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Update: Safe Harbours for directors and Ipso Facto clauses

Update: Safe Harbours for directors and Ipso Facto clauses

22 Sep 2017

Update: Safe Harbours for directors and Ipso Facto clauses
WRITTEN BY
Deepti Wadhwa
Deepti Wadhwa
Senior Associate

Update: Safe Harbours for directors and Ipso Facto clauses

22 Sep 2017

Article written by: Deepti Wadhwa 

The much anticipated insolvency reforms to the Corporations Act relating to safe harbours for directors and the stay on the enforcement of ipso facto clauses have now been passed by parliament.
 
Set out below is a summary of the new laws including the additional amendments.  For a discussion of the originally proposed reforms, please see our article of 4 September 2017 available here.
 
Safe Harbourthe new law along with the additional amendments
                                                                  
The new section 588GA of the Corporations Act will provide directors a safe harbour from insolvency proceedings if at a particular time after the director starts to suspect the company may become or be insolvent, the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, and, any relevant debt is incurred directly or indirectly in connection with any such course of action. The key additional amendments here are that:      
  • The safe harbour will begin to apply at the time the director begins developing the course/s of action, as opposed to the original draft which began at the time the director actually took the course of action. This has expanded the ambit of the protection to allow directors the time to develop carefully thought out plans rather than jumping to act at the first viable plan developed.
  • The course of action should be reasonably likely to lead to a better outcome for the company (only), as opposed to the original draft which required a better outcome for both the company and its creditors. This will allow directors to focus their efforts on the best interests of the company (but does not necessarily mean that such actions would not consider or benefit the company’s creditors).
  • The debt is to be incurred either directly or indirectly in connection with any such course of action, as opposed to the original draft with required the debt to be incurred (presumably directly) in connection with the course of action. This again has afforded directors a greater ambit when incurring debts to restructure their company which may be incidental to the central course of action.
In addition to the amendments to the operative safe harbour provision, the Senate also approved an additional amendment to the legislation which requires an independent review of the safe harbour provisions after 2 years of operation. The review must consider:
  • the impact of the availability of the safe harbour to directors of companies, specifically relating to the conduct of directors and the interests of creditors and employees of those companies; and
  • any other matters the Minister considers relevant.
When will it take effect?

The safe harbour provisions will commence the day after the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 receives Royal Assent (expected to occur this year).
 
Ipso Facto clausesthe new law along with the additional amendments
                    
An ‘ipso facto’ clause is a provision that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty. 
 
The new law will provide a stay on the enforcement of ipso facto clauses where a company enters into administration, a scheme of arrangement or receivership. The key additional amendments here is that the stay has been expanded to apply to receiverships.
 
In addition to the above expansion of the stay, the Senate has introduced the following amendments:
  • New integrity provisions which provide that the stay will apply in relation to arrangements that are in substance contrary to the imposition of the stay. For example, a contractual clause could specify that the trigger for termination or amendment is the passing of a resolution to appoint an external administration. While the trigger is not the actual administration itself, such a clause would still be caught by the integrity provision and the stay will therefore apply.  This ensures that contractual arrangements that purport to circumvent the stay by triggering on events that occur prior to a company entering a formal restructure will still be subject to the stay.
  • The stay also applies to self-executing provision. There are certain types of ipso facto clauses that operate automatically on the occurrence of a certain event without requiring a decision by a party to the contract to enforce the right. For example, some clauses may provide that the entire contract automatically terminates if one party enters into external administration.  The intention of the Bill was to apply the stay in relation to both ipso facto clauses which must be enforced by a party and those which are triggered automatically, and as such, the Senate amendments now expressly provide for the application of the stay to self-executing clauses.   
When will it take effect?
 

The ipso facto reforms will commence on the later of 1 July 2018 or 6 months after the Bill receives Royal Assent.  The new regime will only apply to contracts entered into after the law takes effect (i.e. there is no retrospective application).
 
What these changes mean for Directors?
 
By increasing the ambit of the safe harbour protections the amended Bill should ideally entrench a cultural change amongst company directors to take reasonable risks to facilitate the company’s recovery instead of simply entering voluntary administration or liquidation. The legislative review of the operation of the protections should provide a good indication of whether this cultural change has actually taken effect. Watch this space!
 
Similarly, by refining the application of the stay on ipso facto clauses during insolvency and by carving out potential contractual loopholes, businesses should hopefully be able to continue to trade under their contracts in order to recover from an insolvency event.
 
Contact
 
If this article raises concerns for your business, contact our Corporate and Commercial team on +61 2 9458 7005 or email info@ablawyers.com.au 

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