INSOLVENCY Alert: Recent Australian Insolvency Reforms

22 May 2018

Publications

Safe Harbour and staying the implosion of contracts after engaging in a formal insolvency process

Keeping sinking ships afloat

Directors and holding companies perspective

OVERVIEW

Broadly, the big changes are:

First, don’t have to be solvent to do a turnaround and trade on; and

Secondly, if undergo a formal appointment, contracts cannot be modified or terminated under ipso facto clauses in favour of suppliers or customers.

Valid concerns were that prior to these changes:

First, directors were incentivised to prematurely make formal insolvency appointments to the company instead of preserving value by trading through difficulties.

Secondly, suppliers and customers were incentivised to modify or terminate under ipso facto clauses in their favour to prevent further losses.

Thirdly, skilled investors were incentivised to decline becoming board members of start-up companies because of their personal exposure through potential insolvent trading risk.

The Government hopes that these reforms will tip the balance in favour of positive outcomes, for example:

First, informal commercial turnarounds and trade ons rather than formal insolvency appointments with the objective of producing a better outcome for the company and its stakeholders.

Secondly, formal turnarounds and trade ons through the VA, Scheme, Receivership and other like processes rather than Liquidations with the objective of staying the enforcement of Ipso Facto clauses.

Thirdly, the right people going on the boards of start-up companies with the objective of protecting them from insolvent trading risk.

When insolvency arrives ‘Grim Reapers’ swoop in uninvited like hungry seagulls fighting over a few discarded chips. Well you can gladly tell them to go because you do not need them. What you need are advisors who can advise you how to stabilise and resurrect a business (not gouge it). For example:

First, insolvency lawyers and accountants who can become part of the advisory team performing a central role in creating, monitoring and adjusting the turnaround plan seeking to produce a better outcome than under a formal appointment.

Secondly, insolvency accountants who could, as the VA, Scheme Manager, Receiver and Manager or other like appointee, seek to stay the enforcement of Ipso Facto clauses.

Thirdly, litigation lawyers who can push back and defend Liquidator claims against directors and a holding company, seeking recovery of loss through an insolvent trading claim when Safe Harbour protection has actually been engaged.

However, these reforms will not deliver as advertised because in many common situations what is gained through one reform measure is taken away in another. The most obvious examples of this are that to engage Safe Harbour protection there must be historic and ongoing:

First, payment of super on time and in the full amount; and

Secondly, compliance with reporting obligations to the ATO.

As things stood prior to these reforms such matters were rarely achieved by financially distressed companies.

Overall, the Australian insolvency regime must mature as the world becomes smaller and commercial practices, technology and macroeconomic forces constantly change. These reforms take up that challenge in a variety of ways to some degree. They are an important departure from the valid criticism of Australia’s insolvency regime being too creditor focussed and penal. They embrace the notion that entrepreneurial risk taking should be encouraged (as in America) not stigmatised (as in Elizabethan England). With any luck this will be just the beginning and one day Australia may bring in reforms that fully embrace the efficient recycling of capital through a process not unlike Chapter 11 in America.

Click here for our full alert.