Australian insolvency laws recently underwent the most comprehensive review and reform since the early 1990s. Part of those reforms included the introduction of:
* a ‘safe harbour’ for directors in respect of the insolvent trading offence; and
* a stay on the exercise of certain rights (including termination rights) for counterparties (or ‘ipso facto’ clauses).
The New ‘Safe Harbour’ for Directors
Directors of Australian companies are liable for any debts incurred while the company is, or is likely to become, insolvent. The reforms introduce a safe harbour for directors to somewhat temper the onerous insolvent trading provisions.
Directors may have the benefit of the safe harbour where they are taking one or more courses of action that are likely to result in a better outcome for the company than an immediate winding-up. In addition, directors ought be taking certain steps, including:
- properly informing oneself of the company’s financial position;
- taking appropriate steps to prevent any misconduct by officers or employees that could affect the company’s ability to pay its debts;
- taking appropriate steps to ensure the company is keeping appropriate financial records; and
- obtaining advice from an appropriately qualified entity (ie an accountant, lawyer or other specialist with skills in turnarounds or restructures).
The safe harbour is not absolute. It applies to only those debts that are incurred directly or indirectly in connection with the proposed course of action and will come to an end if:
- a director fails to take a step to implement the proposed course of action within a reasonable period;
- a director ceases to take any such course of action;
- the course of action ceases to be reasonably likely to lead to a better outcome for the company; or
- an administrator or liquidator is appointed to the company.
Furthermore, the safe harbour is only available where the company has continued to pay all employee entitlements (including superannuation) and comply with all tax reporting obligations.
The safe harbour provisions came into effect on 19 September 2017, so it remains to be seen how the Courts will apply the provisions and interpret the concepts of a “better outcome” and whether a plan was implemented within a “reasonable period”.
Stay on Enforcement of Ipso Facto Clauses
Ipso facto – or by the fact itself – is a term used to describe clauses in commercial contracts that provide a party with certain rights (including termination rights) upon the occurrence of a specific event. The right may be exercised regardless of the counterparty’s continued performance of its obligations under the contract.
The ipso facto provisions apply to new contracts entered into on or after 1 July 2018.
The provisions impose a stay on enforcing rights merely because of the financial condition of the company or because the company is in voluntary administration, receivership or subject to a deed of company arrangement. Necessarily, the stay does not apply if a resolution or Court order has been made to wind up the company.
The provisions also impose a stay on self-executing clauses, being those clauses in contracts that start to apply automatically upon the occurrence of a certain event and without any party making a decision that the provision should start to apply.
The stay is not a blanket stay. A number of rights, self-executing clauses and contracts are excluded from the operation of the stay, reflecting that there is a variety of situations where the stay on ipso facto clauses is unnecessary or undesirable.
The provisions do not apply to certain types of contracts and rights, including, by way of summary:
|Contracts that relate to:||Rights in connection with:|
The safe harbour provides directors with additional time to implement a restructuring of a company. This may provide more opportunities for stakeholders to support a company in financial distress.
For contracts entered into on or after 1 July 2018, a party may be required to continue to perform the contract notwithstanding the counterparty’s financial position or insolvency.
Please contact the authors for more information.