The Australian government has announced a
'National Innovation and Science Agenda' to be introduced
by the middle of 2017, which includes providing a defence to
protect directors from liability for insolvent trading where
restructuring advice is obtained in an attempt to turn around a
company's financial position. The government has also released
the Productivity Commission Report on 'Business Set-up,
Transfer and Closure' which contains recommendations on how the
defence will operate.
The lack of a 'safe harbour' defence has long been a
criticism of Australia's insolvency laws. Because directors are
exposed to personal liability for insolvent trading they feel
pressure to call in administrators or liquidators when a company
first experiences financial trouble. Often when strategies are
available to improve the performance of the organisation and
achieve a successful restructure.
The government's proposed 'safe harbour' defence
will be incorporated into the Corporations Act 2001
(Cth) and will permit directors of solvent but
struggling companies to seek advice and provide for a reasonable
period of time to restructure without directors being exposed to
liability for insolvent trading.
The Productivity Commission Report provides that the 'safe
harbour' defence is intended to be available where:
directors of a company have made, and documented, a conscious
decision to appoint a safe harbour adviser with a view to
constructing a plan to turnaround the company;
the adviser was presented with proper books and records upon
appointment, and can certify that the company was solvent at the
time of appointment;
the adviser is registered and has at least 5 years'
experience as an insolvency and turnaround practitioner and
directors are able to demonstrate that they took all reasonable
steps to pursue restructuring; and
restructuring advice must be proximate to a specific
circumstance of financial difficulty, and subject to general anti
avoidance provisions to prevent repeated use of the safe harbour
defence within a short period.
The defence would not attach to any particular decision and
instead would cover the running of the business and any restructure
activity from the time of appointment until the reasonable
conclusion of implementation of the advice.
If the adviser forms the opinion that the business cannot be
successfully restructured, the safe harbour period will terminate
and formal insolvency processes will commence.
The Productivity Commission expressed the concern that the
'safe harbour' defence should not be used by directors to
carry out phoenix activities that siphon assets out of the business
and into a new company. To limit this risk the Commission has
recommended the introduction of a director identification number,
underpinned by an identification process along the lines required
to establish a bank account, to monitor director registration.
Where this recommendation will be taken up is unclear.
A proposal paper for the 'safe harbour' defence will be
released in the first half of 2016.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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