Safe Harbour Reforms and Goverment Pheonix Crackdown

Genuine restructuring efforts to be rewarded by Safe Harbour Reforms – A new era in restructuring

In September 2017 legislation passed through Parliament that is designed to give Australian companies a better fighting chance at avoiding insolvency and formal external administration by offering directors some relief from the harsh insolvent trading laws that currently exist.

The reforms – termed Safe Harbour - support directors who engage in genuine and reasoned steps to restructure their businesses, by providing a defence to an insolvent trading claim if those genuine and reasoned steps fail to achieve their desired outcome.

To achieve this, directors of companies in financial distress will need to develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

The Safe Harbour regime to be introduced into the Corporations Act 2001 (“Act”) seeks to protect a director from personal liability for debts directly incurred in the pursuit of the courses of action that are reasonably likely to lead to a better outcome for the company.

Therefore, it is essential that directors be very aware of the means by which they can demonstrate that the courses of action are reasonably likely to lead to a better outcome. The legislation assists us in this regard by describing relevant factors, including whether the director:

  • Genuine restructuring efforts to be rewarded by Safe Harbour Reforms – A new era in restructuring
  • Government Crackdown on Illegal Phoenixing outcome. The legislation assists us in this regard by describing relevant factors, including whether the director:
  • is properly informing themselves of the company’s financial position; or
  • is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
  • is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
  • is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
  • is developing or implementing a plan for restructuring to improve the company’s financial position.

There are also a range of checks and balances in the legislation which in our view helps to ensure the entity being restructured is not wildly insolvent. They include that Safe Harbour will not be available if the company is failing to do one or more of the following matters:

  • pay the entitlements of its employees by the time they fall due; and
  • give returns, notices, statements, applications or other documents as required by taxation laws.

In addition, should the company pass into external administration, the director’s claims for the benefit of Safe Harbour will be compromised if they:

  • fail to provide a Report as to Affairs to the external administrator; or
  • fail to provide the books and records to or comply with reasonable requests for information from the external administrator.

This amendment to the Act is yet to receive Royal Assent (expected to be very soon), but implicit in the legislation is a requirement that there be an independent review of the impact of the legislation 2 years after it commences.

At the same time as the Safe Harbour legislation was introduced, further legislation was introduced that will support company restructurings when formal external administration is required.

This amendment will provide powers to prevent contracts automatically terminating upon a company entering a Scheme of Arrangement, Managing Controllership or Voluntary Administration. These so termed ipso facto clauses have the power to cripple businesses in a formal restructuring and this initiative represents a significant power to help external administrators preserve enterprise value for all creditors.

This prevention on terminating a contract is limited to specific grounds (i.e. insolvency) and there is no ability to use this amendment to prevent the termination of a contract for any other reason e.g. failure to perform an obligation, including a payment obligation.

The stay on termination will continue until the external administration ends unless:

  • the administration ends because the company is being wound up, in which case the rights will not be enforceable until the time when the affairs of the company are fully wound up; or
  • where the company makes an application to the Court to extend the period for which the rights will not be enforceable:
    • either the application is withdrawn or the Court rejects the application; or
    • the order of the Court extending the period ceases to apply.

The commencement date of this amendment to the Act has been delayed until 1 July 2018 therefore there is some time left to consider the implications of the introduction of this statutory restraint on contracting parties.

These two initiatives are great news for companies in need of restructuring and we genuinely believe that they will deliver positives for creditors.

We welcome the opportunity to discuss these reforms with you and can deliver a staff training session to you and your team to assist your greater understanding of the impacts of the reforms and how they can assist your clients.

Government Crackdown on Illegal Phoenixing

Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.

Not all company failures will involve illegal phoenix activity, however where there are deliberate attempts to avoid liabilities by shutting down and transferring some or all of the assets to another company, the process and the decisions made by directors will come under close scrutiny for illegal actions.

The Turnbull Government has recently announced that it is intending to take additional action to crack down on illegal phoenixing activity and this sounds a warning to company directors thinking of restructuring options.

The intended reforms will include the introduction of a Director Identification Number (DIN) and a range of other measures to both deter and penalise phoenix activity.

Kelly O’Dwyer, the Minister for Revenue and Financial Services said in her press release “the DIN is intended to interface with other government agencies and databases to allow ASIC to map the relationships between individuals and entities and individuals and other people” (possibly including advisers). This will make the identification of phoenixing activity much easier.

Other measures being contemplated include:

  • creating a specific phoenixing offences to enable easier prosecution;
  • improving the ATO’s power to recover monies from suspected phoenix operators;
  • increasing the range of corporate taxes that directors can be made personally liable for; and
  • reviewing who can act as liquidator for high risk individuals.

It is clear that there is a much strengthened will in the Government to stamp out illegal phoeninxing activities, and announcements from Government made in September 2017 lead us to conclude that meaningful law reform in this area can be expected.