.

 

Court powers

The court will have the power to override the stay and allow enforcement of the right if satisfied that it is appropriate in the interests of justice or, in the case of a scheme, the scheme was not to avoid the company being wound up in insolvency.

The court will also have in effect an anti avoidance power to order that rights (not expressed as ipso facto rights), which have been enforced merely because of entry into a scheme, receivership or other managing controllership or VA, are only enforceable with leave of the court and in accordance with such conditions as the court imposes.

In considering an order for this stay on enforcement, a court will be able to give an interim order but not require an undertaking as to damages as a condition for granting the interim order.

 

Exceptions

The stay will not apply to rights:

– prescribed by the regulations

– declared in a Ministerial determination

– in agreements made after the commencement of a scheme, receivership or other managing controllership or VA.

A contractual counterparty will not be forced to provide additional credit while its right to enforce ipso facto clauses is suspended.

The Bill will amend the VA provisions to make clear that the ipso facto restrictions do not change the exemptions from the VA moratorium for particular types of enforcement action (enforcement by the holder of a substantial security interest, enforcement that began before the beginning of a VA, perishable property, giving notices: Corporations Act 2001 (Cth) ss 441A – 441C, 441E).

 

Inconsistency with other legislation

The Payment Systems and Netting Act 1998 (Cth) and the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) prevail over the ipso facto restrictions to the extent of any inconsistency.

 

Commencement date

The date for the commencement of the ipso facto restrictions is the day after the later of:

– 30 June 2018 and

– the last day of the period of 6 months beginning on the day the amending Act receives Royal Assent.

However, the Governor-General may proclaim an earlier commencement date.

Importantly, the Bill provides that the ipso facto provisions will only apply to contracts, agreements or arrangements entered into from the commencement time of the ipso facto provisions.

 

Conclusion

The legislation when passed will effect very significant reforms to Australia’s insolvency laws.

The safe harbour from liability for insolvent trading should better enable directors to pursue corporate restructurings. The restriction on the ability to enforce ipso facto clauses should in certain circumstances reduce the immediate loss in value and enable a company to continue to trade following the proposal of a scheme of arrangement or the appointment of an administrator or controller over substantially all of the property of the company.

The proposed legislation will have significant implications for directors, companies and contractual counterparties.