Recent Australian Insolvency Law Reform
Often, directors prematurely appoint a voluntary administrator to viable companies due to the risk of liability for potential insolvent trading and the uncertainty associated with determining whether a company is insolvent.
The recently passed safe harbour amendments to the Corporations Act aim to encourage directors to remain in control and take steps to restructure and turn around the company.
To take advantage of the safe harbour carve-out, a director must at the time the debts are incurred, suspect that the company is or may become insolvent, and must be developing or implementing one or more courses of action that are reasonably likely to lead to a better outcome for the company than an immediate voluntary administration or liquidation.
A director seeking safe harbour protection must also ensure that financial records are adequately maintained, and payments for employee entitlements and tax liabilities are up to date.
The Corporations Act includes non-exhaustive factors that should be considered when determining whether a course of action by directors is reasonably likely to lead to a better outcome for a company. The list of factors include taking appropriate steps to develop a restructuring plan, being kept informed of the company’s financial position and obtaining appropriate advice from a qualified entity, which may include a restructuring specialist.
An ipso facto clause in a contract allows one party to terminate the contract or exercise other rights as a result of certain events, including the insolvency of the counterparty. Such a clause allows termination or other steps despite the counterparty otherwise not being in default and being able to perform all obligations under the contract. The ability to terminate contracts (or exercise other rights) in such circumstances can have a detrimental impact on a financially distressed company’s ability to restructure or to successfully sell its business as a going concern.
A party to a contract is now prohibited from enforcing any rights in a contract entered into after 1 July 2018 that are enlivened due to a voluntary administrator or a managing controller being appointed or the company being subject to a scheme of arrangement (proposed to avoid an insolvent winding-up). If one of these appointments occurs, the 'ipso facto' stay will also apply if, a counterparty enforces a right for a reason that:
- relates to the financial position of the company
- is prescribed by the regulations, or
- is in substance contrary to 'ipso facto' provisions of the Corporations Act.
Amendments to the Corporation Regulations and Ministerial Regulations exclude a significant number of contracts and types of rights from the operation of the 'ipso facto' stay. Excluded contracts include certain debt capital markets arrangements, government licences and permits.