As part of the Australian Government’s National Innovation and Science Agenda, we have seen a number of law reforms recently introduced including a new regime allowing for start-ups and SME’s to obtain funding via crowd sourced funding, various tax incentives aimed at start-ups and SME’s, and reforms of insolvency laws. With a goal of encouraging innovation, start-ups and entrepreneurs in Australia, part one of the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Amending Act) has introduced a number of safe harbour provisions for directors.
The safe harbour provisions are aimed at protecting directors from insolvent trading claims while engaging in a legitimate restructure of the company. Section 588G of the Corporations Act 2001 (Cth) (Act) provides that if a person who is a director of a company at the time when:
- the company incurs a debt;
- the company is insolvent (or becomes insolvent by incurring that debt); and
- there are reasonable grounds for suspecting that the company is insolvent at that time,
then by failing to prevent the company from incurring that debt, the director will be in breach of s 588G(2) of the Act if:
- the director was aware that there were grounds for suspecting insolvency; or
- a reasonable person in the position of the director would have been aware that there were grounds for suspecting insolvency.
A breach of s 588G(2) of the Act has the effect of making the director personally liable and may also attract a pecuniary penalty. One of the objectives of the National Innovation and Science Agenda is to avoid directors prematurely placing the company into formal insolvency to protect themselves from liability under s 588G of the Act where other steps could be reasonably taken to continue the business. From 19 September 2017, s 588GA provides directors with an exception from liability provided the director commences a course of action that is ‘reasonably likely to lead to a better outcome’ for the company once the director becomes aware that the Company may become or is insolvent. It is important to note that for the provisions to apply the debt incurred by the company needs to be directly or indirectly connected with the course of action taken by director.
If a director wishes to rely on the safe harbour provisions the director will need to prove that they took a course of action which was reasonably likely to lead to a better outcome for the company.
In determining whether the course of action taken by the director was reasonably likely to lead to a better outcome for the company, subsection 588GA(2) of the Act provides a number of indicative factors including whether the director:
- properly informed themselves of the company’s financial position;
- took appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts;
- took appropriate steps to ensure that the company keeps appropriate financial records consistent with the size and nature of the company;
- obtained appropriate advice from professional advisors; or
- developed and/or implemented a plan for restructuring the company to improve its financial position.
It should also be noted that under subsection 588GA(4) of the Act, the safe harbour provisions may not protect directors where the company is not paying entitlements to its employees or complying with its tax reporting obligations.
If you are a director looking for further advice in respect of safe harbour, your duties as a director, a potentially insolvent company please contact us.