The arrival of the ‘safe harbour’ reforms aim to protect directors from personal liability for insolvent trading as long as from the outset of suspecting insolvency of the company they have thoroughly documented their attempts at improving the company’s financial state and implemented a well-defined strategy to restructure the company and prevent it from entering into insolvency.
Under the current regime, section 588G of the Corporations Act 2001 (Cth) (Act) holds a director to be in breach of their duty to prevent insolvent trading of the company if:
(i) They were a director of the company when the company incurred the debt(s);
(ii) The company was insolvent when the debt was incurred or became insolvent as a result of incurring that debt; and
(iii) There were reasonable grounds for suspecting the company is or would become insolvent.
The reforms however seek to introduce section 588GA to the Act which intends to facilitate a restructuring of the company outside the formal insolvency process. This is only available to directors who have genuinely undertaken a course of action which is reasonably likely to lead to a better outcome for the company, its employees and its creditors.
WHAT DOES A ‘COURSE OF ACTION’ ENTAIL?
Whether a course action will be classified as reasonable will depend on the circumstances surrounding each case. Generally the directors are required to perform a thorough review of the company’s solvency by garnering relevant advice from “appropriate qualified entities” which have inter alia extensive experience in restructuring, managing stakeholders and assessing a company’s financial position.
In addition to what may be necessary, the directors here are required to take an active role in being informed of the company’s financial position by maintaining adequate books and records whilst concurrently ensuring that they are complying with their directors’ duties including the ability to produce information and books upon request, preventing misconduct of the company’s officers and employees who could adversely affect the company’s ability to pay its outstanding debts and meeting their employee entitlement and tax reporting obligations where both superannuation and tax lodgements are not overdue by more than 3 months.
Directors who are relying on safe harbour will need to provide evidence in any proceedings that may arise in the future to indicate that there were reasonable prospects for their ‘course of action’ to lead to a ‘better outcome’. For this directors are required to document any and all steps they have undertaken during the restructuring of the company including but not limited to:
(i) The formal implementation of the plan;
(ii) Minutes of any meetings which examined the progress of the company’s solvency;
(iii) Assessment of the company’s financial records;
(iv) Reports to stakeholders;
(v) Documents indicating compliance with employee and tax obligations; and
(vi) Engagement of any qualified third parties for advice.
Safe harbour only covers debts which were incurred from the time the first course of action was undertaken up to the date when (a) it is no longer feasible that the directors’ ‘course of action’ will reasonably lead to a ‘better outcome’; or (b) the company is placed into external administration. Once that occurs, the option to rely on safe harbour is no longer available to directors.
For directors to successfully commence safe harbour protection for their company, they must ensure that they are satisfying the following at a minimum:
(i) Informing themselves of the company’s financial position;
(ii) Engaging with ‘qualified’ advisors as necessary;
(iii) Complying with directors’ duties through maintenance of adequate books and records and not knowingly incurring any debts which would remain unpayable;
(iv) Lodging tax in a timely manner;
(v) Providing employees with their entitlements including making superannuation contributions; and
(vi) Documenting the entire plan and strategy for restructuring the company.