Safe harbour introduced into law

Landmark ‘safe harbour’ legislation, a reform that could energise businesses and the economy, has now passed Parliament, and will become law.

In welcome news for all directors, the Parliament has now passed a bill that will introduce a ‘safe harbour’ for company directors from personal civil liability for insolvent trading.

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 amends the Corporations Act 2001 (Cth), by introducing a safe harbour carve out to a director’s personal liability for insolvent trading. It also introduces a stay provision which affects the enforceability of “ipso facto” clauses during an administration or scheme of arrangement.

Due to late amendments by Labor in the Senate and agreed to by the government, the bill now also includes an independent review of the impact of the safe harbour in two years.

The safe harbour component of the bill will commence the day after the bill’s assent by the governor general, while the stay component will commence at a later date, yet to be proclaimed.

What is the status quo?

Under the current liability regime, a company director risks liability under s 588G(2) of theCorporations 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 that the company is insolvent or would become insolvent.

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

In particular, the AICD has argued that the existing regime can lead to premature insolvency, resulting in job losses, contract terminations, destruction of goodwill, and overall value diminution.

What is changing?

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 that are ‘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 new business (“start-ups”) 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 the company. But it can also lead to better outcomes for employees and creditors, who have an interest in the long-term success of the business.

Are there other conditions?

The Safe Harbour will also be 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 will encourage proper maintenance of records and co-operation with liquidators and administrators, should the company fall into formal insolvency.