Australia: Directors take note: Law reform to promote corporate restructuring

Last Updated: 5 May 2017
Article by Marguerite Xavier and Wylie Thorpe

Most Read Contributor in Australia, August 2017

The Commonwealth Government has released draft legislation1 that proposes significant amendments to the Corporations Act 2001 (Cth) (Corporations Act) by introducing:

  1. a 'safe harbour' regime for company directors from personal liability for insolvent trading if the company is undertaking a restructure; and
  2. a stay on the enforcement of 'ipso facto' clauses (contractual clauses which allow contracts to be terminated or modified due to an insolvency event) during an administration of a company or a scheme of arrangement.

The draft legislation is intended to promote a culture of entrepreneurship and innovation and reduce the stigma associated with business failure by:

  1. encouraging directors to engage early should a company fall into financial hardship and take reasonable risks to facilitate the company's restructure rather than placing the company prematurely into voluntary administration or liquidation; and
  2. preventing contractual parties from exercising their rights under 'ipso facto' clauses in order to terminate or modify a contract on the basis of an insolvency event without having regard to the ability of the company to perform the contract. This can deprive the company of the opportunity to continue to trade through a restructure 2.

Safe harbour defence

Section 588G of the Corporations Act currently imposes liability on company directors who cause the company to trade whilst it is insolvent.

The amendments seek to introduce section 588GA into the Corporations Act which provides that a director will have a defence to personal liability for debts of the company if, at a particular time after the director suspects 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.

The defence will apply to debts incurred when the director starts taking a course of action and ends when the course of action ends or stops being reasonably likely to lead to a better outcome for the company and its creditors or the company goes into administration.

A 'better outcome' for the company and its creditors will be assessed on an objective basis and is determined against the outcome of the company entering administration, receivership or liquidation. The proposed amendments include a non-exhaustive list of factors which will be taken into account when determining whether a director's actions are reasonably likely to lead to a better outcome for the company and its creditors as a whole. These amendments include:

  1. 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;
  2. taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
  3. obtaining appropriate advice from an appropriately qualified entity who was given sufficient information to give appropriate advice;
  4. properly informing himself or herself of the company's financial position; and
  5. developing or implementing a plan for restructuring the company to improve its financial position.

The safe harbour defence will not be available to directors where the company fails to provide (to a reasonable standard) employee entitlements (such as superannuation), maintain required books and records or report financial information required by taxation laws.

If introduced in its current form, the safe harbour defence will take effect on the day after the amending Act receives Royal Assent.

Stay on 'Ipso facto' clauses

An 'ipso facto' clause is a standard contractual clause that allows one party to terminate or modify a contract upon the occurrence of an insolvency event.

The amendments seek to introduce sections 415D-E and 451E-F into the Corporations Act which will provide for an automatic stay on the exercise of 'ipso facto' rights in the event of a company entering voluntary administration or a scheme of arrangement. The stay does not apply to a company in liquidation or where receivers and managers have been appointed. The automatic stay will operate:

  1. in respect of a scheme of arrangement, from the time the company makes an application to enter a compromise or arrangement and ends when:
    1. the application is withdrawn or the court dismisses the application;
    2. at the end of an approved compromise or arrangement; or
    3. if the compromise or arrangement ends because of a resolution or order for the company to be wound up, when the company is wound up
  1. in respect of voluntary administration when the administration begins and ends when:
    1. the administration ends;
    2. a period extended by order of the court; or
    3. if the administration ends because of a resolution or order for the company to be wound up, when the company is wound up
  1. otherwise until the court exercises its powers to lift the stay if it is satisfied that it is in the interests of justice to do so.

The stay on the enforcement of 'ipso facto' rights does not apply in relation to contracts:

  1. to be prescribed by regulation, which are currently proposed by the Commonwealth Government to include, for example, rights of set-off, securities underwriting agreements, flawed asset arrangements, covered bond transactions and debt factoring agreements;
  2. of a kind prescribed in ministerial declaration, which will allow any unintended consequences which may result from the automatic stay to be remedied; and
  3. that manage financial risk associated with a financial product that is commercially necessary for that type of financial product. For example, swaps, where the party is entitled to close out their position in order to manage counterparty risk.

The amendments also seek to introduce sections 415F and 451G into the Corporations Act which will give the court power to order that other contractual rights will only be enforceable with leave of the court or on conditions imposed by the court, if those rights are merely being exercised because the company is subject to a scheme of arrangement or under administration.

If introduced, the stay on the enforcement of the 'ipso facto' clauses will take effect from the later of 1 January 2018 or the day the Act receives Royal Assent (if that date is later).

What this means for you

In respect of the proposed safe harbour amendments:

  1. Company directors will need to ensure that in the course of restructuring if it becomes apparent that the steps being taken will not lead to a 'better outcome', the director should either adjust the course of action or place the company into administration or liquidation.
  2. As the test is objective, there is a risk that directors may not meet the requirements to take the benefit of the 'safe harbour' provisions despite their subjective intention. The Explanatory Memorandum makes it clear that where a company cannot objectively be considered viable in the long term, the course of action will not be reasonable and therefore directors will not be able to take the benefit of the defence.
  3. The test is likely to result in a significant body of case law. Directors should familiarise themselves with the list of non-exhaustive factors which will be taken into account by the court when determining whether a director has adopted a course of action that is reasonably likely to lead to a better outcome.
  4. Directors should seek legal or other advice in respect of the proposed restructure to demonstrate that appropriate advice was obtained. The Explanatory Memorandum makes it clear that the advice sought will depend on the nature and size of the company. For example, a small company may only need to take advice from an accountant or lawyer whereas a listed entity may retain turnaround specialists, insolvency specialists, lawyers and accounting firms to advise on a reasonable course of action.
  5. The amendments may lead to greater risk taking in corporate restructuring and investors and other financial providers may consider it prudent to incorporate contractual clauses which will allow greater oversight over, and monitoring of, company activities where there is an insolvency event.

In respect of the proposed stay on the enforcement of 'ipso facto' rights:

  1. Parties to commercial contracts should assess how they may be impacted by the proposed stay on 'ipso facto' clauses and consider measures that can be taken to minimise the effect of such clauses on the occurrence of an insolvency event.
  2. Notwithstanding the operation of the stay, a contractual party will retain the right to terminate a contract for any other breach, such as non-payment or non-performance.
  3. A number of contracts are proposed to be excluded from the stay on 'ipso facto' clauses, however, that does not currently include credit contracts which may result in lenders not being able to enforce security under those contracts. However, the stay would not require any creditor to provide a new advance of money or credit or to provide additional security for further credit to a debtor company 3.
  4. Creditors should remain vigilant and monitor their contractual relationships with debtor companies. Creditors should engage early in open dialogue with company directors because that interaction may assist a turnaround and reignite further business in the future if a restructure is successful.
  5. The Commonwealth Government is currently considering the public submissions received in response to the draft legislation which may inform the final version of the legislation.

Holding Redlich will monitor the passage of the legislation through Parliament and provide further updates.

Footnotes

1 Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Cth) (exposure draft).

2 Commonwealth Government, Treasury, "National Innovation and Science Agenda - Improving Corporate Insolvency Law", 28 March 2017: HTTP://www.treasury.gov.au/ConsultationsandReviews/Consultations/2017/NISA-Improving-corporate-insolvency-law

3 Explanatory Memorandum, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Cth), paragraph 2.10-2.11.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.