The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), which introduces a safe harbour for directors of insolvent companies and a stay on the operation of ‘ipso facto’ clauses during and after certain formal insolvency processes, received Royal Assent on 18 September 2017.

Director safe harbour

The Act amends the Corporations Act 2001 (Cth) (Corporations Act) to create a new safe harbour for company directors from personal liability for insolvent trading under section 588G where a company is undertaking a restructure outside of formal insolvency.  The safe harbour is available where a debt is incurred as part of a course of action, within a reasonable time period, that is reasonably likely to lead to a better outcome for the company than an immediate liquidation or administration.  There are also certain other conditions that must be met including paying employee entitlements as they fall due and giving notices, statements, applications or other documents as required by taxation laws.  

The safe harbour reforms commenced on 19 September 2017.

As result of amendments made in the Senate, the Minister must cause an independent review of the impact of the safe harbour on the conduct of directors of companies and the interests of creditors and employees of those companies within 2 years of commencement.

Ipso facto clauses

An ipso facto clause is a provision that allows one party to terminate or modify the operation of a contract solely upon the occurrence of a particular event (including insolvency) regardless of continued performance of the contract by the counterparty. 

The Act amends the Corporations Act and the Payment Systems and Netting Act 1998 to introduce a stay on the enforcement of ipso facto clauses which are triggered by a company’s formal restructure (or, once a formal restructure has commenced, by the company’s financial position before or during the restructure) including where:

  • a company is placed into administration;
  • a company enters a compromise or arrangement aimed at avoiding insolvent liquidation; or
  • where a managing controller has been appointed over all or substantially all of the property of the company.

Amendments made in the Senate clarify that the stay applies to both the exercise of rights by a counterparty and self-executing provisions which automatically terminate or amend existing rights. 

The ipso facto reforms will commence on a date to be fixed by proclamation, but if they haven’t commenced by the later of 30 June 2018 or 6 months after Royal Assent, they will commence the day after the later of those 2 dates.  The stay will apply to contractual rights under contracts made after the date of commencement.