On 18 September the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 received Royal Assent. As part of the amendments introduced by this legislation the Corporations Act has been amended to create a safe harbour defence for directors from personal liability for insolvent trading if the company is undertaking a restructure outside of the formal insolvency processes.
The amendments also provide for a stay on ipso facto clauses. These are clauses in contracts that cause the agreement to come to an end in the event of insolvency. There will now be a stay of the enforcement of rights against a company that seek to amend or terminate an agreement because of the company’s formal restructuring.
The amendments are part of the Governments Innovation Revolution and Insolvency Law Reforms initiative. The rationale is to protect diligent and competent directors that take proactive steps to restructure a company when it is reasonably likely to achieve a better overall outcome than a formal winding up of the company.
The Corporations Act will now recognise that viable but financially stressed businesses under external administration or schemes of company arrangement may find it difficult to trade if contracts are cancelled. The reforms should create some breathing space for a company to continue to trade through insolvency and improve its chances of being turned around.
The safe harbour provisions are effective as at 19 September 2017 and the Government has announced that the stay on ipso facto clauses will commence on 1 July 2018.
If a company is experiencing financial stress, directors should seek advice early to take advantage of the changes in legislation to minimise risk of personal liability and explore informal and formal turnaround or restructure options that might be available.