ASX updates Guidance Note on safe harbour

In September 2017, the Commonwealth Parliament passed the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) to amend and reform the insolvency and external administration provisions of the Corporations Act 2001 (Cth). 

One of the main changes implemented by these reforms was the introduction of a ‘safe harbour’ protection for company directors.

The safe harbour provides directors with protection from liability for insolvent trading provided they have begun developing a course of action that is reasonably likely to lead to a better outcome for the company and the company’s creditors than the appointment of a voluntary administrator or liquidator.

The safe harbour is intended to give directors breathing space to consider innovative solutions and to take reasonable, considered risks to restructure viable companies without necessarily exposing the company to the stigmatism of formal, public insolvency processes.

As the then Minister for Small Business, the Hon Michael McCormack, put it:

“The threat of Australia's insolvent trading laws, combined with uncertainty over the precise moment a company becomes insolvent have long been criticised as driving directors to seek voluntary administration even in circumstances where the company may be viable in the longer term …

Broadly, the safe harbour … measures encourage Australians to take a risk, leave behind the fear of failure and be more innovative and ambitious.”[1]

As with any new legislation or legislative shift, there are always unexpected implications and outcomes that need to be addressed.

One such outcome of the safe harbour reforms is uncertainty over whether the intended reliance by directors of a listed entity on the safe harbour protections is a matter that must be disclosed under the ASX listing rules in order to comply with the company’s continuous disclosure obligations.

ASX re-issues Guidance Note on Safe Harbour 

The ASX has now re-issued Guidance Note 8 which includes updated guidance as to the interplay between the safe harbour reforms and the continuous disclosure obligations affecting listed companies (Note).

In the Note, the ASX has indicated that it does not require a company to disclose to the market that its directors intend to rely on the safe harbour regime to develop a course of action which would result in a better outcome than a formal insolvency process. However, the company nonetheless remains subject to its continuous disclosure obligations in respect of the fact that it is generally in financial distress.

It is clear from the Note that the ASX’s primary focus in respect of disclosure is not on whether the safe harbour regime is intended to be relied upon, but rather whether there have been adverse developments in respect of the financial condition of the company, providing that:

“… if there is an adverse development affecting the financial condition or prospects of an entity that falls outside the carve-outs to immediate disclosure in Listing Rule 3.1A and a reasonable person would expect information about that development to have a material effect on the price or value of its securities, the entity must immediately disclose that information under Listing Rule 3.1.”[2]

Indeed, the ASX noted that investors would fully expect directors to be considering such plans as a matter of course. However, disclosure would be required when a definitive course of action has been determined or if the planning process is no longer confidential.

Considerations for listed companies

The updated Note means that listed companies in financial distress must continuously consider:

• whether the financial distress of the company would have to be disclosed in the ordinary course, regardless of whether safe harbour will be relied on;
• whether during the safe harbour an adverse development has occurred that would otherwise need to be disclosed; and
• whether any of the other exceptions to disclosure in listing rule 3.1A apply.

What further questions remain?

Notwithstanding the updated Note by the ASX, a number of questions remain, including:

1. whether the development of a turnaround plan would fall within the ‘incomplete proposal’ or ‘internal management information’ exceptions to the disclosure requirements under rule 3.1A;
   
   
2. at what point during the development of a turnaround plan has a “definitive course of action been determined” and therefore the plan must be disclosed; and
   
   
3. will companies seek to extend out the development of the turnaround planning process so as to delay the arrival to a “definitive course of action” and therefore the obligation to disclose?

As safe harbour becomes a more familiar response by directors to financial distress and examples of listed companies implementing the turnaround plans fundamental to safe harbour, the ASX will need to consider these questions and provide further guidance to the market.