Safe harbour Q&A

Can a board determine the restructure to be in the "best interests of the company" when trading through insolvent or near insolvent situations?

Yes. There is no Australian law forcing a company to appoint Voluntary Administrators or to cease trading. The prohibition in Ch 2D lies in exercising powers for self-interest, or without a reasonable degree of care or diligence or for a proper purpose in good faith. The prohibition in section 588G is against incurring debts while the company is insolvent, excepting when sections 588GA and GAA apply, as to which see below. These are technical matters. The more relevant question then is whether there is a proper plan in place to bring the enterprise through the present crisis and reset for future business.

The new COVID-19 Safe Harbour contains an "ordinary course of business" qualification. Is this consistent with a restructuring in a special situation or does the fact of a non-recurring item (restructuring) mean the defence is illusory?

All enterprises undertake constant improvements in the face of changing business environments, strategies ranging across a full continuum of transformation, transition and turnaround.  These events are part of the non-recurring business environment – perhaps an extreme form of, but still part of the business environment and, so long as the enterprise remains one undertaking a post restructuring business of some likeness to its pre restructuring business, the restructuring would be undertaken in the "ordinary course of business". 

If the turnaround plan encompasses some control feature (eg. scheme of arrangement), how could this possibly be said to form part of the "ordinary course of business" of the enterprise?

Safe Harbour is not a destination but a process of thinking about the purpose for which debts are incurred. Directors exercise powers for specified or permitted purposes (eg. to leave unchanged management delegated authorities to incur particular forms of debt). Pursuance of a control transaction or promotion of a main undertaking asset transaction must be considered against the "interests of company" tests articulated in Bell and such cases. If articulated, measured and executed properly, a turnaround plan may well encompass one of these transactions, if for a proper purpose. In which case, a control transaction feature would no more invalidate the capacity to incur the debt in the "ordinary course" than would capital raising, debt renegotiation, supplier and counterparty arrangements.

Can directors sit back and leave the planning to management?

No. The dual board governance and management structures of enterprise focus the attention of the board on compliance testing around fraud, execution of management plans against strategy, testing of management's risk sensitivity analysis, statutory and record keeping compliance and the usual financial and risk assurance commission of boards.

Can directors just pause and do nothing in particular until 25 September or extended date?

Time resets provide just that, a reset to execute on a plan. Most plans identify a transaction or event of sufficient probability as to exist as a reasonably likely future source of capital from which "pre-plan" debts can be paid. This is the shoreline to which the plan bridges. While on the bridge, there must [usually] be some other source from which to meet post plan credit. Of course, the plan only activates sections 588GA (or GAA) if the company insolvent or may become so. Hence, the section 588GAA SH must still be part of the bridge to a solvency solution. If there is no solution, or no plan, there is nothing by which the directors can say leads (under section 588GA) to a better outcome [than alternatives] or (under section 588GAA) a proper discharge of duties to act in the best interests of shareholders and, in a twilight sense, broader stakeholders.

When might section 588GA apply but not section 588GAA?

One example might be when the plan envisages either a pre-pack process, cleansing positions ahead of a proposed liquidation or non trade-on Voluntary Administration, in which case the 'ordinary course of business' test may not be met. Another is possibly a (lawful) phoenix style activity. A third might be when the plan has no ultimate objective. In the case of the first two examples, but probably not the third, section 588GA might provide sanctuary because a "better outcome" is achieved even in a non-trade on scenario.

Surely the company should notify suppliers once the enterprise (or some of its businesses) enlivens Safe Harbour protection?

Although good practice guidelines would see an enterprise transparently engage with its suppliers when under financial pressure, ASX Guidance in Listing Rule 3.1 makes clear that materiality triggers do not include simply for activating a defence. Possibly changes in financial guidance, asset values, change in the enterprise strategy, class action notifications or (in the face of social media commentary), rumour of the appointment of 'harbour master' might each be disclosable events.

What do you say to criticism that changes to make trade ons easier simply transfer risk to workers and the supply chain?

Labour is mostly protected under new Government subsidies. However, there is a clear risk transfer when dealing with credit arrangements. In this market, credit worthiness tests are critical, as are ROTs lodged on the PPSR. But risk transference is real, as are the downstream supply chain credit transfers. Directors need a clear understanding of their duties and responsibilities, and probably also their responsibilities not to mislead or deceive suppliers – these are legal questions an tricky technical questions, each requiring special help.

Does the COVD-19 relief package (relief from insolvent trading / amended stat demands process / landlord enforcement) effectively render the need for directors to engage a Safe Harbour Harbour Master redundant and will it lead to debtors stockpiling cash in the short term and a rush for Voluntary Administration appointments before the six-month window closes?

There is a risk that people will sail blind and not take appropriate steps or advice that will enable them the long term benefits and protection that well-developed restructuring plans can deliver. The balance between regard having been had to the dire circumstances many companies will find themselves in and regulatory oversight and investigations into questionable and inappropriate trading (and the inevitable phoenixing activity) will need to be carefully monitored to protect all stakeholders.

Does this mean future appointed liquidators will start to scrutinise all transactions within the six-month relation back period for any voidable preference clawbacks?

Yes. Possibly we will see some further law reform to address this very issue. Relieving creditors from preferential payments overt the COVID-19 period, though, is only part of the solution given Barnes v Addy and other tests around participatory receipt and/or assistance in fiduciary breach cases. This is an area ripe for future dispute.

One development we are seeing is safe harbour being inserted as an Event of Default (or Review Event) in new restructuring money deals – does this simply make Safe Harbour a trigger rather than a defence?

Efficacy of such provisions remain to be tested – Safe Harbour is not an event in itself but a defence. Neither is it a static state. A clause without clarity of application is potentially unenforceable without reference to permissable extrinsic evidence of purpose.

Might we see new legislative reform similar in effect to a temporary extension of section 447A relief (to Voluntary Administrators) to situations involving Safe Harbour masters?

This is probably unlikely for a COVID-19 situation given ASIC's powers to issue instruments relieving companies against certain Corporations Law compliance. We will, however, keep this issue under close consideration. 

Might directors take alternate courses of action, for example to defer payment of declared dividends in order to both protect cash and also to defer the "incurrence" point of the debt represented by the dividend (considering the interplay between sections 254V(2) and 254T Corporations Act?

Although the "profits test" element of section 254T was removed in 2010, the company must still be balance sheet solvent in order to make a dividend distribution. A decision to revoke a dividend remains open to directors. Indeed, a board would probably wish to assess the dividend payment in the light of three way financial instruments demonstrating an ability to meet a dividend in a solvent state.