New & Proposed Legislative Changes

SAFE HARBOUR REFORMS

Effective 19 September 2017, the Federal Government introduced changes to the Corporations Act, 2001 (Cth) (“the Act”) (Section 588GA) which are commonly referred to as the “Safe Harbour Reforms”.  The reforms apply to courses of action taken before, at, or after that date and to debts incurred on or after that date.

The new provisions create a safe harbour for directors (and potentially their advisers) from personal liability for insolvent trading, if their company is undertaking a restructure outside formal insolvency.

The aim is to provide protection to directors, who, at a time when a debt is incurred, have a suspicion that their company may become, or is, insolvent, but who are in the process of restructuring their company’s affairs to allow it to trade out of its difficulties.

The director(s) will only be protected if they can show that the restructure plan was reasonably likely to produce a better return to creditors than a formal insolvency appointment.

While not included in the statute, the Explanatory Memorandum contains commentary, that to develop and instigate a restructure plan, the director(s) should seek the input and guidance of an “appropriately qualified entity”.

The reasonableness of the plan is to be assessed at the time the plan is developed, not with the benefit of hindsight.

The protection is only in respect to debts incurred while the plan is being developed or being actioned.

A parent company is also able to gain similar protection pursuant to Section 588GA of the Act, if its subsidiary takes similar reasonable steps.

For Directors

To avail themselves of this protection, directors must:

• Engage early in the restructure plan;
• Ensure that the company maintains proper books and records;
• Pays all employee entitlements when due;
• Meets all taxation reporting and payment obligations;
• Closely monitor the company’s performance; and
• If, at a later date, it becomes reasonably likely that the creditors will not be better off, a formal insolvency appointment must occur.

If the plan fails, the director is only protected by the safe harbour provisions, if he/she has provided the Liquidator with a Report as to Affairs and all of the company’s books and records.  Failure to comply with these provisions of the Act, the “Safe Harbour” is deemed to have not existed.

For Creditors

There is no requirement for the company to disclose to any or all of its suppliers that it is embarking on a restructure plan.

However, if a supplier becomes aware of the plan, and receives payments during this period, in the event of the failure of the company it may be difficult for the supplier if defending a preference payment recovery action by a Liquidator to avail themselves of the defences provided in the Act including the “no reasonable grounds for suspecting insolvency” defence available under Section 588FG of the Act. 

Creditors (particularly unsecured) must be prepared to protect themselves especially if trading with an entity that is attempting to restructure and relying on the safe harbour provisions with the knowledge of a plan.  This will include advisers.

IPSO-FACTO CLAUSE REFORM

The Safe Harbour reforms include Ipso-Facto Clause Reform which will commence on 1 July 2018 (or earlier by proclamation).

An Ipso-Facto Clause in a contract, is a provision which allows one party to the contract to terminate the contract (or part thereof) on the occurrence of certain credit worthiness events to the other party (insolvency), notwithstanding “compliance” with all other provisions of the contract.

A thorough review of these changes will be canvassed in a forthcoming newsletter.

INTRODUCTION OF BANKRUPTCY BILL

New legislation has recently been introduced into Federal Parliament to deal with the period upon which bankrupts will be discharged from bankruptcy.  As the legislation presently stands, an individual is to be discharged from bankruptcy on the day 3 years and 1 day after their Statement of Affairs (“SOA”) is lodged with the Australian Financial Security Authority (“AFSA”).   

The new legislation seeks to amend the period by which a person remains bankrupt, such that an individual will be entitled to discharge from bankruptcy after a period of 1 year from the date their SOA is lodged with AFSA.  The transition provisions associated with the legislation will mean that those debtors whose bankrupt estates commenced before the implementation of this legislation, will also be eligible to be administered under the 1 year automatic discharge provisions.

The explanatory memorandum in relation to the legislation highlights that one of the reasons for the introduction of the reform is to “foster entrepreneurial behaviour and to reduce the stigma associated with bankruptcy. Reducing the automatic discharge to 1 year will reduce stigma, encourage entrepreneurs to re-engage in business sooner and encourage people, who have previously been deterred by the punitive bankruptcy laws, to pursue their own business ventures”.

Upon discharge from bankruptcy, the debtor is released from their debts and will no longer be subject to a number of limitations associated with being an undischarged bankrupt.  Some of these limitations include restrictions on travel, disclosures when borrowing money and / or when issuing personal cheques, and not being eligible to act as a director of a company.

The legislation does provide for amendments so that the debtor will still be subject to income contributions for 3 years, that certain financial records are required to be retained for 3 years, and that trustees are still able to lodge objections to the bankrupt being discharged from bankruptcy.

There are a number of other provisions regarding the proposed legislation which are not addressed in this article.  As the legislation has only recently been introduced, the ultimate outcome, and the possible timing of the proposed legislation, is yet to be determined.