New insolvent trading safe harbour and ipso facto legislation

insolvent trading safe harbour and ipso facto

On 11 September 2017, two major reforms to Australia’s insolvency laws – an insolvent trading safe harbour and a restriction on the enforcement of ipso facto rights in certain circumstances – passed through the Senate. The Bill awaits royal assent.

What you need to know

  • On 11 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Bill) passed through the Senate
  • The safe harbour provisions commence the day after the Bill receives royal assent
  • However, the ipso facto reforms will commence on the later of 1 July 2018 or 6 months after the Bill receives royal assent
  • Under the Bill as passed, the insolvent trading safe harbour applies where the directors start developingone or more courses of action that are reasonably likely to provide a better outcome for the company than an immediate liquidation or administration. The safe harbour protects directors from insolvent trading liability arising from debts incurred directly or indirectly in connection with any such course of action
  • Importantly, the ipso facto regime will now apply to schemes of arrangement, administration and receivershipIt will also now prevent a counter party using the company’s financial position at the time of the scheme, administration or receivership as the triggering event. The regime in the Bill removes the counter party’s ability to exercise rights based solely on those trigger events indefinitely.
  • The Senate amended the legislation to extend the operation of the ipso facto regime to include a stay on rights prescribed by regulation, rights which are in substance contrary to the provision introducing the stay and self-executing provisions (being provisions in an agreement which automatically come into operation).

Insolvent trading safe harbour 

The safe harbour provisions provide directors with an exception from insolvent trading liability where they are developing courses of action which are reasonably likely to lead to a better outcome for the company than administration or liquidation.

Ipso facto clauses

The ipso facto provisions are intended to restrict counterparties from exercising contractual rights solely as a consequence of the company entering into administration, a scheme of arrangement or receivership (or is subject to the appointment of another form of managing controller).

Key changes

The key changes made in the Senate are as follows:

  • Regulations: the stay will extend to contractual rights prescribed by regulation in relation to the company, or the company’s financial position, triggered  by the company entering into a scheme of arrangement, administration or receivership;
  • Rights contrary to the regime: the stay will extend to contractual rights which, in substance, are contrary to the new provisions and which would otherwise be triggered by the schemes of arrangement, administration or receivership; and
  • Self-executing provisions: the stay will apply to self-executing contractual provisions which apply automatically (i.e. without one party electing to enforce a right) on the appointment of an administrator, receiver or the company entering into a scheme of arrangement.

The introduction of these latter two points may create some uncertainty as to the extent of the ipso facto regime. Both were introduced very late in the process, and therefore unfortunately have not had the benefit of refinement and comment through the public consultation process.

In addition to the Senate amendments, a number of key issues with the draft legislation have been addressed in the drafting of the Bill following the consultation process. These include the following:

  • Application to receivership: whilst the draft legislation proposed that a stay would only arise where a company enters into administration or a scheme of arrangement, the Bill now expands on that and makes a stay available when a company has a receiver and manager or other form of managing controller appointed to the whole or substantially the whole of the company’s property (Substantial Receivership);
  • Extension to surrounding financial position: under the draft legislation, the stay only applied to rights triggered by the administration or scheme of arrangement. However, it did not prevent the exercise of rights based on, for example, the factual insolvency that accompanies administration. Under the Bill, the stay is expanded to also apply to rights arising from the company’s financial position where it enters administration, a scheme of arrangement or a Substantial Receivership. This will assist in restricting counterparties from relying on collateral defaults to circumvent the stay provisions;
  • Extension beyond the immediate event: the Bill provides that the relevant contractual rights will be unenforceable indefinitely after the stay has lifted to the extent that the reason for enforcing the right relates to a company’s financial position before the end of the stay period or the company’s commencement of a scheme of arrangement, administration or Substantial Receivership;
  • Carve out for the ‘decision period’ in administration: the Bill amends existing provisions to make it clear that the stay on exercising contractual rights which applies when a company enters into administration does not apply to a secured creditor’s right to take enforcement action under its securities during the ‘decision period’; and
  • Grandfathering provision: the Bill provides that the ipso facto regime does not apply to contracts entered into before the commencement of the regime. This creates different regimes in relation to contracts entered into before or after this date, and may encourage parties to amend rather than replace existing contracts so as to continue to have the benefit of existing ipso facto rights.

Conclusion

If you find yourself in a legal dispute, contact the Boss Lawyers insolvency lawyers – we are ready to step in and assist you.