Implications of disclosing restructure plans to creditors when entering safe harbour
|Services:||Corporate & Commercial, Restructuring & Insolvency|
|Industry Focus:||Financial Services|
|Date:||03 October 2017|
|Author:||Joanne Hardwick, Partner|
What you need to know
- Australia’s new safe harbour laws are now in force, providing a helpful regime for directors of a struggling company to pursue restructuring efforts without fear of liability for insolvent trading, but leaving some gaps around the protection of third parties dealing with the company.
- Directors will need to consider whether to inform creditors about the company’s position, while trade creditors who are told about a restructure plan and continue to support a company through the safe harbour period may find themselves in a difficult position if the restructure plan is ultimately unsuccessful.
- Unsecured creditors, including advisors, should take steps to protect their interests if they provide goods and services to a company during a safe harbour period.
After passing through Parliament, following months of anticipation, Australia’s new safe harbour laws received Royal Assent on 18 September 2017. The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 amends the Corporations Act 2001 (Cth) (Corporations Act) by introducing a safe harbour to protect company directors from liability for insolvent trading, and imposing restrictions on the enforcement of ipso facto clauses in contracts.
The amendments made in relation to safe harbour commenced on 19 September 2017 and apply to courses of action developed or taken before, at or after the commencement date, and to debts incurred on and from that date. The ipso facto reforms are set to commence on 1 July 2018, unless a proclamation is made for them to commence earlier.
In our Safe Harbour Wheelhouse publication series we will consider how the new laws are likely to play out and impact key stakeholders once companies begin relying on the new provisions in months and years to come. In this first update, we look at some of the issues that directors and unsecured creditors will need to consider given the Corporations Act’s silence about whether or not a restructure plan should be disclosed to creditors.
To disclose or not to disclose – a comparison with the United States
In the United States, for a company to restructure its affairs under Chapter 11 the company must file a petition with a bankruptcy court accompanied by a list of creditors and a summary of assets and liabilities. Therefore, all creditors will be on notice of the proceeding and the pending restructure. Immediately upon the filing of a bankruptcy petition, a moratorium or automatic stay operates to prevent enforcement action without leave of the court. The public nature of the Chapter 11 petition and its subsequent processes and procedures means that all creditors are aware of the situation and their support can be courted and negotiated during the moratorium period with a restructure plan ultimately put to the vote of all creditors.
Australia’s voluntary administration process is equally as public. Creditors are informed about the administration process and they are the ones who ultimately decide a company’s future at the second meeting of creditors.
But under Australia’s new safe harbour laws there is no requirement to put a restructure plan to all creditors or even tell them that a plan exists. This raises issues for both directors and creditors, particularly those that are unsecured.
Considerations for directors
While the amendments introduced to the Corporations Act have created a process by which directors can implement a restructure plan, they have not addressed whether or not a restructure plan should be disclosed to creditors. Therefore, directors will need to consider the company’s specific situation and ask themselves:
- Should some, all or any creditors be told about the company’s precarious financial position?
- If so, how much information should be disclosed about that position and the proposed plan to rescue or restructure the company?
- If a decision is made to inform certain creditors of the company’s financial position and restructure plans, at what point should they be told?
Companies that are publicly listed will have continuous disclosure obligations to bear in mind, which will be the subject of another update in our series. But for a director of a company without such obligations, the position is different. When such a director starts to suspect the company may become or is insolvent, and then starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, the director must, at some point, consider whether or not to disclose the fact that steps are being taken to rescue or restructure the company that either is, or may be, insolvent.
Clearly there will be some key stakeholders such as banks and other secured creditors who will need to be involved in the process of developing and executing a restructure plan. Standstill agreements or like arrangements will need to be entered into to formalise their support and preserve their rights under existing loan and security facilities. Support from these key stakeholders for one or more of the courses of action being developed will be crucial to a successful restructure.
However, what about unsecured creditors such as suppliers, customers, employees and even advisors of the business? To what extent will they need to be (or should they be) informed or consulted about the process being undertaken by directors to rescue the insolvent or soon to be insolvent company?
Directors will need to consider whether a particular trade creditor is a critical supplier or provides an essential service. They will need to assess the state of the relationship with that creditor – is it strong, valuable and worth preserving or has it deteriorated beyond repair? What pressure is that creditor placing on the company to meet existing terms of trade? Is there scope to renegotiate trading terms in order to assist a restructure plan?
If directors do decide to disclose some (or the entirety) of the company’s position to creditors, important questions will arise for those that are unsecured. What are the consequences if those creditors are in fact told that a company is trading in a safe harbour state and that a restructure is underway? If those creditors provide ongoing support to the company by continuing to trade with it in the ordinary course of business, but then that restructure plan ultimately fails, how do those creditors protect themselves against subsequent unfair preference claims that may be made by a liquidator pursuant to section 588FA of the Corporations Act?
Considerations for unsecured creditors
The Corporations Act has not been amended to protect unsecured creditors, including advisors, who know about a restructure plan and who continue to provide goods or services to the company during a safe harbour period.
An unsecured creditor who has been informed that a company may be or is insolvent and who accepts payments from the company for debts during the safe harbour period will risk losing the ability to raise the "no reasonable grounds" defence normally afforded to them under section 588FG of the Corporations Act. In the circumstances described above it will be difficult for a creditor to argue that, at the time they became a party to the relevant transaction, they had no reasonable grounds for suspecting the company was insolvent at that time or would become insolvent.
Aside from suppliers, customers and employees being the most obvious unsecured creditors, there is another group who will have a major role to play in almost every restructuring event, in light of the regime that has been introduced. The amendments contemplate the engagement of an "appropriately qualified entity" to assist directors to work out whether a course of action is reasonably likely to lead to a better outcome for the company. Although there are no particular qualifications that an appropriately qualified entity must possess, such persons or entities must be "fit for purpose" and possess the requisite skills and experience to assist directors to develop a course of action that is reasonably likely to result in a better outcome for the company than immediate administration or liquidation.
What all of this means is that unsecured creditors, including advisors such as accountants and insolvency practitioners who are engaged to assist a company to develop a restructure plan, will need to consider the terms of their own contracts and retainers and how they can best secure payment for their goods or services so as to minimise the risk of payments received during the relation-back period being clawed back in any subsequent liquidation.
Any business offering credit terms to their customers should seek legal advice on how best to protect their interests if they are told that a company with whom they do business may be insolvent, a restructure plan is being developed and they are asked to continue to trade with and support the business until the restructure plan has been executed.
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