Restructuring Law Reform, ATO Debt and your Credit Rating, Public Examinations and AskInsolvency

  • 30 June 2017

Valuable restructuring law reform being considered

On 28 March 2017, the Australian Government released an exposure draft of legislation dealing with two key areas of insolvency and restructuring law reform. The legislation may come into effect by early next year.

First, the proposed legislation provides directors of a company with a safe harbour from civil liability for insolvent trading when they are attempting to restructure the company.

Secondly, the legislation restricts, with qualifications, the ability of contractual counterparties to enforce ipso facto clauses where a scheme is proposed or an administrator is appointed.

The goal of the safe harbour reform is to assist protect directors from insolvent trading claims while they engaged in legitimate restructuring activity.

Legitimate restructuring activity will involve action taken that was reasonably likely to lead to a better outcome for the company and its creditors, and that the debt was incurred during a period that the restructuring activity was continuing.

Therefore, relief from an insolvent trading claim may be provided if the director can prove they took restructuring activity that would include:

  • preventing misconduct by officers and employees;
  • ensuring the company maintained appropriate management information systems;
  • taking advice from an appropriately qualified person so that the directors are properly informed;
  • keeping properly updated about the financial position of the company; and
  • developing and implementing a plan of restructuring that supports an improved financial position being achieved.

Safe harbour could still apply to a director where the end result of the restructuring activity made the position of the company worse, provided the above activity was faithfully followed.

The legislation is clear that safe harbour will not be available to directors who:

  • failed to provide for employee entitlements; or
  • fail to give returns, notices and documents required by taxation laws.

Directors will be prevented from relying on the books and records of the company as evidence of having taken a reasonable course of action if they have:

  • concealed, destroyed or moved the books of the company; or
  • failed to provide liquidators with access to books or other materials following an appropriate request.

In our view, the proposed reforms appear beneficial steps towards encouraging a restructuring and rescue platform for companies. However, that platform will only be available to directors who act diligently and reasonably when their companies are at or approaching insolvency.
The proposed reforms provide benefits to diligent directors yet retain the otherwise harsh elements of the existing insolvent trading laws for directors who are not.

ATO debt defaults can lead to compromised credit rating

In the fine print to the federal government’s December Mid-Year Economic and Fiscal Outlook it was announced that from July 1, 2017, the Australian Taxation Office (“ATO”) will be allowed to disclose information about a defaulting business to a credit reference agency.

This sounds a very severe penalty to apply to a struggling business, however there are preconditions that must first apply.  They are:

  • it must be a business with an Australian Business Number;
  • that business must have a tax debt of $10,000 or more that is at least 90 days overdue; and
  • the debt is not being repaid with an arrangement that is on terms.

Under the measure, the ATO will have the discretion to disclose tax debt information to credit reference agencies; not an obligation to.

Therefore, it seems that taxpayers who remain disengaged with the ATO and its debt collection efforts will be the businesses to which these powers will be applied.

It has been reported that debts genuinely in dispute will not be reported, as with debts under payment arrangement.

Another safety check that will be used, in an effort to avoid unnecessary embarrassment, will be that that the ATO will notify a business that it intends to refer its tax debt to a credit bureau before it passes on the information.

The key takeout’s from this announcement must be:

  • keep on reporting tax debts, even if payment is not currently possible;
  • engage with the ATO to structure effective repayment plans; and
  • ensure contact details with the ATO are current so that important correspondence is not misdirected.

Public Examinations – A valuable tool for liquidators

Many readers will have heard of the powers of liquidators to examine persons (not just directors) in Court concerning documents and knowledge they may have of events may have occurred prior to a company’s liquidation.

The Corporations Act 2001 (“Act”) provides for a mandatory examination of officers (s 596A) and for a discretionary examination of other persons (s 596B).  In these examinations, a liquidator, provisional liquidator or administrator has the power to require that a proposed examinee produce documents and answer questions put to them. In response the examinee is compelled under oath or affirmation to answer all questions asked honestly and to the best of their ability, and the record that is taken of the examination can subsequently be used as evidence in legal proceedings against other parties, or against the examinee himself

In May 2017, Clive Palmer was examined concerning the failure of his Queensland Nickel business, and media quoted Mr Palmer saying the public examination process was akin to “Nazi Germany,” and he quoted Bob Dylan by likening justice to “a game”.  

In recognition of the power that the examination procedure gives, the examinee is entitled to claim privilege against self-incrimination, but the examinee is regardless still required to answer the question put.

In practice, the power to publicly examine is not often employed, and is most often utilised to encourage recalcitrant or vague company officers to cooperate.

Therefore, when faced with the questioning of a liquidator following the failure of the company, a wise director is best advised to answer questions asked of them, or otherwise run the risk of answering the very same questions from the confines of a witness box in a Court.

AskInsolvency – A simple insolvency self-assessment toolkit

We are pleased to introduce a simple self-assessment toolkit for directors who are worried about whether their company may be insolvent.

www.askinsolvency.com.au allows directors to remain completely anonymous whilst they answering a series of questions that are aimed help highlight an emerging risk of insolvency.

Why not log on and give it a try!