Safe Harbour - Protection from Liability for Insolvent Trading

Earlier this year we reported on the reforms to the Corporations Act 2001 (Cth) known as safe harbour, which provides directors with protection from liability for insolvent trading, in circumstances where they have started developing a course of action that is reasonably likely to lead to a better outcome for the company than the appointment of a voluntary administrator or liquidator.

One of the issues raised in that blog was the uncertainty over whether the intended reliance on the carve out defence by a director needs to be disclosed to comply with the ASX listing rules and continuous disclosure obligations.

To assist listed companies and their directors, the Australian Securities Exchange (ASX) has since issued a revised guidance note on meeting disclosure requirements under Listing Rule 3.1 (which requires a listed entity to disclose “market sensitive” information to the ASX immediately) and reminds entities of the possible consequences of failing to do so.

The full text of the Guidance Note can be found here:

https://www.asx.com.au/documents/rules/gn08_continuous_disclosure.pdf

In the expanded guidance note, the ASX states that the fact that a company’s directors are relying on the insolvent trading safe harbour to develop a course of action that may lead to a better outcome for the company than insolvent administration, in and of itself, is not something that the ASX would generally require a company to disclose until Listing Rule 3.1.

Of course, most investors would expect directors of company in financial difficulty to be considering whether there is a better alternative for the company and its stakeholders in an insolvent administration.  Therefore the fact that the directors are doing so is not likely to require disclosure unless it ceases to be confidential or a definitive course of action has been determined.

Communicating with ASIC

Underlying the new section is the ASX’s recognition that for a company in financial difficulty, the requirement to disclose materially negative market sensitive information immediately can be a significant impediment to completing a financial restructure or reorganisation necessary for its survival.  However, the proper course for a company in such a situation is not to disregard its continuous disclosure obligations but rather to approach the ASX and discuss the possibly of a voluntary suspension to manage its disclosure obligations, while it completes the transaction in question.

The ASX may agree to suspend quotation of an entity’s securities where it is satisfied that the entity is in genuine financial difficulty and continued trading in its securities is likely to be materially prejudicial to its ability to complete a transaction which is critical to its continued financial viability.

Considerations for ASX listed companies

Companies and directors must continue to consider the following issues when seeking to rely on the safe harbour defence:

• whether the financial distress of the company would have to be disclosed in the ordinary course, regardless of whether the directors contend to rely on safe harbour or not;
• whether during the period of safe harbour an adverse development has occurred that would otherwise need to be disclosed; and
• when and whether directors should approach the ASX to discuss the possibility of a voluntary suspension, or trading halt of an entity’s securities as a means to prevent disclosure of a materially negative market-sensitive information immediately but not breach their continuous disclosure requirements.