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”.
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.
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:
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:
Unsurprisingly, there have been limitations placed on the proposed “safe harbour” provisions, including where the company has failed to:
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.
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.
 The Treasury, Australian Government, Government releases insolvency law reforms for consultation (28 March 2017) < http://kmo.ministers.treasury.gov.au/media-release/025-2017/>.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.