Australia: Safe harbour: Getting past the Harbour Master for protection from insolvent trading laws?

Last Updated: 23 May 2017
Article by Robert Hutson

The Federal Government's recent Exposure Draft of legislation designed to provide a safe harbour from insolvent trading laws needs rework to address the practical and legal challenges of accessing safe harbour.

The Federal Government's recent Exposure Draft of legislation designed to provide a safe harbour from insolvent trading laws has generated significant commentary regarding the practical and legal challenges of staying within the safe harbour.

However, there has been less commentary on the proposed gatekeeper subsection, Section 588GA(4), which excludes a person from access to the safe harbour provisions. This subsection provides that the safe harbour protection provided by:

Subsection (1) does not apply if the company is failing to do any of the following to a standard that would reasonably be expected of a company that is not at risk of being wound up in insolvency:
  1. providing for the entitlements of its employees
  2. giving returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997).

Complexity and ambiguity undermine new draft Safe Harbour legislation

As currently drafted, there are numerous difficulties in determining whether a person is eligible for safe harbour arising from this subsection. Rather than providing directors and their advisers with clear guidance, the Exposure Draft has used concepts and language that will make it harder for directors and their advisers to determine whether they will fall inside the bounds of the safe harbour.

The subsection creates a new standard or benchmark being the reasonable standard applied by a "company that is not at risk of being wound up in insolvency". What this means is unclear given the breadth of companies that may not be at risk of winding up and the wide variance in compliance standards across corporate Australia. Is the reference set to be those companies that have never been subject to winding up proceedings or is there a higher financial standard to be met to be a reference company? Even amongst wholly solvent companies, compliance standards for employee entitlements and taxation compliance vary widely. By applying a subjective test of whether a company has reasonably met its compliance obligations, the Exposure Draft creates uncertainty around whether directors may rely on the safe harbour provisions.

The uncertainty created by this subsection is further amplified by the language used when identifying the matters than "must be being done to a reasonable standard" by that company.

Firstly, the company must be providing for the entitlements of its employees. The Exposure Draft indicates that entitlements will be defined by reference to subsection 596AA(2) and so the entitlements to be provided for include retrenchment and termination payments. However, the Exposure Draft does not define what is meant by 'providing' for these entitlements. The Explanatory Memorandum provides no more clarity on the meaning of 'providing' with various references to providing or having met employee entitlement obligations. Is it sufficient that any employee entitlements that have fallen due are paid when due? Is an accounting provision for entitlements sufficient even though accounting provisions do not usually extend to retrenchment and termination payments? Does it mean that the company needs to provide for the entitlements by fully cash backing or otherwise segregating sufficient value to protect all employee entitlements in the event of formal insolvency proceedings? If so, how are issues such as security interests over circulating assets or employees in corporate service companies to be considered?

An accounting provision for entitlements provides no real comfort for protection of employee entitlements. Compliance by a company in paying all employee entitlements that have fallen due is a good start for access to the safe harbour but it does little to protect unpaid employee entitlements from risk. Given the inclusion of retrenchment and termination entitlements in the definition of entitlements, it seems that the intent is that more is required than payment of entitlements falling due. Further, in respect to providing for entitlements, if providing means a requirement to fully secure all employee entitlements, that will be a liquidity hurdle that will further challenge a company facing solvency concerns as well as cause concern for companies that are not in financial distress. The legislation then starts to impact on existing and well established accounting standards and the very definition of solvency.

Secondly, the company must comply with the taxation reporting obligations of the Income Tax Assessment Act 1997. It would seem a simple test to determine whether a company is compliant or non-compliant with its taxation reporting obligations. However, the subsection sets the compliance standard by reference to the hypothetical "company that is not at risk of being wound up in insolvency". Is there a level of non-compliance with taxation law that is now to be legislatively acceptable? If not, the subsection should be amended to reflect clearly that all taxation reporting obligations must be up to date to obtain access to the safe harbour provisions.

Proposed changes to the draft Safe Harbour legislation

The exercise of judgement required for directors and their advisers in implementing effective safe harbour protection will be challenging. The capacity to access the safe harbour is not helped by drafting which makes the availability of safe harbour protection uncertain for directors and their advisers. If the safe harbour legislation is to be readily accessible, the Harbour Master entry requirements need to be amended to:

  • Exclude the new subjective test of the standards applied by a company that is not at risk of being wound up in insolvency.
  • Make clear what the test is regarding 'providing' for employee entitlements. If the test is payment of all employee entitlements that have fallen due, that is a simple test that can be applied. If it is to fully secure payment of all employee entitlements if the company is subject to either voluntary administration or winding up, the legislation should set that test, even though it is likely that this will substantially limit the number of companies that can access safe harbour.
  • Exclude any reference test in relation to compliance with taxation reporting obligations. A company is either compliant or non-compliant by reference to the Income Tax Assessment Act 1997.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions