Discussion Group Wednesday, 6 December 2017 Topic Safe harbour and - - PowerPoint PPT Presentation

Wednesday, 6 December 2017 Topic

Safe harbour and ipso facto

Presented by Michael Crommelin, Associate – Jackson McDonald

City Insolvency Discussion Group

Michael Crommelin Associate, Jackson McDonald

Safe harbour for insolvent trading and ipso facto clauses

• “[Australia’s] current insolvent trading laws

put too much focus on stigmatising and penalising failure…”

• Two main culprits:
• Operation of ipso facto clauses
• Lack of safe harbour for directors

Calls for reform

• An ipso facto clause gives a party a right to

terminate or modify a contract upon the

• ccurrence of a specified event

Ipso facto clauses

“Insolvency Event” examples:

• Company becomes insolvent
• Liquidator, receiver,

administrator, manager or controller is appointed

• Reorganisation or moratorium is

proposed etc.

• Application for winding up is

made

• Company can’t pay debts as

and when due

• The new law introduces a stay on the operation
• f ipso facto clauses in certain circumstances
• Three categories:
• Compromise or arrangement (s 415D)
• Managing controller (s 434J)
• Administration (s 451E)

New law

• A stay will begin when the insolvency

event is set in motion and will end when the insolvency event wraps up

• Counterparties retain the right to

terminate for non-payment or non- performance

• Points to note

Period of the stay

• The Court may extend or lift a stay, if “satisfied that this

is appropriate in the interests of justice”

• The Court may order that one or more rights are

enforceable only with the leave of the Court and in accordance with certain terms

• The Minister may limit the stay’s application by declaration
• The Regulations can be used to broaden the suite of

reasons for which a right cannot be enforced

• A stay will not apply to a right that an administrator,

liquidator, managing controller or person overseeing a compromise or arrangement consents to in writing

Court orders, Ministerial declarations, Regulations

• Lack of retrospective application will

“effectively create two classes of contracts… [which] will create a competitive imbalance in the economy…”

Things to consider

Counterparties will opt to vary or amend contracts, rather than enter into new ones, to retain the benefit of pre-amendment ipso facto clauses

• Effect on precedents
• Volume of restructuring and turnaround work
• Pricing and availability of credit
• Carve outs

Things to consider

• More companies opting to enter VA – s 451E(2)(c)
• Importance of identifying early warning signs of

insolvency

Things to consider

• The new law also provides a safe harbour for

directors who trade while insolvent, so long as certain conditions are met

• To enjoy the safe harbour, a director must have

developed a course of action that is reasonably likely to lead to a better outcome for the company, and they must incur the debt in connection with that course of action

Safe harbour for directors

• The safe harbour will exist from the moment

the course of action is implemented, until the moment it ceases or is no longer “reasonably likely to lead to a better outcome”, or until the company is placed into administration

Objective test

• Directors must ensure employee entitlements are

being paid and taxation reporting obligations met

• Directors must lead evidence to support safe harbour

Evidentiary requirements

• Directors cannot rely on company

books if certain reporting obligations are not met

• A party alleging unreasonableness

against a director must lead evidence to that effect

• Appropriately qualified entity not defined

in the legislation

• Court may refuse safe

harbour if it deems entity not appropriately qualified

Things to consider

• Does not cover all debts
• Will directors be emboldened by the safe

harbour?

• What about creditors who deal with companies

while they are enjoying safe harbour?

• Continuous disclosure rules

Things to consider

Disclaimer: this presentation is for general information purposes and cannot be relied upon as legal advice

Questions?

February Can a creditor prove for a statute barred debt? Ray Christensen – Zilkens Lawyers March Pre-insolvency advisors and illegal phoenix activity Murray Thornhill – HHG Legal Group April Liquor Control Act 1988 (WA) – an overview and relevant considerations for insolvency practitioners Joanne Matich & Alexandra Matich, Joanne Matich + Associates May Corporate Trustee Update David John – Herbert Smith Freehills June Insolvency Hot Topics Hector West, Eleanor Taylor, Helene Chryssidis - Dentons July Practical considerations and extracting value from the sale of a professional services practice – preservation of goodwill Tom Meagher – Murfett Legal August PPSA Updates Matthew Noonan-Crowe – Valenti Lawyers September Technical and practical implications of the Insolvency Law Reform Act Kellie Link – Norton Rose Fullbright October Trading and sale considerations for hospitality businesses Murray Brown – GMO November Channel 10 Case Dan Butler & Tegan Healey – Lavan December Safe harbour and ipso facto Michael Crommelin – Jackson McDonald

2017 CIDG TOPICS

We wish you all a safe and happy Christmas. See you all in 2018!

PD hours will be out this week.

City Insolvency Discussion Group