On 28 March 2017, the Federal Government released draft reform
legislation to Australia's insolvency laws to promote a culture
of entrepreneurship and help reduce the stigma associated with
The reforms, known as 'safe-harbour' provisions propose
changes to directors' personal liability for insolvent trading
under the Corporations Act 2001 (Cth)
Currently, under section 588G of the Act, directors can be held
personally liable for a debt incurred by a company that is
insolvent, or becomes insolvent by incurring the debt, where there
are reasonable grounds for suspecting that the company is or will
The 'safe-harbour' provisions
The proposed amendments to the Act will create a 'safe
harbour' for company directors from this personal liability if
the company is undertaking a financial restructure. They are
intended to encourage honest company directors to remain in control
of a financially distressed company and take reasonable steps to
restructure and allow the company to trade out of its
The proposed 'safe-harbour' provisions will provide a
carve-out from personal liability where directors can prove that,
at the time the company was insolvent, they took a course of action
which was reasonably likely to lead to a better outcome for the
company and the company's creditors. A better outcome is one
where the company and its creditors are better off than if the
company had entered into external administration.
The amendments also provide an indicative and non-exhaustive
list of factors to determine if the directors' actions were
reasonable and likely to lead to a better outcome, including
whether the directors have:
taken steps to prevent misconduct by officers and employees of
taken appropriate steps to ensure the company maintains
appropriate financial records;
obtained appropriate advice;
kept themselves informed about the company's financial
been developing or implementing a plan to restructure the
company to improve its financial position.
The amendments to the Act are intended only to apply to
directors acting honestly to pursue a reasonable course of action.
There are certain circumstances in which directors will not be able
to rely on the 'safe harbour' provisions, including where
the company has not:
provided for the entitlements (including superannuation) of its
maintained its books and records (so they are available to a
liquidator or administrator, if required); or
met all taxation reporting obligations.
The provisions aim to strike a balance between protecting
creditors and encouraging directors to actively engage and take
reasonable risks to restructure a financially distressed company.
To address the stigma often associated with corporate failures, the
provisions seek to shift the cultural focus from the existence of
insolvency to the behaviour of the directors in seeking restructure
The proposed 'safe harbour' provisions are not intended
to be a mechanism for a company to continue to trade past the point
where it is viable. At that time, it is appropriate for the
directors of the company to either make adjustments to their course
of action or place the company into voluntary administration.
Failure to do so may expose the directors to personal liability
under the Act.
The proposed amendments are open for
public submission until 24 April 2017 by email or post.
New South Wales is now aligned with all other states in the Commonwealth and the Federal Court on this important issue.
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