Insolvency Law Reforms and "Safe Harbour"

The Federal government seeks to implement a draft legislation that wants to amend the Corporations Act 2001. It introduces the following:

  • A ‘safe harbour’ carve-out regarding a director’s liability for insolvent trading.

  • Stay provisions that affect the enforcement of specific ipso facto and other clauses during a scheme arrangement or administration.

A draft legislation to reform insolvency laws was released on 28th Mar 2017 and the federal government incorporated its National Innovation and Science agendas of 7 Dec 2015, an assurance that they would introduce safe harbour and ipso facto reforms. This commitment was made after they received recommendations from the Productivity Commission in the Business Set-up, Transfer and closure of 30 Sep 2015 (Inquiry Report). The government’s aim for implementing this legislation is to promote a culture of innovation in Australia.

Safe Harbor

There are certain conditions under which a company director might be liable under the current insolvent trading provision of Australia (i.e. section 588G (2) Corporations Act):

  • In case the company is under their control when it incurs a debt.

  • If the company is insolvent at that particular moment or the debt incurred leaves it insolvent.

  • In case at a certain time, there are enough reasons to suspect that the company is insolvent or is about to become insolvent.

The new section 588GA proposal is a carve-out to the previous section 588G (2) Corporations Act. Through this new proposal, directors will not be held accountable for certain debts incurred by the company if they suspect insolvency and start taking measures to help the company get out of the crisis. The director takes such measures to prevent the company from becoming a Chapter 5 body corporate, i.e. is under receivership, under a compromise that has not been resolved or under administration. To determine whether the actions taken by the director are likely to result in better outcomes for the company, the draft legislation proposes that the following factors should be considered. Whether the director has:

  • Informed himself/herself about the company’s financial status

  • Sought the necessary advice

  • Taken the necessary steps to maintain the financial records

  • They have taken appropriate measures to prevent misconduct from employees that could affect the ability of the company to settle its debts.

  • The manager has been developing a plan to restructure the company to make it financially stable.

The Explanatory Memorandum says that the above list of factors only acts as a guide that a director can add to the additional steps they should consider. Additionally, that doesn’t mean that all the above factors must be present so that safe harbour can apply.

What do I do now?

Contact us if you have further questions about these upcoming reforms or if would like legal advice on your company. Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

Director's Liability, Directors' DutiesGuest User