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
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
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.