Australia's insolvent trading laws are set to be drastically altered by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Bill), which was passed by the senate on 11 September 2017.
The imposition of personal liability on company directors for company debts in insolvent trading circumstances has historically been criticised as a significant factor in a director's decision to seek the appointment of a voluntary administrator, even in circumstances where the company may have good prospects of a successful restructure or turn around.
The Bill, among other things, establishes a safe harbour for company directors against the imposition of personal liability for insolvent trading under section 588G of the Corporations Act 2001 (Cth) (Act) in certain circumstances.
Operation of Safe Harbour Provision
A new clause 588GA will be inserted into the Act which sets out that a director will not be personally liable for debts incurred by the company while the company was insolvent, where it can be shown that:
- The Directors were taking or developing a course of action that was reasonably likely to achieve a better outcome for the company than could be achieved by putting the company in administration or liquidation; and
- The debts were incurred directly or indirectly in connection with this course of action.
The protection will apply from the time that a director, after beginning to suspect that the company may face a solvency issue, starts to develop a course of action and will cease if the course of action is not acted upon in a reasonable time, where the director or company stops taking this course of action or where the course of action stops being reasonably likely to achieve a better outcome than an immediate formal appointment.
In determining whether a course of action is reasonably likely to lead to a better result, regard may be had to (inter alia) whether the director properly informed himself of the company's financial position, whether the director is developing or implementing a plan for restructuring the company to improve its financial position or whether the director has engaged a suitably qualified person to provide advice in respect of a restructure.
The question of who is a suitably qualified advisor will be assessed on a case by case basis having regard to the nature, size, complexity and financial position of the company and the independence, experience, professional qualifications and professional memberships of the advisor.
Even if it eventuates that the Company is unable to turn-around and becomes subject to a formal insolvency process, the directors will still have the benefit of the safe harbour provision, subject to compliance with certain obligations.
Limitations on Safe Harbour
The safe harbour carve out cannot be relied upon by a director in circumstances where the company failed to maintain proper books and records, failed to pay employee entitlements when they fell due or failed to file documents as required by taxation laws, and such failure was not in substantial compliance with these general requirements, or there was more than one failure in the preceding 12 months.
Importantly, this protection does not extend beyond the civil liability espoused in section 588G of the Act, and a director will still be liable for a breach of directors' duties or failing to comply with any applicable continuous disclosure obligations.
Looking Forward
The operation of the safe harbour will drastically change the way that directors approach a company's solvency issues. These changes will encourage directors to give consideration as to how they can attempt to restructure or turnaround the company without the concern of being held personally liable for company debts incurred at or after this time.
