Critical reforms to establish a safe harbour for directors seeking to turnaround financially distressed companies are moving ahead, with an exposure draft of legislation released for consultation by the federal government.
The reforms aim to support efforts by boards to turnaround a viable company where currently, the legal framework encourages a move to formal insolvency too quickly. This reform is needed to build a restructuring culture in corporate Australia and preserve value, jobs and investment that is currently lost through moving early to formal insolvency.
The exposure draft reflects many of the AICD’s key asks along with advice from a wide variety of stakeholders. The reform is complex, however, and is linked with proposed prohibitions on ipso facto contractual clauses, also released for stakeholder input.
Under the draft law, the civil insolvent trading provisions that currently hold directors personally liable for debts incurred would not apply “to a person and a debt” which is incurred in connection with a “course of action” that is reasonably likely to lead to a “better outcome” for the company and the company’s creditors as a whole.
To rely on the safe harbour, directors will need to be able to provide evidence of the “course of action” they undertook. Importantly, directors that take limited or no actions to deliver a change in circumstances won’t be able to rely on the safe harbour – “hope is not a strategy”, says the Explanatory Memorandum.
Relevant factors in determining whether a course of action was reasonable would include whether a director is properly informed of the financial position of the company, obtaining appropriate advice and implementing a plan for restructuring the company.
There are threshold requirements for directors seeking to rely on the proposed safe harbour. First, all employee entitlements, including superannuation, must be protected. Secondly, companies must be up to date on tax reporting obligations. Thirdly, company books must be maintained and available to administrators or liquidators to rely on if the turnaround does not succeed.
Some federal parliamentarians are cautious about supporting insolvency reforms due to concerns that workers’ protections may be compromised, and so these aspects of the reforms are welcomed.
You can access the AICD’s submission on the Advocacy page of the AICD website: companydirectors.com.au/advocacy. If you would like to discuss the reforms with the AICD, please contact Matt McGirr in the Advocacy team via MMcGirr@aicd.com.au.
A look at risk culture
The AICD’s APRA-Regulated Entities Forum – which looks at issues facing directors in financial services – has almost hit the one-year mark, and has canvassed topics including risk culture in organisations and the split of responsibility between the board and management. The forum is supporting an upcoming NSW event with APRA chair Wayne Byres MAICD, and ASIC commissioner John Price to explore the theme of risk culture. Keep an eye out for this upcoming event in AICD member communications. Members will also be able to “live stream” the event.
Views on diversity success
The Australian chapter of the 30% Club’s recently released publication Leading by Example features insights from ASX200 chairs with 30 per cent or more women on their boards. The report serves as a practical guide to improving gender diversity on boards for chairs and directors. It draws a common thread between the attitudes, commitment, practices, values and processes fostered by those who have contributed to meeting the 30 per cent target by 2018.
The report groups insights under five overarching themes: the importance of board diversity, board recruitment, selection and appointment practices, boardroom dynamics, organisational impact and environmental facilitators.
Today, there are 66 boards on the ASX200 with at least 30 per cent women. This is a significant improvement from 53 boards in August 2016. While some of the chairs interviewed were appointed to boards that had already reached the target, the majority have been actively involved in appointing women, and continuing to maintain the 30 per cent minimum. All share their journey with the diversity target. We encourage members to take a look at the report which is available on the AICD’s website.