New anti-phoenix measures

Not to be outdone by the Queensland Government – which tabled legislation in the last week of August to safeguard against construction industry phoenixing, discussed here – the Federal Government today issued a media release announcing a range of measures intended to address ‘illegal phoenixing.’

The most developed initiative appears to be a proposal to introduce a unique Director Identification Number (DIN) – a reform proposed by Professor Helen Anderson and advocated by ARITA. Although the release does not address this point it, seems that there will be some kind of bank-style 100 point identification regime; and the release did refer to the use of the DIN to cross-reference against government databases, to allow ‘mapping’ of relationships.

The announcement also flags consultation about a range of other possible measures intended ‘to deter and disrupt the core behaviours of phoenix operators,’ including:

The introduction of specific ‘phoenixing offences’
A single point of contact for reporting illegal phoenix activity
Extension of the director penalty provisions, to cover GST liabilities
Applying tax avoidance promotion penalties to those promoting phoenixing
Prohibiting related entities to the phoenix operator from appointing a liquidator.

There will be a focus on identifying ‘high risk individuals’ – if not a ‘blacklist, a ‘greylist,’ it seems – who may:

Be required to provide the ATO with a security deposit.
Not be allowed to appoint the liquidator of their choice.
Be the subject of immediate recovery action following the issuance of a Director Penalty Notice.

It is not completely clear what ‘Prohibiting related entities to the phoenix operator from appointing a liquidator’ means – but laws that prevent the appointment of a liquidator to an insolvent company will require careful thought, especially given their potential to intersect with the laws that require directors to make an appointment to avoid personal liability.

A proposal to prevent ‘high risk individuals’ from appointing the liquidator of their choice may be less effective than hoped. The ILRA changes that made it easier for creditors to replace a liquidator surprisingly did not include any anti-abuse measures, and so a restriction on appointment may need to be accompanied by a comparable restriction on replacement.

The release explains that the government intends to open a consultation process shortly.

Update: The consultation process began on 28 September 2017, with responses due by 27 October 2017. Two of the specific measures are discussed in Taxi! A cab-rank system for insolvency appointments? and Department of Liquidation? The possible creation of a Government Liquidator…

Safe Harbour: We’ve arrived!

As discussed here, the Senate Economics Legislation Committee concluded its 8 August 2017 report into the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill – aka the Safe Harbour legislation – with a recommendation that the bill be passed as tabled.

However, when debated in the Senate tonight there were two sets of proposed amendments.

First, the Government tabled amendments to the proposed ipso facto protections that were intended to strengthen the anti-avoidance regime, most notably measures intended to address ‘self-executing’ clauses – provisions that ‘can start to apply automatically.’ Those amendments were accepted by the Senate.

Secondly, the Opposition proposed their own amendments to:

Change the nature of the safe harbour from a ‘carve out’ to a defence, putting the onus of proof on company directors, rather than on the liquidator. This proposal aligns to the position advocated by ARITA and recommended in the Productivity Commission report.
Turn what were effectively best practice guidelines into mandatory requirements, only allowing the protection to those directors who:
- Keep themselves informed about the company’s financial position
- Take steps to prevent misconduct by officers and employees of the company
- Take steps to ensure the appropriate financial records were maintained.
- Obtain appropriate advice from an appropriately qualified adviser
- Take appropriate steps to develop or implement a plan to restructure the company to improve its financial position.
Mandate a review of the effectiveness of the legislation after it has been in operation for two years.

The first two Opposition amendments were rejected, however the proposal for a two-year review was successful.

It appears that the Safe Harbour reforms are still ‘on course.’

Update: the amendments were passed in the lower house on 12 September 2017, the consolidated Bill is available here

Further Update: The Act received Royal Assent on 18 September – so the Safe Harbour is now available to directors.

There is more detail on the Safe Harbour legislation here.

Opposite directions: Phoenix busting or second chance?

In the last week of August the Queensland Government tabled legislation which is intended to better protect construction industry subcontractors from the risk of non-payment.

The Building Industry Fairness (Security of Payment) Bill 2017 available here includes a number of measures.

Project Bank Account Regime

PBAs are effectively trust accounts which operate to quarantine money paid to a head contractor that is expected to be on paid to their subcontractors.

Initially the PBA regime will apply only to Queensland Government projects, and will only protect ‘first tier’ subcontractors – it will not extend to those subcontractors who directly or indirectly work for the first tier subcontractors.

However, the legislation provides a mechanism for extension of the PBA regime to all construction projects over $1m- ie whether government or private – by proclamation. Likewise there is a mechanism to extend the regime to all subcontractors – not just tier 1 subcontractors – by a separate proclamation.

Dispute Resolution and adjudication

The legislation incorporates the existing Subcontractors’ Charges Act 1974 regime, but it tightens the rules which require a head contractor to respond to a sub-contractor’s ‘payment claim’ with a ‘payment schedule.’

The extent to which criminal sanctions will apply is noteworthy. Head contractors apparently commit an offense if they do not:

Provide a payment schedule on time.
Pay an amount owed when it falls due.
Pay an adjudicated amount within five business days of receiving a written decision.

Financial Reporting

The legislation will reinstate requirements for licensed builders to provide financial information to the Queensland Building and Construction Commission. The QBCC will also be given power to require the production of financial information so that it can better assess whether a builder continues to meet the minimum financial requirements.

Phoenix-busting

The legislation includes a measure that is described as clamping down on ‘corporate phoenixing’ – by restricting those involved with a recent financial failure from holding a QBCC license.

The current licensing regime already bars those who were a director or secretary of a construction company in the twelve months prior to its liquidation or administration from holding a building license. The amendments will extend the period to cover the two years prior to liquidation or administration. Further, the exclusion mechanism will also take into account the activities undertaken by a person – not just the office they occupy – including those who:

act as the chief executive officer or general manager
give instructions to officers of the company which are generally acted upon
participate in making decisions that affect a substantial part of the business
present themselves to others in such a way as to lead them to believe that they control or influence the business.

The intention is to ensure that the regime also captures ‘shadow directors’ – those who manage companies without holding the office formally. Whilst the Corporations Act extends the definition of directors to those who act in the position of a director, as demonstrated most recently in the Akron Roads decision that extension may not cast the net as widely as once thought. In Akron Roads it was held that a person who:

dealt with creditors,
attended executive meetings,
negotiated with the bank and attempted to obtain finance,
had financial accounts prepared and was responsible for short-term cash flow, forecasting and cash management

was not a shadow director, because none of those activities ‘involve a board decision or fall within the responsibilities of the directors…[who] do not carry out managerial tasks.’

The exclusion will also apply to those who directly or indirectly control 50% or more of a class of shares in the company.

Opposite Directions?

The Federal Government is undertaking reforms that are intended to de-stigmatise business failure, and encourage entrepreneurialism.

The Queensland government appears to be moving in the opposite direction however, by introducing a ‘one-strike’ regime specifically aimed at preventing those involved in a financial failure from going straight back into business.

The new focus on activities will require a qualitative assessment, and so it will be critical that the QBCC has the skills and resources to take the assessment process in a new direction.

If the Queensland initiative is successful in tackling phoenix activity, there will some who use its success to argue the framework should be applied more widely in a universal director-licensing regime.

Update: on 12 September 2017 the Federal Government announced its own anti-phoenix measures, details here.

Further update: The Building Industry Fairness (Security of Payment) Act 2017 was passed on 26 October 2017, with some measures to be effective from 1 January 2018, however most of the measures await proclamation. The 143 amendments to the original draft legislation detailed here are mostly matters of clarification, correction of typographical errors, or the consolidation of definitions. However there are some noteworthy changes: allowance for ‘reasonable excuse’ into some offence provisions, and a review of operation after 12 months.

And another update: On 12 June 2018 the Queensland government announced that the commencement of security of payment changes had been changed from 1 July 2018 to 17 December 2018.

Undercover Administrators?

In 2016 the Dutch Lower House passed legislation which if confirmed by their Senate would initiate quite unique reforms to their restructuring laws.

According to an unofficial translation of the explanatory memorandum, the Continuity of Enterprises Act 1 was intended to facilitate so-called ‘pre-packaged’ insolvency administrations (‘pre-packs’). Pre-packs describe a sale that is negotiated in anticipation of a formal insolvency administration and implemented immediately after the appointment is made, thus structured to bypass some of the issues caused by formal insolvency:

Suppliers shortening or even cancelling credit terms
Key customers switching to suppliers seen as more financial
Key staff seeking alternate employment.

However, pre-packs usually occur without a comprehensive sale program, and so raise questions about whether the best outcome for creditors is achieved. A UK study found that pre-packs provided unsecured creditors with a ‘paltry benefit’ – with no distribution in 60 percent of cases. The same study found that 63% of pre-packs resulted in a sale to a ‘connected party,’ which many Australians would describe as a ‘phoenix.’

Ordinarily, Dutch Courts appoint an insolvency practitioner as a ‘bankruptcy trustee,’ whose conduct and decisions are supervised by a judge of a specialist bankruptcy Court.

Under the proposed reforms, the intended trustee and judge would be appointed up to two weeks before the expected formal appointment. The pre-appointment appointment will allow them to supervise and assess the sale process, thereby addressing some of the questions otherwise raised. The application would be made without any public notice, and there would be no public disclosure of any appointments.

Legislation in limbo

The Dutch Senate had put the legislation to one side, apparently waiting on the outcome of litigation initiated by employees of a company who claimed that a pre-pack sale was a transfer of business, thereby resulting in the automatic transfer of the employees and their entitlements to the acquirer.

The Court found in favour of the employees in June 2017, which means that Dutch employers (and possibly others in Europe, because the ruling reflected an EU-wide directive) will not be able to use pre-packs to rationalise a workforce, or renegotiate employment conditions.

At the time of writing it is not clear whether the legislation will be permanently shelved, or whether it might still be taken forwards, perhaps with modification.

How does that compare to Australia?

In Australia formal insolvency via a voluntary administration is far quicker than the painfully slow (and horrendously expensive) US Chapter 11 procedure, but even a quick administration will last for some months. For that reason, most large restructuring is done ‘informally’ – out of Court – which avoids the issues arising from loss of confidence.

The position under Safe Harbour

As Australia moves towards implementing the Safe Harbour reforms discussed here, one of the questions being raised is whether entering the Safe Harbour regime will require public disclosure.

At first glance it seems hard to think that entering Safe Harbour would not require disclosure, but it is important to remember that directors of ASX-listed companies already have significant disclosure obligations, some of which are discussed here. Those rules impose an obligation on directors to ensure that the market is kept informed as to the financial position of their company. Arguably, if a company is insolvent then that should have already been disclosed, whether there is a safe harbour mechanism or not.

Is there anything in the legislation that requires an additional disclosure?

There are two notable aspects to the Safe Harbour mechanism which suggest that it may have been specifically designed to avoid any additional disclosure. First, there is no requirement for appointment of a restructuring adviser as a pre-condition. Although the involvement of a ‘restructuring adviser’ would bring advantages, it would be a very clear reference point in any later analysis about the adequacy of disclosure.

Secondly, by structuring the safe harbour as a carve out to the existing directors’ duty rather than a defence against a breach, arguably all the directors are doing is continuing to ensure that they comply with their duties, which surely is so unexceptional as to not require disclosure.

Others may have different views, but my own is that it is arguable that there is no need for special disclosure that a board is accessing the safe harbour. That would be a good thing, because advisers will be able to operate ‘undercover’ – with a successful turnaround more likely in the absence of negative publicity.

Senate Inquiry releases Report into the Safe Harbour legislation

The Senate Economics Legislation Committee today released its report (available here) into the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 – the Safe Harbour legislation – following referral on 15 June, as discussed here.

The committee acknowledged that a number of submissions had identified potential improvements to the legislation – but it declined to recommend any changes. The Committee noted that there had been ‘broad support’ for the bill, and explained that it had formed the view that matters raised in submissions ‘would best be clarified in regulations.’

In practical terms that appears to eliminate any possibility that the ipso facto stay will be extended to apply to contracts entered into before the commencement, which in my view (as discussed here) is a very significant missed opportunity.

There was a single recommendation “The committee recommends that the bill be passed.”

Submission to the Senate Inquiry into the Safe Harbour and Ipso Facto Legislation

[This is a copy of my submission to the Senate Economics Legislation Committee Inquiry into the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017]

My Background

I am a Chartered Accountant and former registered liquidator, with more than 25 years’ experience in financial and professional services at Nab, ANZ Bank, and Ernst & Young.

In my current role I lead complex loan workouts across the Institutional and Corporate platforms at Nab, and I am member of the ARITA Vic./Tas. State Committee and ARITA National Board.

I very much appreciate the opportunity to provide a submission to the Inquiry into the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, which for clarity represent my personal views, and is not made on behalf of either my employer, or ARITA.

Summary

In my view those responsible for drafting the legislation should be commended for the care that they have taken to balance different policy objectives and minimise unintended consequences, resulting in a package of very meaningful and worthwhile reforms.

My submission has a single focus, the commencement of the ipso facto protections. The reforms are so beneficial that I believe we should move away from the proposed very gradual implementation, and implement them more quickly.

Issue: that the ipso facto protections will be introduced only very gradually

The ipso facto protections will apply only in respect of rights under contracts entered on or after the commencement (refer Explanatory Memorandum 2.99).

That means that companies incorporated after the commencement will have comprehensive protection against ipso facto clauses. By contrast, companies in existence prior to the commencement will not receive the benefit of ipso facto protection, unless they enter into a completely new contract.

Many contractual counter-parties currently holding ipso facto termination rights will avoid entering into new contracts. Instead they will seek to vary existing contracts, to preserve those termination rights. Those with greater negotiating leverage are most likely to be successful, i.e. by definition, extension will be more likely to occur where there is an imbalance of power. There will be some cases where contracts with ipso facto termination rights continue in existence for many years – with variation after variation after variation – and for most businesses, in practical terms the implementation will therefore be gradual.

There may be some argument for maintaining the position of those who currently hold ipso facto termination rights, to recognise freedom to contract and avoid retrospectivity – but there can be no other policy reason to deny the very clear benefits of ipso facto protection to all businesses.

The argument for limiting ipso facto protection

My understanding is that the limitation of ipso facto protection to only those contracts entered on or after the commencement date reflects a policy objective to avoid the retrospective removal of contractual rights that parties have independently negotiated.

The argument against limiting ipso facto protection

There was no suggestion that the Safe Harbour reforms be only available to those directors appointed after the commencement date – even though the safe harbour regime impinges on an individual creditor’s right to make an insolvent trading claim. I believe that reflects a clear recognition that the benefits of safe harbour are so significant that they should be universally available. Exactly the same argument applies in relation to ipso facto protection – the benefits are so significant that they should likewise be universally available.

If there is a residual concern about taking away rights that parties have independently negotiated, that should be balanced by consideration of three other issues:

First, ipso facto termination rights are something that a well-informed party would avoid if possible. They are more likely to exist in a contract where one party is less well-informed as to the risks they engender, and/or where there is an imbalance in negotiating position – such that a party cannot refuse their inclusion. We should be cautious about protecting rights that may have been secured through knowledge imbalance or power imbalance.
Secondly, ipso facto clauses provide a right to terminate where there is no other default. By definition therefore, they are only useful to a party that has suffered no loss or damage. There may be an argument to preserve the rights of a party that has suffered loss or damage – but it is harder to mount an argument to protect the rights of a party that has not suffered any loss at all, especially where the exercise of those rights may cause significant damage to the other party.
Finally, it should be noted that there is no way for employees to understand whether an employer’s contracts are protected against ipso facto. Similarly, there is no way for those who trade with a company to understand whether their credit risk is exposed to ipso facto termination.

Suggested solution

There are some circumstances where ipso facto termination rights should be maintained, and these have been recognised in the legislation. For those circumstances where it is appropriate to provide ipso facto protection, the legislation should be amended so that it applies to all contracts in existence before, on, or after the commencement.

If this is cannot be practically achieved, a compromise would be to follow the precedent in the Unfair Contracts legislation, and provide ipso facto protection to contracts entered into, or renewed or modified, after the commencement.

There is more detail on the issues that the Senate Inquiry will be considering here. All of the submissions are available here.

Safe Harbour & Ipso Facto: Issues for the Senate Inquiry

Legislation to implement the Government’s Safe Harbour and ipso facto reforms was tabled in Parliament on 1 June 2017, and then referred to the Senate Economics Legislation Committee on 15 June 2017, as noted here.

On 22 June 2017 the House of Representatives approved the second reading of the Bill. The Opposition speakers were each careful to highlight their support for the intention of the proposed reforms, but a review of their second reading speeches (available here, from page 22) helps identify some of the issues of detail that will occupy the committee:

Carve out or defence? – The legislation proposes a Safe Harbour via a ‘carve out’ from director’s duties – effectively placing the onus of proof on a liquidator, which is a shift away from the concept of a defence as proposed in the Productivity Commission report, that would place the onus of proof on the director. The Opposition has flagged its interest in understanding the move away from the Productivity Commission recommendation.

Anti-phoenix measures – The Opposition is calling for the introduction of a range of anti-phoenix measures including the introduction of a unique ‘director identification number’ with a 100-point identification check, and tougher penalties for phoenix-related offences. It is not clear whether their intention is to seek immediate amendment of the legislation to implement these measures, or use the hearings to progress the debate more generally. The idea of a DIN appears widely supported but there would be some logistical issues to address before it could be implemented – not least the likely need to expand the ASIC register to accommodate, and link, the DINs.

Transactions depriving employees of their entitlements – The Opposition also wants to address the problems caused by transactions entered into with the intention of avoiding payment of employee entitlement liabilities. In fact, the Government has just closed a consultation on Reforms to address corporate misuse of the FEG scheme, so this is something already underway.

Model A or Model B? The Productivity Commission proposed a Safe Harbour that would be triggered by the formal appointment of an individual as a ‘restructuring adviser,’ described in the exposure draft as the ‘Model A’ approach. The legislation as tabled implements the ‘Model B’ approach which does not specifically require such an appointment, but rather expects the directors to undertake one or more ‘courses of action’ likely to lead to a ‘better outcome,’ and the Opposition has flagged that it would at least like to understand the reasons for the departure from the original Productivity Commission proposal.

The speeches did not identify any issues with the ipso facto protections, the benefits of which, pleasingly, seem well understood and acknowledged.

Submissions close 12 July 2017, with the committee due to report by 8 August 2017. A copy of my submission is available here.

Restructuring: Singapore or Australia?

In March 2017 Singapore enacted a raft of changes to its insolvency and restructuring laws, apparently with the intention of positioning itself as the dominant international debt restructuring jurisdiction for Asia.

There are two key components to the changes, which are operative from 23 May:

First, a move away from a predominantly informal framework to a Chapter 11-style regime, via a mechanism that Herbert Smith Freehills describe as a ‘turbo-charged Scheme of Arrangement.’
Secondly, adoption of the UNCITRAL Model Law on Cross-Border Insolvency, some twenty years after its introduction in 1997.

Despite its name, the Model Law does not actually prescribe an insolvency law template to apply across all jurisdictions – instead it prescribes processes for the recognition of whatever law applies in the ‘principal jurisdiction’ of an insolvent company. The end result is that the restructuring and insolvency regime of the principal jurisdiction is effectively ‘exported’ to the countries in which the business operates.

In adopting the Model Law, Singapore joins over 40 countries – a list that significantly, does not include either Hong Kong or China.

If the initiatives are successful, Singapore may displace the current incumbent – Hong Kong – as the predominant debt restructuring jurisdiction in the region. This raises the question: how can there be a choice as to which jurisdiction applies?

The answer is that the Model Law relies on an identification of the ‘centre of main interest’ (COMI) of the insolvent company, and then applies the law of the COMI jurisdiction. In a world where operations may span across several countries, with multiple administrative locations, and shareholders and directors located elsewhere, identification of ‘the’ COMI may be far less black and white than some would think, and there may be more than one COMI to choose from.

It is in this context that Singapore has moved to create a regime that facilitates restructuring. If the new restructuring regime becomes widely utilised through Asia, then there will be work opportunities for its professionals throughout the region.

Australia has just tabled legislation to implement a safe harbour protection for company directors of struggling companies and protect those companies from the risk of ipso facto termination of their contracts, discussed in more detail here. When that legislation takes effect in mid-2018, where will we fit in the Hong Kong v Singapore battle?

To US investors and lenders seeking the familiar features of the Chapter 11 approach: cram downs, debtor in possession financing, and so on; Singapore may be the most attractive option.

But there is a notable divergence between the US regime and the Singapore regime, in the protection against ipso facto clauses: clauses which provide a contractual counter-party with the option to terminate if the other party to the contract becomes insolvent. Chapter 11 provides a debtor with ipso facto protection however the Singaporean ‘turbo-scheme’ only imposes a temporary moratorium on the exercise of those rights.

The ipso facto protections in the yet-to-commence Australian regime are not just closer to the US model, in fact they will be arguably amongst the most comprehensive in the world.

For businesses where so much enterprise value is captured inside legal agreements – and therefore at risk if there is formal insolvency – that the ipso facto protection outweighs any other considerations, Australia may well be a better jurisdiction to restructure than Singapore. It won’t be a surprise to see Australian restructuring lawyers making travel plans to visit offshore investors and owners, to explain the advantages that our modified regime will offer.

* There is one shortcoming: unfortunately it seems the protection will not apply to clauses in existence before the provisions come into effect, even if they are later modified.

Thanks to Michael Murray for his assistance especially with regard to UNCITRAL, and to Rachel Burdett-Baker for her helpful input and suggestions.

Referral to Senate Economics Committee – Safe Harbour & ipso facto

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill – which is the legislation to implement the Safe Harbour and ipso facto reforms – was yesterday referred to the Senate Economics Legislation Committee.

Those seeking to have the scope or operation of the legislation modified have one more chance to put their arguments via a submission to the committee.

This blog provides more detail on the issues that the Senate Inquiry will be considering here. A copy of my submission is available here.

Submissions closed on 12 July 2017, with the committee due to report by 8 August 2017.

Arriving in Safe Harbour?

Legislation to implement the Safe Harbour and ipso facto protections was tabled in Parliament today, reflecting a rapid progression from the exposure draft released on 28 March 2017.

The legislation includes some adjustments to the original safe harbour proposals, and very significant and sensible changes to the original ipso facto protection proposals.

Those responsible for the drafting should be commended for the care that they have taken to avoid unintended consequences.

The Safe Harbour protection

The Safe Harbour reform is intended to address a concern that the risk of potential insolvent trading claims was forcing directors to place their companies into administration prematurely, rather than try to restructure them. There are those who will say they have never actually seen a premature administration – but we should not let that objection overshadow the fact that the reforms will certainly lead some directors to take better advice and a more systematic approach to a turnaround, and that has to be a good thing.

Technically the safe harbour protection is a ‘carve-out’ from the insolvent trading liability provisions and not a defence. However, many will think of it as a defence, because it provides a practical and useful checklist of issues that company directors need to address to ensure that they are not caught by an insolvent trading claim for debt. Notably, it provides protection only for debt incurred in connection with a course of action ‘reasonably likely to lead to a better outcome,’ and the protection ceases if that course of action ceases.

Well advised directors will create a document, probably specifically identified as a ‘Restructuring Plan,’ that will set out:

An objective – preferably a return to solvency or viability, but if not, the ‘better outcome’ that the legislation requires. If it is a ‘better outcome objective, then presumably there will be an analysis comparing the planned outcome to the expected return from an immediate liquidation.
The steps that the directors have taken to ensure that they have taken advice from an appropriately qualified and properly informed adviser.
The reasons why the directors are able to conclude that they are properly informed about the financial position of the company, and what they will do to ensure that they remain properly informed.
The steps that the directors will be taking to ensure that there will be no misconduct ‘that could adversely affect the company’s ability to pay all its debts.’
The reasons why the directors are able to conclude that the company is keeping appropriate financial records, and how they will ensure that continues.
A set of actions to deliver the objective, to be undertaken by or under the supervision of the directors.
The process by which the directors will measure the effectiveness of the actions and review the plan to ensure that it continues to meet the safe harbour requirements. Presumably there will be formal milestones, and a series of monthly (or more frequent) reviews involving the adviser if he or she is not directly involved in the turnaround.

The legislation does not provide any guidance as to what constitutes an ‘appropriately qualified’ adviser. The explanatory memorandum says that the question is not ‘limited merely to the possession of particular qualifications,’ and references:

independence
professional qualifications
membership of appropriate professional bodies
professional indemnity insurance to cover the advice being given.

Those well advised directors will likewise avoid falling foul of the disqualifying criteria, by:

Paying employee entitlements as they fall due.
Keeping tax returns and lodgements up to date.
Submitting a Report as to Affairs in the event that the plan fails and the company later passes into formal insolvency administration.

Although the Court will have the discretion to excuse a disqualification, that will occur only in ‘exceptional circumstances’ or where it is ‘otherwise in the interests of justice,’ so clearly it would best to not have to make such an application!

Arguably the most significant development over the exposure draft proposals is an extension to now also provide a similar protection to the holding company of an insolvent subsidiary.

The safe harbour protections apply in respect of debt incurred after the commencement (the day after the amending Act receives Royal Assent) but take into account actions taken before commencement, which means that there will be no need for directors to reconfirm an existing restructuring plan on commencement.

Ipso Facto protection

A wide range of commercial contracts including franchise agreements, leases, licenses and supply agreements will include a clause that allows one party to terminate the agreement if the other party becomes insolvent – even if there is no other default.

Such ipso facto clauses mean that a business is at risk of disintegration if there is a formal insolvency appointment – at the very time when it is essential to try and maintain it as a going concern, to ensure ongoing employment for staff and the best return for creditors.

To address this, the reform proposals included a stay mechanism that would prevent the operation of such clauses. Whilst the exposure draft included a carefully defined and limited stay that would have had a very limited impact, pleasingly, the final version includes a considerably broader stay:

The stay will now also offer protection where a managing controller has been appointed – so long as the appointment is over ‘the whole or substantially the whole of the assets of the business.’
Perhaps most significantly, the stay will also provide far greater protection, against termination based on the ‘financial condition’ of the company, with scope for further expansion of the protection by regulation.
For Schemes of Arrangement the stay will commence when a public announcement is made, rather than require the actual formal commencement of an application.

There have been other very significant changes:

Critically, a contractual right to terminate will be indefinitely unenforceable – even after the end of the stay. This very important amendment means that an ipso facto clause will no longer provide the other party to the contract with a free option to terminate the contract at will.

The stay will not prevent a secured creditor from appointing a receiver after an administrator is appointed. Whilst this may appear at odds with the purpose behind the stay, it is important because will eliminate a potential ‘first mover advantage’ that might otherwise have prompted secured lenders to seek a premature insolvency appointment.

The ipso facto stay will apply to rights arising under contracts entered on or after the commencement (i.e. 30 June 2018 unless there is an earlier proclamation). Start-ups incorporated after that date will therefore have the full benefit of the changes. Disappointingly, companies trading today will not receive ipso facto protection, unless they change suppliers or enter into a completely new contract.