Safe harbour

In welcome news for all directors, on September 11, the Senate passed a bill introducing a ‘safe harbour’ for company directors from personal civil liability for insolvent trading. Under the existing liability regime for insolvent trading, a director risks liability under s.588G(2) of the Corporations Act 2001 (Cth) if they are a director at the time a company incurs a debt, and the company is insolvent or becomes insolvent by incurring the debt, and there are reasonable grounds for suspecting the company is insolvent or would become so.

The AICD has argued that the existing harsh regime pushes directors to trigger premature insolvency, resulting in job losses, contract terminations, destruction of goodwill, and overall value diminution. The regime also dissuades experienced and knowledgeable directors from providing their expertise and guidance to startup and scale-up businesses.

In submissions, articles and public statements over many years, the AICD and others have criticised these laws as being unnecessarily strict, and potentially stifing the ability of directors to take sensible measures to turn a distressed company around.

In response to these concerns, and following a recommendation of the Productivity Commission, the Government announced last year that it would address the problems associated with s.588G by providing some form of “safe harbour” for directors to pursue a company restructure without infringing on civil insolventtrading provisions.

The Treasury Laws Amendment (2017 Enterprise Incentives No.2) Bill 2017 amends the Corporations Act by introducing a safe harbour carve-out to a director’s personal liability for insolvent trading. It also introduces a stay provision that affects the enforceability of “ipso facto” clauses during an administration or scheme of arrangement.

Under the new provisions directors of companies in financial distress will be able to rely on the safe harbour protection if they start developing one or more courses of action “reasonably likely” to lead to a “better outcome for the company than the immediate appointment of an administrator or liquidator”.

The AICD believes this reform has the potential to energise business and the economy, by enabling directors to take common-sense steps to rehabilitate distressed businesses. The reforms also bring the potential to attract greater engagement and investment in startup and scaleup businesses from experienced directors.

A business, or part of a business, that can be saved or “turned-around” prior to formal insolvency can lead to a better outcome for not only the company, but for employees and creditors, all of whom have an interest in the long-term success of the business.

Importantly, the “safe harbour” is also conditional upon the company meeting employee entitlements and tax-reporting obligations, and directors fulfilling existing statutory obligations to provide assistance in the event of administration or liquidation.

In addition to these safeguards, the new law encourages proper maintenance of records and cooperation with liquidators and administrators should the company fall into formal insolvency.