Australia: What questions are directors asking about the new safe harbour laws?

The new safe harbour against insolvent trading laws have been in place for about 5 months now. Just over a week ago Scott Butler participated in a panel style presentation to members of the Australian Institute of Company Directors on the new laws with Reece Walker, Richard Hughes and Richard Kennerley. The audience consisted of a mix of company directors, lawyers and other restructuring advisers. The questions from the audience gave a good insight into the issues that directors and their advisers are thinking about and so we thought we would share some of those with you.

For those readers who are unfamiliar with the laws, here is a brief summary. The insolvent trading laws say that if a company is insolvent and there are reasonable grounds to suspect the company is insolvent, a director must prevent the company from incurring debts. Subject to some generally difficult to make out defences, if the director doesn't prevent the company incurring debts and they remain unpaid, the director can be held personally liable for the debts by a liquidator or, less commonly, the Australian Securities and Investments Commission. However, the duty to prevent insolvent trading does not apply to a director during a 'safe harbour' period.

The safe harbour will start to apply from the time a director, after beginning to suspect that the company may become insolvent, starts developing one or more courses of action which are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

The safe harbour ends if:

  • a director stops taking the course of action;
  • the course of action stops being reasonably likely to lead to a better outcome for the company; or
  • after starting to develop a course of action, the director fails to take the course of action within a reasonable period after that time.

Very importantly, to access the safe harbour, the company must pay the entitlements of employees by the time they fall due and lodge all tax related documents (i.e. notices, statements, returns, etc.) when due under the tax laws.

Absolute compliance is not required, but unless a court orders otherwise, at the time a debt is incurred, the company must both:

  • be substantially complying with these obligations; and
  • not have failed two or more times to do these things during the 12 month period ending when the debt is incurred.

The majority of questions which were asked related to the obligations to pay employee entitlements and lodge tax documents. The following are the key points about these obligations:

  1. The entitlements of employees must be being paid by the time they fall due – you can't pay all the obligations up to date later on and then claim safe harbour in relation to debts incurred earlier on when the obligations were outstanding.
  2. Only those entitlements which fall due for payment (generally superannuation and wages), need to be paid on time – you don't have to put aside money for leave or other entitlements which have accrued, but are not yet payable.
  3. Other than paying employee entitlements when they fall due, the company does not have to have paid its other tax obligations, such as GST or income tax; it just has to have reported them to the tax office on time.
  4. In our view:
    • substantial compliance means meeting the obligation within a short period of time after the due date. The longer the delay, the greater the chance of not substantially complying;
    • you could never be substantially compliant with the obligations to pay employees their entitlements by not paying them in full (i.e. paying 95% of what is due would not meet the test).
    • The key is to avoid having to justify that you substantially complied and comply with the obligations in full.
  5. If you enter into a repayment arrangement with the tax office and it includes payments for outstanding PAYG or superannuation, that will (in our opinion) mean that you are (in relation to the liabilities the subject of the repayment arrangement) paying those by the time they fall due (if you comply with the repayment arrangement). However, just paying all the entitlements when they fall due (even under a repayment arrangement with the ATO) and ensuring all lodgments are up to date won't automatically allow to you to enter into the safe harbour if you have failed two or more times to do these things during the previous 12 month period (which is likely if you are in a repayment arrangement). Therefore, at most, you can afford one failure to pay entitlements or lodge tax documents when due in within the preceding 12 months.
  6. For the purposes of the requirement to not have two or more 'failures' to comply with these obligations during the 12 month period ending when the debt is incurred, the company will fail to comply with its obligations if it does not meet them strictly – substantial compliance will still mean a failure for the purposes of this requirement. Therefore, in reality, to get the safe harbour when a debt is incurred, the company can only have a single failure to pay or lodge on time during the 12 months prior to incurring the debt and it must have rectified that before it incurs the debt (or have entered into a repayment arrangement with the Australian Taxation Office and be meeting its obligations under it).

The unfortunate fact of the matter is that a lot of companies that get into financial difficulty will fail to meet these strict tests at the time the directors want to avail themselves of the safe harbour.

One director asked whether a director could be held responsible by creditors or members for loss they say they suffered because the director put a company into voluntary administration instead of trying to trade on and restructure under safe harbour protection. In our view, even if the safe harbour was potentially available to a director, a director could never be held personally liable for appointing administrators if the board had reasonably formed the view that the company was insolvent or likely to become insolvent at some future time (which is what the Corporations Act requires for directors to resolve to appoint an administrator). It is important to keep in mind that getting safe harbour protection is not a fait accompli and a director may have to convince a liquidator or even a court that all the various requirements have been met, which involves a level of risk. If a director is not willing to take that risk, and the company is insolvent or likely to become insolvent at some future time, the director should be able to appoint an administrator with confidence.

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