Australia: Special report on the Productivity Commission review of restructuring practices in Australia

Focus: Series: Draft business restructuring recommendations
Services: Restructuring & Insolvency
Industry Focus: Financial Services

This article is the second in our series focussed on the business restructuring recommendations set out in the Productivity Commission's Business Set-up, Transfer and Closure draft report. Our first article may be accessed here.

This week, we consider the proposal to include provision for a 'safe harbour' to allow companies and their directors to explore restructuring options without liability for insolvent trading.

Draft recommendation 15.2, the introduction of a 'safe harbour'

  • Currently, under section 588G of the Corporations Act 2001 (Cth), directors who pursue restructuring efforts during the twilight zone, that is when the company is or probably is insolvent, risk being found personally liable for insolvent trading if those efforts fail and the company is placed into liquidation.
  • The Productivity Commission's draft report recommends that the Corporations Act 2001 (Cth) be amended to include provision for a 'safe harbour' to allow companies and their directors to explore restructuring options without liability for insolvent trading.
  • The limbs of the framework proposed in the draft report are as follows:
    • a registered adviser must be appointed by the company to provide independent advice during the safe harbour period
    • that registered adviser would be disqualified from accepting a formal appointment in any subsequent insolvency process
    • the company would be obliged to inform ASIC (and the ASX if listed) of the appointment of the registered adviser
    • directors must exercise their business judgment in the best interest of the company's creditors as a whole, as well as the company's members, in determining whether to act on the advice of the registered adviser
    • the safe harbour period would continue for the period during which the advice is given and acted upon, relieving the directors from any exposure to insolvent trading for such period.
  • While conceptually, there is good support for law reform to provide a restructuring safe harbour, submissions to the draft report indicate that there is still much work to be done in considering the text that such law reform might take.
  • DibbsBarker was asked to consider the text of a safe harbour defence to insolvent trading in the context of the Financial System Inquiry's final report. In response, we made a submission to Treasury which identified (in paragraph 2) the following key considerations in delivering a safe harbour where the objective is to encourage and facilitate corporate turnarounds:
    • What we expect directors to do during the safe harbour period ought to be clear from the text. Law reform provides legislators with the opportunity to stipulate the behaviours that Australia wishes to encourage. In a restructuring context, we want directors to come up with a plan. Ideally, a plan to deliver a turnaround but if that is not possible, then a plan to deliver a better outcome than would be achieved with an immediate insolvency appointment.
    • Preparing and implementing a restructuring plan involves a specific area of expertise. As such, we expect directors to engage experts to assist them, where they do not already have access to that expertise within their own company. We do not consider it helpful however, to restrict a company's access to suitable expertise by mandating that a registered adviser be appointed. The company should be free to access the best advice available in the particular circumstances which may be a turnaround executive, a turnaround adviser, a corporate finance adviser, an investment banker, a private equity firm, a lawyer, to name a few. The right person/s will depend on the particular needs of the company and the size and complexity of the restructuring.
    • The advice that is given and the plan that is prepared must be supported by good quality financial information. A turnaround or restructuring plan is unlikely to succeed if it is based on poor quality, inaccurate information. Query the appropriateness of a director benefiting from a safe harbour defence in such circumstances.
  • Notably, ASIC's submission supports consideration of safe harbour reforms to facilitate corporate restructure. ASIC agrees that the company should appoint an adviser during the safe harbour period and suggests that the adviser be a suitably qualified, independent and experienced safe harbour adviser. As to duration, ASIC does not recommend imposing a time limit but submits that directors and the safe harbour adviser should be required to diligently pursue the restructure during the safe harbour period.
  • The AICD, Chartered Accountants (Australia & NZ) and PPB Advisory submit that an effective safe harbour will need to be broader in its reach, with liability to the Commissioner of Taxation (including for preference payments) and other potential liabilities under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) also to be considered. The AICD directs the Productivity Commission to its Honest and Reasonable Director Defence.
  • The AICD also notes concerns with an overly complex safe harbour with too many limbs or one that may hinder or complicate decision making, for example by virtue of a combined duty to creditors and members which may conflict.
  • A number of parties including ARITA are concerned with the proposal for public notification, which they say could undermine the ability of directors to explore restructuring options outside of a formal insolvency appointment.
  • The business judgment rule has been criticized and as noted by DibbsBarker, the Business Law Section – Law Council of Australia and the AICD, is accordingly, unlikely to be the appropriate measure for future legislation.
  • It is evident, from these and others' submissions, that the Productivity Commission has a range of important matters to consider, in making its final recommendation for the introduction of a safe harbour.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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