Having incorporated some modification, courtesy of successful lobbying, the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Bill 2017 – set to commence on 1 July 2018 – provides a ‘safe harbour’ for company directors from personal liability for insolvent trading if they’re pursuing a restructure outside formal insolvency. It also makes ‘ipso facto’ clauses unenforceable during and after certain formal insolvency procedures.
This is a landmark development considering that Australia has had one of the most punitive corporate insolvency laws globally. Given that ‘ipso facto’ protections were previously the exclusive domain of schemes of arrangement and voluntary administrations, what this reform effectively does is entrench a secured creditor’s ability to appoint a managing controller (receiver & manager) within the Australian insolvency landscape.
The Bill will effectively protect a director from being liable to compensate the company for a debt incurred when the company was insolvent. The protection applies if the debt was incurred in undertaking a course of action that is reasonably likely to lead to a better outcome for the company and the company’s creditors.
On a positive note, this legislation – which aligns Australia more closely with liberalised insolvent trading laws globally – is designed to balance creditors’ interests with the mechanisms for preserving value and saving companies
Is the bar too high?
There’s some concern that while the new legislation may avert companies from prematurely moving formal insolvency administrations, the bar may have been set too high. Given the difficulty directors may encounter demonstrating, whether a course of action is reasonably likely to lead to a better outcome, the availability of the safe harbour defense could end up being rendered ineffective – if it becomes the exclusive preserve of only the very best run companies.
Whether the safe harbour provision can through personal liability protection encourage timely action and preserve value remains to be seen. The jury’s also out on whether safe harbour and ‘ipso-facto’ changes will A) equally benefit small-to-medium sized enterprises (SMEs) as well as their public counterparts, and B) if unsecured creditors and other affected stakeholders will give it their blessing.
Given that the directors of SMEs are already financially exposed, they’re more likely to ignore the further risk of personal liability for allowing the company to incur debts whilst insolvent.
It’s equally important to note that while the ‘ipso facto’ protection is essential to facilitate value maximisation in schemes of arrangement and voluntary administration, it will only apply to contracts entered into, after the commencement of the Bill.
Reforms tackle illegal ‘phoenixing’
Safe harbour and ipso-facto changes also coincide with the Turnbull-led government’s plans to crackdown on the illegal stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities – aka phoenixing. By introducing a Director Identification Number (DIN,) regulators plan to better map the relationships between individuals and entities and individuals and other people.
Other measures to deter and disrupt the core behaviours of phoenix operators, include specific phoenixing offences and penalties, and stronger powers for the ATO to recover a security deposit from suspected phoenix operators.
Consultation on the non-DIN measures will commence in the coming weeks, and the government will also consult on how best to identify high risk individuals who will be subject to new preventative and early intervention tools.
If you or your clients require any further information on these changes, please contact us at Shaw Gidley shawgidley.com.au.