Australia: Implications of disclosing restructure plans to creditors when entering safe harbour

Services: Corporate & Commercial, Restructuring & Insolvency
Industry Focus: Financial Services

What you need to know

  • Australia's new safe harbour laws are now in force, providing a helpful regime for directors of a struggling company to pursue restructuring efforts without fear of liability for insolvent trading, but leaving some gaps around the protection of third parties dealing with the company.
  • Directors will need to consider whether to inform creditors about the company's position, while trade creditors who are told about a restructure plan and continue to support a company through the safe harbour period may find themselves in a difficult position if the restructure plan is ultimately unsuccessful.
  • Unsecured creditors, including advisors, should take steps to protect their interests if they provide goods and services to a company during a safe harbour period.

After passing through Parliament, following months of anticipation, Australia's new safe harbour laws received Royal Assent on 18 September 2017. The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 amends the Corporations Act 2001 (Cth) (Corporations Act) by introducing a safe harbour to protect company directors from liability for insolvent trading, and imposing restrictions on the enforcement of ipso facto clauses in contracts.

The amendments made in relation to safe harbour commenced on 19 September 2017 and apply to courses of action developed or taken before, at or after the commencement date, and to debts incurred on and from that date. The ipso facto reforms are set to commence on 1 July 2018, unless a proclamation is made for them to commence earlier.

In our Safe Harbour Wheelhouse publication series we will consider how the new laws are likely to play out and impact key stakeholders once companies begin relying on the new provisions in months and years to come. In this first update, we look at some of the issues that directors and unsecured creditors will need to consider given the Corporations Act's silence about whether or not a restructure plan should be disclosed to creditors.

To disclose or not to disclose – a comparison with the United States

In the United States, for a company to restructure its affairs under Chapter 11 the company must file a petition with a bankruptcy court accompanied by a list of creditors and a summary of assets and liabilities. Therefore, all creditors will be on notice of the proceeding and the pending restructure. Immediately upon the filing of a bankruptcy petition, a moratorium or automatic stay operates to prevent enforcement action without leave of the court. The public nature of the Chapter 11 petition and its subsequent processes and procedures means that all creditors are aware of the situation and their support can be courted and negotiated during the moratorium period with a restructure plan ultimately put to the vote of all creditors.

Australia's voluntary administration process is equally as public. Creditors are informed about the administration process and they are the ones who ultimately decide a company's future at the second meeting of creditors.

But under Australia's new safe harbour laws there is no requirement to put a restructure plan to all creditors or even tell them that a plan exists. This raises issues for both directors and creditors, particularly those that are unsecured.

Considerations for directors

While the amendments introduced to the Corporations Act have created a process by which directors can implement a restructure plan, they have not addressed whether or not a restructure plan should be disclosed to creditors. Therefore, directors will need to consider the company's specific situation and ask themselves:

  • Should some, all or any creditors be told about the company's precarious financial position?
  • If so, how much information should be disclosed about that position and the proposed plan to rescue or restructure the company?
  • If a decision is made to inform certain creditors of the company's financial position and restructure plans, at what point should they be told?

Companies that are publicly listed will have continuous disclosure obligations to bear in mind, which will be the subject of another update in our series. But for a director of a company without such obligations, the position is different. When such a director starts to suspect the company may become or is insolvent, and then starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, the director must, at some point, consider whether or not to disclose the fact that steps are being taken to rescue or restructure the company that either is, or may be, insolvent.

Clearly there will be some key stakeholders such as banks and other secured creditors who will need to be involved in the process of developing and executing a restructure plan. Standstill agreements or like arrangements will need to be entered into to formalise their support and preserve their rights under existing loan and security facilities. Support from these key stakeholders for one or more of the courses of action being developed will be crucial to a successful restructure.

However, what about unsecured creditors such as suppliers, customers, employees and even advisors of the business? To what extent will they need to be (or should they be) informed or consulted about the process being undertaken by directors to rescue the insolvent or soon to be insolvent company?

Directors will need to consider whether a particular trade creditor is a critical supplier or provides an essential service. They will need to assess the state of the relationship with that creditor – is it strong, valuable and worth preserving or has it deteriorated beyond repair? What pressure is that creditor placing on the company to meet existing terms of trade? Is there scope to renegotiate trading terms in order to assist a restructure plan?

If directors do decide to disclose some (or the entirety) of the company's position to creditors, important questions will arise for those that are unsecured. What are the consequences if those creditors are in fact told that a company is trading in a safe harbour state and that a restructure is underway? If those creditors provide ongoing support to the company by continuing to trade with it in the ordinary course of business, but then that restructure plan ultimately fails, how do those creditors protect themselves against subsequent unfair preference claims that may be made by a liquidator pursuant to section 588FA of the Corporations Act?

Considerations for unsecured creditors

The Corporations Act has not been amended to protect unsecured creditors, including advisors, who know about a restructure plan and who continue to provide goods or services to the company during a safe harbour period.

An unsecured creditor who has been informed that a company may be or is insolvent and who accepts payments from the company for debts during the safe harbour period will risk losing the ability to raise the "no reasonable grounds" defence normally afforded to them under section 588FG of the Corporations Act. In the circumstances described above it will be difficult for a creditor to argue that, at the time they became a party to the relevant transaction, they had no reasonable grounds for suspecting the company was insolvent at that time or would become insolvent.

Aside from suppliers, customers and employees being the most obvious unsecured creditors, there is another group who will have a major role to play in almost every restructuring event, in light of the regime that has been introduced. The amendments contemplate the engagement of an "appropriately qualified entity" to assist directors to work out whether a course of action is reasonably likely to lead to a better outcome for the company. Although there are no particular qualifications that an appropriately qualified entity must possess, such persons or entities must be "fit for purpose" and possess the requisite skills and experience to assist directors to develop a course of action that is reasonably likely to result in a better outcome for the company than immediate administration or liquidation.

What all of this means is that unsecured creditors, including advisors such as accountants and insolvency practitioners who are engaged to assist a company to develop a restructure plan, will need to consider the terms of their own contracts and retainers and how they can best secure payment for their goods or services so as to minimise the risk of payments received during the relation-back period being clawed back in any subsequent liquidation.

Any business offering credit terms to their customers should seek legal advice on how best to protect their interests if they are told that a company with whom they do business may be insolvent, a restructure plan is being developed and they are asked to continue to trade with and support the business until the restructure plan has been executed.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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 Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions