A Safe Harbour From Insolvent Trading?

In late March 2017, draft reform legislation in relation to the Corporations Act 2001 (Cth) (“the Act”) was introduced as part of the National Innovation and Science Agenda.  A key element of the reform has been dubbed as the “safe harbour” provisions. The purported rationale behind the reform is to:

“… promote a culture of entrepreneurship and help reduce the stigma associated with business failure, … [and offer] businesses a better chance of restructuring outside of a formal insolvency, which often produces significantly better outcomes for the company, its employees and its creditors”.^[1]

The Act presently imposes a corporate veil whereby company directors are generally shielded from personal liability for company debts save for in certain and exceptional circumstances. For example, section 588G of the Act places personal liability on company directors who allow a company to incur a debt while insolvent, or which debt has the effect of making the company insolvent, when there were reasonable grounds for suspecting that the company was or would become insolvent at the time of incurring the debt. The Act also enables a Liquidator to seek to recover from the Company’s director(s) an amount equal to the loss and damage incurred by a creditor of the Company to whom a debt is owed.

Legislative Reform

In contrast, proposed section 588GA(1) of the Act provides a defence to an insolvent trading claim for company directors who can prove that when they suspected that the company may be (or may become) insolvent:

• they took a course of action that was reasonably likely to lead to a better outcome for the company and the company’s creditors than if the company was placed into external administration; and
• the debt was incurred in connection with that course of action.

The prescribed factors which a Court may consider in determining whether a course of action taken by a director was reasonably likely to lead to a better outcome for the company and the company’s creditors (refer proposed section 588GA(2) of the Act) include:

• obtaining appropriate advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; and
• steps taken to:
• prevent misconduct by officers and employees of the company that could adversely affect the company’s ability to pay all of its debts;
• ensure that the company was keeping appropriate financial records;
• appropriately inform themselves of the company’s financial position; and
• develop or implement a plan for restructuring the company to improve its financial position.

Limitations to entering the “Safe Harbour”

Unsurprisingly, there have been limitations placed on the proposed “safe harbour” provisions, including where the company has failed to:

• provide for employee entitlements; and
• meet its reporting obligations under the Income Tax Assessment Act 1997 (Cth).

Further, company books will not be admissible to support the defence if a director fails to permit inspection or delivery of any of the company books in accordance with certain provision of the Act.

Be sure to seek legal advice

Whilst an “appropriately qualified entity” is not defined in the draft reform legislation, if you are a company director and suspect your company is facing insolvency, seeking legal advice could save you from personal liability from an insolvent trading claim.