have been met. The submissions also
questioned whether it was appropriate
to displace the decision making of the
directors at such a crucial time with
the views of an external advisor.
Even among submissions that were
supportive of Model A, there was a
range of views around the qualifications
and accreditation requirements that
should apply to a restructuring advisor.
While some submissions suggested
that a restructuring advisor should
be a registered liquidator,
pointed out that the skill sets that
such a restructuring advisor should
hold should go beyond the scope of
dealing with insolvent companies
and should instead be focused on
professionals that have experience in the
restructuring and turnaround industry.
Indeed, the submissions of TMA Australia
noted that different distressed and
restructuring situations require the skill
sets of a range of different advisors. For
example, there may be a need for balance
sheet turnaround or cultural, brand, or
business strategy change. There may
also often be a need for more than one
type of specialist advisor so that a range
of issues can be analysed and addressed.
Another point on which submissions
differed is whether under Model A
companies should be required to
disclose that they are operating under
safe harbour and the issue of how this
would apply to publicly listed companies
that are subject to continuous disclosure
requirements. While some submissions
suggested that public companies under
safe harbour should be exempted
from their continuous disclosure
7 others questioned whether
all companies should be required to
at least disclose their safe harbour
status to contractual counterparties
so that those counterparties can
decide whether to enter into new
contracts—and, if necessary, to avoid
doing so—with the company.
Submissions that showed a preference
for Model A criticised Model B as
being less certain given the subjective
elements that are required to fall within
the carve-out (e.g., establishing, on a
subjective basis, that the directors had an
honest and reasonable belief that they
were acting in the best interest of the
company). Some submissions noted that
satisfying the objective requirements
of appointing a restructuring advisor
and relying on their written advice, as
per Model A, provides more certainty.
Other submissions criticised Model B
as tilting the balance too far in favour of
directors. They noted that a liquidator
pursuing a director for insolvent trading
would have to establish that the company
was insolvent and then prove that the
director had breached the requirements
of the carve-out.
10 However, as
noted in submissions supportive of
Model B, a similar approach works
successfully in the United Kingdom
and there is established legal precedent
that may be relied on by Australian
courts should Model B be adopted.
At the time of this writing, there had been
no announcement regarding specifically
when the proposed legal reforms would
be introduced. While it was initially
envisaged that this could occur during
2016, the narrow victory in the recent
federal election by the Australian
Liberal Party, which was responsible
for launching the National Science
and Innovation Agenda, brings into
question whether this is still achievable.
If and when the reforms come into effect,
it will inevitably signify a substantial
shift in the Australian restructuring
landscape. Whatever form the reforms
take, it will be interesting to see whether
they are sufficient to deliver the stated
objectives of the proposal, which,
as noted earlier, are to encourage
greater entrepreneurship and risk
taking by directors in Australia.
In the author's opinion, to promote
such entrepreneurship, the reforms
need to create an environment in
which companies that are sailing close
to insolvency can attract directors (in
particular, nonexecutive directors) with
the experience and knowledge to steer
those companies to financial viability.
Such experienced directors can often
bring not only commercial expertise but
also their own financial connections
and credibility to a business, which
in turn can improve the chances of
that business succeeding. Removing
the risk of personal liability for such
directors and allowing them to make
key decisions for the business (with
or without the advice of external
experts) is crucial in achieving this.
It is therefore the author's opinion
that Model B is more likely to succeed
in fulfilling the proposal's objectives.
However, Model B may well be a
bridge too far in terms of changing the
current legal framework to lighten the
onerous insolvent trading obligations
imposed on directors and shift prevailing
practices in the Australian market.
The perceived clarity that Model A
provides to distressed situations may
well be the path that the Australian
federal government takes when the
reforms are ultimately implemented. J
1 Wayne Martin, Chief Justice of Western
Australia, 'Official Opening Address' (2009)
Insolvency Practitioners' Association of
Australia (16th National Conference).
2 Parliamentary Joint Committee on
Corporations and Financial Services,
Parliament of Australia, Corporate Insolvency
Laws: A Stocktake (2005) [ 5. 12].
3 For example, see the submissions of
the Australian Institute of Company
Directors dated 27 May 2016.
4 Again see the submissions of the
Australian Institute of Company
Directors dated 27 May 2016.
5 For example, see the submissions of
Ferrier Hodgson dated 27 May 2016.
6 See the submissions of TMA Australia (undated).
7 See the submissions of the Australian Institute
of Company Directors dated 27 May 2016.
8 See the submissions of the Australian
Shareholders' Association dated 27 May 2016.
9 For example, see the submissions of the
Australian Private Equity and Venture Capital
Association Limited (AVCAL) dated 27 May 2016.
10 See, for example, the submissions
of the Australian Restructuring,
Insolvency & Turnaround Association
(ARITA) dated 27 May 2016.
Zina Edwards is a special counsel at K&L Gates’
Sydney, Australia, office, specializing in restructuring
and turnaround. She has extensive experience
advising major trading and investment banks,
syndicates, funds, and public companies in relation
to various high-profile and complex financial
turnarounds, restructurings, and special situations.
Edwards has worked on a large number of distressed
and performing portfolio sale transactions in
Australia and across Asia, acting for both purchasers
and sellers. She also has experience acting on
leveraged and structured finance transactions.