On 11 September 2017, the Senate passed legislation to enact amendments to the Corporations Act 2001 to provide directors with safe harbours from liability for insolvent trading.
The amendments come into force upon receiving Royal Assent.
The Corporations Act contains provisions that can make a director personally liable for debts incurred if at the time the debt was incurred there are reasonable grounds to suspect the company is insolvent.
Identifying the precise moment when a company becomes insolvent can be extremely difficult and can lead to great uncertainty for those directors seeking to act diligently and honestly in their stewardship of the company. It is that uncertainty that lead to the safe harbour reforms, which are designed to enable a company to undertake a restructure outside of formal insolvency and providing the directors with protection from liabilities for insolvent trading.
The Explanatory Memorandum for the amendments states that the safe harbour laws are intended as a protection for competent directors acting honestly and diligently. However, the legislation includes a number of obligations on directors in order for them to avail the safe harbour protections.
Limits of safe harbour
The safe harbour protections do not extend beyond the civil liabilities imposed by the insolvent trading provision. During the period of safe harbour:
• Directors must continue to comply with their other legal obligations, such as the duty to act in good faith etc;
• Directors must ensure te company complies with its obligations to pay its employees (including superannuation) and meet all tax reporting requirements;
• Publicly traded companies have an ongoing obligation to comply with continuous disclosure requirements;
• A third party (eg a creditor) is not prevented from having an external administrator appointed.
Period of safe harbour
The safe harbour starts from the time when the person commences developing one or more courses of action, and one of those courses of action is ‘reasonable likely’ to lead to a better outcome for the company than the immediate appointment of an external administrator.
Directors must then proceed to take the determined course of action within a ‘reasonable period’ in order to remain in safe harbour. The period of safe harbour continues until:
• the company stops taking the course of action;
• the course of action stops being reasonably likely to lead to a better outcome; or
• the company goes into external administration.
There is no definition of ‘reasonable period’. The Explanatory Memorandum states that the reasonable period will vary from case-to-case.
Scope of debts incurred that will fall within safe harbour protection
The safe harbour protection applies to debts incurred directly or indirectly in connection with developing and taking the course of action. As such, such debts would include ordinary trade debts and include specific debts incurred as part of/in order to affect the restructure.
How does a director determine if a course of action is reasonably likely to lead to a better outcome than the immediate appointment of an external administrator?
The Explanatory Memorandum states that ‘reasonably likely’ requires “that there is a chance of achieving a better outcome that is not fanciful or remote, but is fair, sufficient or worth noting”. As such, it will depend on the circumstances in each case.
The legislative amendments provide an indicative and non-exhaustive list of factors regarding actions taken by the directors which may be considered in determining whether a course of action was reasonably likely to lead to a better outcome for the company, that is that they:
• kept themselves informed about the company’s financial position;
• take steps to prevent misconduct by officers and employees of the company;
• take appropriate steps to ensure the company maintained appropriate financial records;
• obtain appropriate advice from an appropriately qualified adviser; and
• have been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position
The above factors are only a guide.
As such, directors need to be cognisant that they act appropriately. For example, an ‘appropriately qualified adviser ‘will be someone who is ‘fit for purpose’. It will be a case by case assessment of the circumstances, the size, business and nature of the issues and what the directors, acting diligently, undertake to implement a restructure.
Safeguards on the application of safe harbour
In seeking to allow directors to avail themselves of the safe harbour provisions, the legislation has a number of safeguards to ensure that directors are acting in accordance with their statutory duties (eg acting in good faith etc). To this end, there are certain circumstances where the safe harbour is not available to directors, being:
• the company failed to or (during the safe harbour period) fails to meet its obligations to pay its employees (including superannuation); and
• the company failed to or (during the safe harbour period) fails to comply with its taxation reporting requirements.
In addition to the above, and in the event of a subsequent formal insolvency appointment, the safe harbour provisions will not apply where a person fails to provide an administrator or liquidator with certain required information and / or access to the books and records of the company.
It is hoped that the new safe harbour legislation will create greater opportunity for directors to act to address the deteriorating financial circumstances of a company outside of formal insolvency that results in a better outcome for creditors (including employees) whilst enabling the company to continue operating and preserve value.
The design of the legislation (as was the intention of the voluntary administration regime) is for directors acting diligently and in a timely fashion to undertake a restructure (outside of formal insolvency) that is in the interests of creditors and stakeholders and ultimately the company itself.
Whether this desired outcome is achieved will only be known over time.share