With effect from 19 September 2017, the safe harbour reform came into effect, reflected in Section 588GA of the Corporations Act 2001 (Cth) (the Act). The practical effect of the reform was to encourage the turnaround culture of companies through innovation and strategic management instead of companies prematurely appointing a voluntary administrator.
What is a Safe Harbour?
The Act now provides an avenue for company directors to take steps against being held personally liable for a company’s inability to comply with their financial commitments. Section 588GA of the Act (the Safe Harbour Reform) provides that a director is not subject to an insolvent trading claim provided that upon suspecting that the company may become or is insolvent, they develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company.
What are the requirements for the Safe Harbour Reform?
To determine what an appropriate course of action is, the Act provides a number of examples a Court is to consider in determining whether a director has in fact, complied with the Safe Harbour Reforms, such as, whether the director:
- is properly informing himself or herself of the company’s financial position; or
- is taking 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; or
- is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
- is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
- is developing or implementing a plan for restructuring the company to improve its financial position.
When do the Safe Harbour Reform provisions apply?
The Safe Harbour Reform provisions only apply to debts incurred (whether directly or indirectly) in connection with the course of action until such time that:
- a ‘reasonable time period’ has passed; or
- the course of action has ceased; or
- the course of action is no longer reasonably likely to lead to a better outcome; or
- the appointment of an administrator, or liquidator, of the company.
The phrase a ‘better outcome’ is defined in the Act as to mean “an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company.”
Debts incurred after the above circumstances may be subject to insolvent trading claims against directors.
What does this mean for directors?
Whilst the Safe Harbour Reform is intended for companies to strategically become more solvent, there is still a risk in relying on the Safe Harbour Reform as a defence to insolvent trading claims as the onus of proof is on the director should the matter escalate. So, while a director may think they are pursuing a course of action that is reasonably likely to lead to a better outcome, they need to be able to prove this. Due to this, many directors may decide to avoid the risk of not being able to successfully prove that their actions were in accordance with the Safe Harbour Reform and simply appoint voluntary administrators.
How can we help?
Our insolvency and commercial litigation team has extensive experience acting on behalf of companies and directors to reach positive outcomes. If you or someone you know requires further assistance with regard to directors’ duties or the Safe Harbour Reform, please do not hesitate to contact Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected].
Please note that this article has been prepared by Krishna Ramji, Law Clerk and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.