The ASX has updated its continuous disclosure guidance for entities in financial distress to address uncertainty following the recent introduction of the insolvent trading safe harbour provisions into the Corporations Act. While the ASX has provided useful guidance, unsurprisingly, the position has not changed and directors must continually assess compliance with continuous disclosure requirements.
Safe harbour reforms
The insolvent trading safe harbour provisions of the Corporations Act (in force since 19 September 2017) were introduced to encourage directors to pursue restructuring opportunities rather than prematurely commencing a formal external administration process.
The safe harbour regime provides a carve-out from a director's potential liability for insolvent trading where:
- the person suspects the company may become or is insolvent;
- the person starts developing one or more courses of action that is reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator; and
- the debt is incurred directly or indirectly in connection with that course of action.
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.
Companies in financial distress
Entities in financial distress are subject to the same disclosure requirements as any other listed company. That is, if an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, disclosure is required (unless a carve-out applies). The same rules apply to directors relying on the insolvent trading safe harbour.
Carve-outs to disclosure continue to apply
Existing carve-outs to the need for continuous disclosure continue to apply where the insolvent safe harbour is being relied on, including where:
- the information concerns an incomplete proposal or negotiation; and
- the information is insufficiently definite to warrant disclosure.
The fact that an entity's directors are relying on the insolvent trading safe harbour to develop a course of action that may lead to a better outcome than the appointment of an administrator or liquidator does not, in and of itself, require disclosure. The Guidance Note in fact states that most investors would "expect directors of an entity in financial difficulty to be considering whether there is a better alternative for the entity and its stakeholders than an insolvent administration" and that this alone will not likely require disclosure.
The status of the restructuring arrangements must be continually assessed 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.
The updates to the Guidance Note provide useful guidance on disclosure requirements in the context of the safe harbour reforms but ultimately, the status quo continues. Directors should, irrespective of whether they are relying on the insolvent trading safe harbour or not, continually assess compliance with disclosure requirements including throughout the formation and implementation of a restructuring plan.