These are slides from a seminar I gave in November 2017 on new insolvency reforms.

1. Safe Harbour and Ipso Facto
Reforms
Associate Professor Jason Harris
UTS Faculty of Law
jason.harris@uts.edu.au
0295143772

2. Safe harbour for directors
• Safe harbour introduced by Treasury Laws Amendment (Enterprise Incentives No 2)
Act 2017
• Assented to on 18.9.17
• Safe harbour provisions commenced on 19.9.17
• There will be a statutory review of the safe harbour in 2 years
• Safe harbour v defence
• Safe harbour (new s 588GA) applies to civil insolvent trading liability for directors arising
under Corporations Act s 588G(2)
• New safe harbour for holding companies (new s 588WA) for civil liability under s 588V

3. Safe harbour for directors
• Safe harbour protection applies to:
• Courses of action developed or taken before, at or after commencement
• Debts incurred at or after commencement
• Treasury Laws Amendment (Enterprise Incentives No 2) Act 2017 (Cth) Sch 1 cl 6.
• Safe harbour does not apply to other directors/officers’ duties
• eg, duty to act in good faith in the best interests of the company-consideration of creditors

4. When does the safe harbour apply?
• New s588GA(1) provides that s588G(2) (insolvent trading liability) will not
apply to directors where:
1. At a time when they start to suspect that co is or may become insolvent
2. They develop one or more courses of action (this must be done within a
reasonable time)
3. The course of action are reasonably likely to lead to a better outcome for the
company
• Judged against immediate appointment of an administrator or liquidator
4. Debts are incurred directly or indirectly in connection with the course of
action

5. Duration of the safe harbour (s588GA(1)(b))
• If no course of action is taken, then the safe harbour will end after a
reasonable time
• Safe harbour applies from the time they take the course of action to the
time when:
• The director ceases to take any such course of action
• i.e. a course of action reasonably likely to lead to a better outcome for the co
• The course of action ceases to be reasonably likely to lead to a better
outcome for the co
• A voluntary administrator or liquidator is appointed

6. Establishing the safe harbour
• Directors bear an evidential burden to establish that the safe harbour applies (s588GA(3))
• Requires pointing to evidence that suggests a reasonable possibility that the matter does or
doesn’t exist (s588GA(7))
• Where evidence of a reasonable possibility of the safe harbour applying is provided in another
recovery proceeding: court must presume reasonable possibility exists (new s588E(8))
• (some) Relevant factors for determining whether a course of action would be reasonably
likely to lead to a better outcome for co:
• Properly informing themselves of the co financial position
• Taking appropriate steps to prevent misconduct
• Taking appropriate steps to ensure company keeps appropriate financial records
• Developing a restructuring plan
• Obtaining advice from an ‘appropriately qualified entity’ who was given sufficient information
to give appropriate advice

7. Safe harbour carve outs
• Safe harbour won’t apply to debts incurred before commencement
• Safe harbour won’t apply where, at the time the debt is incurred:
• Employee entitlements are not paid on time
• ATO returns, notices, statements, applications or other documents as required by
taxation laws are not provided
And the failure amounts to ‘less than substantial compliance’ or the
company has failed to comply with these requirements 2 or more times
in the past 12 months
• Safe harbour will be lost (and taken to never have applied) where:
• RATA forms not supplied (or less than substantial compliance)
• Court may order that carve outs don’t apply to one or more failures if
exceptional circumstances or in the interests of justice (s588GA(6))

8. Safe harbour for holding companies (s588WA)
• 588V(1) (holding co liability) does not apply if:
588WA(1)
(a) the corporation takes reasonable steps to ensure that subsection 588GA(1) (about
a safe harbour for directors taking certain courses of action) applies in relation to:
(i) each of the directors of the company; and
(ii) the debt; and
(b) subsection 588GA(1) does so apply in relation to each of those directors and to the
debt.
• A corporation that wishes to rely on subsection (1) in a proceeding for, or
relating to, a contravention of subsection 588V(1) bears an evidential
burden in relation to that matter.

9. Evidentiary restrictions
• Books or information not admissible in evidence in proceeding for or in
relation to s588G(2) in which person seeks to rely on safe harbour where:
• Failure to provide books or information required for inspection, or where required
to hand over to liquidator or VA
• Warrant issued under s530C(2) where court is satisfied that the person has
concealed, destroyed or removed books of the company (or is about to do so)
• Failure to complete the RATA or to assist the liquidator or VA
• Evidentiary restrictions don’t apply where person did not at any time
possess the books or information and no reasonable steps could have been
taken to obtain it (s588GB(3))
• Notice of the effect of s588GB must be given-otherwise evidentiary
restriction won’t apply (s588GB(5))
• Court may order that evidentiary restrictions don’t apply where
exceptional circumstances or in the interests of justice (s588GB(4))

10. Likely contentious issues
1. How will conduct be established as being ’reasonably likely’ to lead to a
better outcome for the company?
2. How will a better outcome for the co (compared with an immediate
appointment of a VA or liquidator) be determined?
3. When will a course of action cease to be reasonably likely to lead to a
better outcome for the company?
4. Who will be an ‘appropriately qualified entity’?
5. What will constitute ‘substantial compliance’ for paying employee
entitlements and lodging tax documents?
6. What will satisfy ‘taking appropriate steps’ to:
• prevent misconduct?
• keep appropriate financial records?

11. Ipso facto clause reform
• Currently, external administration does not terminate or vary contractual rights
unless provided for by the contract (an ipso facto clause)
• Reform of ipso facto clauses 25 years in the making
• Protection exists in other jurisdictions (US, Canada and to a limited extent UK)
• New provisions inserted into Pt 5.1 (creditors’ schemes); Pt 5.3A (vol admin) and for
Pt 5.2 (receivership)
• But only for managing controller over the whole or substantially the whole of the co property
• Will not apply to stand alone liquidation, but will apply to VA-CVL
• Not operational yet
• Commences on proclamation or 1.7.18
• There will be regulations exempting certain arrangements (eg derivatives contracts,
set-off provisions, trust deed ejection clauses)
• Will only apply to rights arising under contracts, agreements or arrangements
entered into from the commencement date
• Future problems of ongoing pre-2018 contractual arrangements

12. Ipso facto clause protection
• Stay against ipso facto clauses that are in a contract, agreement or arrangement where co is
in:
• Creditors’ scheme (new s415D) (announcement of scheme, application for court order under
s411(1), or co becomes subject to a scheme)
• Appointment or existence of a managing controller over the whole or substantially the whole
of the co property (new s434J)
• Co comes under or is under voluntary administration (new s451E)
• The stay also applies where the ipso facto rights are based on ‘the company’s financial
position’ (or a prescribed reason) and the co is in a scheme (or a scheme has been
announced or applied for), managing controllership or VA
• The financial position ground is disregarded if not in one of those 3 appointments
• Stay also applies to rights exercised for ‘a reason that, in substance, is contrary to’ new stay
provisions
• Power to make regulations for ‘prescribed reasons’ relating to appointment
• Stay also applies to self-executing provisions (i.e. where no decision or action is needed)
• s415FA (schemes); s434LA (receivership); s451GA (voluntary administration)

13. Duration of the stay
Creditors’ scheme
• Stay begins when announcement is made or when order is made
• Court application must state that it is being made for the purpose of the body
avoiding being wound up in insolvency (s415D(5))
• Stay ends:
• 3 months after announcement if no application is made (court may order longer
period); or
• when the application under s 411 is withdrawn or dismissed; or
• when the compromise or arrangement is completed; or
• if court terminates compromise or arrangement and orders a winding up.

14. Duration of the stay
Receivership
• Stay begins on appointment of managing controller
• Stay ends when managing controller’s control of property ends
• Unless court orders an extension (s434J(3))-court must be satisfied extension is
appropriate having regard to the interests of justice
• Multiple extensions may be granted
• Court may grant an interim order (can’t require undertaking as to damages)
s434J(3)(b)
Voluntary administration
• Stay begins when the co comes under administration (see s435C)
• Stay ends when the administration ends (see s435C; s451E(2))
• Court may extend stay (s451E(3)); multiple extensions may be granted; interim orders
may be granted (can’t require undertaking as to damages)
• If administration ends because of a creditors’ resolution for wind up, or court order for
wind up-then the stay ends “when the company’s affairs have been fully wound up”

15. Court may lift the stay
• Only the rights holder can apply to lift the stay
• Scheme: court may lift the stay for ‘one or more rights’ against the company
if scheme is not for the purpose of avoiding winding up in insolvency or in
the interests of justice (s 415E(1))
• Order may allow rights holder to enforce from earlier of announcement or date of
application under s 411 (s415E(2))-only the holder of those rights can apply
(s415E(3))
• Receivership: court may lift the stay for one or more rights against a
corporation if the Court is satisfied that this is appropriate in the interests of
justice (s434K(1))
• Voluntary administration: court may lift the stay for one or more rights
against a corporation if the Court is satisfied that this is appropriate in the
interests of justice (s451F(1))

16. Scope of the stay
• Once the stay is imposed, the right cannot be exercised in the future to the extent that a
reason is covered by the stay provision (i.e. due to appointment)
• s415D(4) (creditors’ scheme); s434J(4) (receivership); s451E(4) (vol admin)
• New power that contractual rights may only be exercised with leave of the court or on
conditions set out by court order, where court is satisfied rights are being exercised
because of creditors’ scheme, managing controllership or VA
• This can include a potential exercise of contractual rights; interim orders may be made (and
no undertaking as to damaged)
• Stay only for defined period specified in order
• Must have regard to interests of justice
• Does not apply to excluded rights or rights where IP consents
• s415F (creditors’ scheme); s434L (receivers); s434G (vol admin)
• Concurrent receivership and VA: s441A allows enforcement and s434J does not
prevent this (amendments to ss441A and 441B provide for this)

17. Scope of the stay
• Will not apply to rights arising from contracts entered into during the
scheme, receivership or vol admin
• Will not apply where Payment Systems and Netting Act or Cape Town
Convention applies
• Will not require provision of money or new credit to company
• Will not prevent IP from consenting to exercise of ipso facto right