The Corporations Act does not define what an "appropriately qualified entity" is or what qualifications an adviser must possess. It is therefore important that an adviser's retainer carefully documents:
- the agreed scope of work (and any specific exclusions); and
- the particular individual adviser's qualifications and experience.
Advisers will also need to maintain appropriate levels of professional indemnity insurance.
As any administrator or liquidator must be independent in order to accept an appointment, advisory firms will need appropriate internal conflict management protocols in place. If a formal insolvency appointment is required, this will assist them in determining whether they are able to accept the appointment.
Directors cannot take a passive approach to a restructuring. The directors must act honestly and genuinely and access up-to-date financial information for the purpose of assessing the likely outcome of the restructuring. By doing so, directors will be in a position where they can properly understand the options available to the company and what a formal insolvency process might look like so as to assess what option presents a better outcome.
Directors must be personally involved in any turnaround strategy and, together with their advisers, keep detailed records of the chosen course of action, especially any key decisions. Directors bear the evidentiary onus of proof if they want to rely on the protection of safe harbour, so they should document their decision-making and steps taken as part of a restructure to assist them in justifying their actions, including showing that any debts incurred by the company were in connection with the restructuring plan.
It will be critical for directors to engage with stakeholders (such as financiers, suppliers, employees and customers) as, unlike liquidation or voluntary administration, the safe harbour does not introduce a statutory moratorium on enforcement. Appropriate standstill and other arrangements should therefore be used to give the company the time and breathing-space necessary to develop and implement any restructuring plan.
Safe harbour is not, however, intended to be a mechanism for a company to trade past the point where it continues to be viable. Safe Harbour protections apply for a reasonable period. Once it becomes clear that the company is not viable in the long term, it is unlikely that the better outcome test will be able to be satisfied and the protection of the safe harbour will cease.
The ASX has strict continuous disclosure requirements for listed companies which are to be read in conjunction with ASX Guidance Note 8 "Continuous Disclosure Listing Rules". The Guidance Note has been updated to clarify the ASX's expectations on disclosure obligations where directors are relying on the insolvent trading safe harbour. Unsurprisingly, the position has not changed and the amended guidance merely clarifies that companies must continually assess compliance with continuous disclosure requirements.
While a company may (depending on the circumstances) have to disclose the course(s) of action developed and adopted as part of a restructuring, the mere fact that the directors may have formed the view that they have the benefit of the safe harbour is not, in and of itself, required to be disclosed as this is a legal outcome which, on its own, may not have a material effect on the price of the company's securities.
The status of the restructuring arrangements must be assessed on an ongoing basis and, where those arrangements cease to be confidential or a definitive course of action as part of the restructuring has been determined, the entity's ability to rely on these carve-outs may no longer be available. Disclosure must then be assessed as it would in any other situation.
Creditors that continue to supply to a company during a period where the directors are able to satisfy the requirements for safe harbour protection will have no recourse to the directors personally if the restructuring fails, and will only be able to recover amounts owed to them by the company through a formal insolvency process.
In our experience, while it is rare for a creditor to supply to a company on the basis of a director's potential personal liability for insolvent trading (and directors may still be personally liable for debts incurred by a company while it is insolvent, risking possible criminal prosecution if they dishonestly allow such debts to be incurred), this may be a factor in determining the terms upon which a supplier is prepared to continue providing credit terms to the company.
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