New safe harbour provisions for company directors – Things you need to know

Following the Productivity Commission’s report in December 2015 investigating the barriers to setting up, transferring and closing a business, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Bill) received royal assent on 18 September 2017.

Amongst other things, the Bill establishes a safe harbour for directors against personal liability for insolvent trading under section 588GA of the Corporations Act 2001 (Cth). More significantly, the new laws encourage directors to restructure the company and in doing so avoid the risk of personal civil liability for insolvent trading.

What has changed?

Previously, there was an increasing trend where in order to avoid personal liability for insolvent trading, the director would place the company under voluntary administration. This caused company directors to resort to the voluntary administration process, which is generally expensive and timely, when the entity may in fact only be experiencing temporary financial difficulties.

Under the new safe harbour laws, directors who have acted honestly and for a proper purpose with a degree of care and diligence as is reasonable in the circumstances, will not be personally liable for insolvent trading.

How does it operate?

In order to be protected under the new laws and to avoid personal liability for insolvent trading under section 588G, it must be shown that:

  1. the directors developed a course of action that was reasonably likely to achieve a better outcome for the company than would have been achieved by appointment of an administrator or liquidator;
  2. the debts were incurred (either directly or indirectly) by the company during the course of the action;
  3. the course of action was implemented within a reasonable time; and
  4. an administrator or liquidator is not already appointed by the company.

In determining whether a course of action is reasonably likely to lead to a better outcome, a company director may have regard to several factors such as:

  1. properly informing themselves of the company's financial position;
  2. taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts;
  3. keeping appropriate financial records consistent with the size and nature of the company;
  4. obtaining advice from an appropriately qualified entity who received sufficient information to give appropriate advice; or
  5. developing or implementing a plan for restructuring the company to improve its financial position.

The above factors are not prescriptive and it is not necessary for all of these factors to apply for directors to have the protection of safe harbour. The Explanatory Memorandum explains that this will vary on a case-by-case basis and depends on the individual company and its circumstances at the time the decision is made. Nonetheless, the above factors provide a useful indication of the factors a Court may consider in a legal proceeding where the safe harbour is at issue.

Future recommendations

Although the safe harbour laws aim to encourage company directors to plan ahead in terms of restructuring a business, it should be noted that the Courts will play an active role in interpreting the new legislation. In particular, it would be interesting to see a judicial analysis of what constitutes a “course of action” and the requirement that the course of action be “reasonably likely” which is based on an objective test. Even without judicial interpretation, the new laws will provide directors with a range of options to achieve a business restructure.

Zoe Hussaini Zoe Hussaini & Kaye Griffiths Kaye Griffiths 10/10/2017

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or epost@dsslaw.com.au.