Solving Insolvency - should company directors be shielded from liability?29 August 2017
In March 2017, Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer, released draft legislation seeking to reform Australia's insolvency laws as part of the National Innovation and Science Agenda.
Under Australia's present strict insolvent trading laws, company directors are at risk of personal liability for any debts incurred while the company is insolvent (or likely to become insolvent), which aims to discourage directors looking to restructure outside of formal insolvency measures. The draft legislation seeks to amend the Corporations Act 2001 (Cth) (Corporations Act) in an effort to overcome this issue.
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The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Treasury Laws Amendment Bill) proposes the introduction of s 588GA into the Corporations Act, providing company directors with a "safe harbour" from civil action for insolvent trading under s 588G(2). To rely on the safe harbour, the debt must have been incurred as a result of "a course of action that is reasonably likely to lead to a better outcome for the company and the company's creditors". In determining whether a course of action is reasonably likely to lead to a better outcome, ss 588GA(2) provides a non-exhaustive list of factors for consideration, including whether the director(s) are:
- taking appropriate steps to prevent misconduct by officers or employees of the company that could adversely affect the ability of the company to pay its debts
- ensuring the company keeps appropriate financial records consistent with its size and nature
- obtaining appropriate advice from a qualified entity that has been given sufficient information to provide such advice
- holding the right information about the company's financial position, and
- developing or implementing a plan for restructuring the company to improve its financial position.
Sub-section 588GA(4) provides that the safe harbour is unavailable if the company fails to meet its employee entitlement or tax reporting obligations.
The amendments conquer a great deal in the way of encouraging restructuring outside of formal insolvency measures, however many company stakeholders provided submissions against the extension of the safe harbour for fears they would not be adequately protected in the event of insolvent trading.
Despite these submissions, the Treasury Laws Amendment Bill has been passed by the House of Representatives and had a second reading moved in the Senate—so it looks like the amendments are on-track to being enacted.