Safe harbour

Yesterday the Federal Government released its long awaited draft legislation to reform Australia’s insolvency laws.

The Australian Institute of Company Directors (AICD) has led the debate on the need for insolvency reform, and the draft legislation reflects many of the AICD’s key asks. It is the next step in an important journey that will provide better outcomes for companies, their employees and their creditors.

In our view, the draft legislation appears to have taken on board advice from a wide variety of stakeholders, including the AICD. It seeks to deliver a workable safe harbour that has the potential to boost productivity, save jobs and promote a culture of entrepreneurship and innovation.

The reforms aim to enable a company to restructure outside of a formal insolvency process where doing so will achieve a better outcome for the company and its creditors as a whole.

Under the proposed new laws, the civil insolvent trading provisions would not apply ‘to a person and a debt’ which is incurred in connection with a ‘course of action’ that is reasonably likely to lead to a ‘better outcome’ for the company and the company’s creditors as a whole, as opposed to moving to formal insolvency.

To rely on the safe harbour, directors will only need to provide evidence of the ‘course of action’ they took. However, a director simply hoping or aspiring that things will eventually turn around will not be protected.

Relevant factors in determining whether a course of action was reasonable include whether a director ‘is properly informing himself or herself of the company’s financial position’, ‘obtaining appropriate advice’ and ‘developing or implementing a plan for restructuring the company’.

Moreover, a director will not be able to rely on the safe harbour if they fail to provide entitlements to employees, or fail to provide an administrator or liquidator with access to the company books or secondary evidence after an appropriate request.

Submissions on the draft legislation close 24 April and the AICD will make a submission. We are keen to hear from members on the draft legislation and would encourage those with feedback to contact either Lysarne Pelling or Matt McGirr from our Advocacy team.