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Understanding Company Insolvent Trading and Safe Harbour Provisions

“Safe Harbour” legislation was introduced in Australia in 2017. This legislation provides that directors will not be personally liable for debts incurred after the date of a company’s insolvency if they can show such debts were incurred in connection with a course of action reasonably likely to lead to a better outcome for the company and its creditors as a whole rather than proceeding to administration or liquidation. The safe harbour provisions operate to carve directors out from the civil insolvent trading provisions of the Corporations Act 2001.

What is insolvent trading?

To better understand how safe harbour provisions work it is important to understand the term ‘insolvent trading’. Under the Corporations Act, if a company is insolvent and a director allows the company to incur a new debt, the director can be personally liable for the new debts incurred. The law makes directors responsible for ensuring that their company does not trade while insolvent.

Why are Safe Harbour provisions necessary?

The safe harbour provisions address the concern about potential insolvent trading claims, forcing directors to place their companies into administration prematurely rather than allow the opportunity to restructure them. The provisions focus on the behaviour of directors in trying to turn their company around, rather than declaring insolvency. They are intended to encourage honest company directors to remain in control of a financially distressed company, to take reasonable steps to restructure and to allow the company to hopefully trade out of its difficulties.

Defences under Safe harbour provisions

The provisions under the Act provide directors with a form of defence to insolvent trading if:

  • at a particular time after a director starts to suspect a company may become or be insolvent, that director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company; and
  • the debt is incurred directly or indirectly in connection with that course of action and during the specified period.

Key steps triggering safe harbour protection

Directors seeking safe harbour protection should:

  1. Check that outstanding employee entitlements are paid to ensure that the company will beable to continue to pay these entitlements by the time they fall due (safe harbour protection will not be available to directors who fail to provide for employee entitlements or fail to keep up to date with tax lodgements);
  2. Check that the company is meeting all its tax reporting obligations through systems that enable the company to continue to meet their obligations;
  3. Check for outstanding issues of any misconduct of employees and officers thatmust be resolved in accordance with policy and misconduct compliance;
  4. Check that existing insurance, indemnity policies and D&O insurance are up-to-date;
  5. Assessing
    whether it will lead to a better outcome for the company to immediately appoint an administrator or liquidator before incurring any further company debt;
  6. Ensure relevant documents are recorded and carefully archived (the safe harbour defence will fail if a director has concealed, destroyed or removed books of the company or fails to provide a liquidator with access to books or other material);
  7. Obtain advice from qualified advisers early.

Consider placing the following items on the Board’s agenda as ‘standing’ items for consideration and discussion:

  • a) the adequacy of financial records and how these financial records might be improved;
  • b) the financial position of the company, and whether it has deteriorated or improved, and how this might impact the availability of the safe harbour;
  • c) whether further advice needs to be obtained from an appropriately qualified adviser;
  • d) whether the restructuring plan is being implemented, and whether adjustments will be required to ensure that the desired outcome will be achieved; and
  • e) whether, all things considered, it would be better for the company to immediately appoint an administrator or liquidator.

If the company is placed into formal insolvency, directors should ensure compliance with their obligations relating to the provision of books, information and other assistance to a liquidator, administrator or controller.

Our Commercial & Disputes lawyers can assist you with any matters relating to Safe Harbour or Insolvency issues that may arise.

Helen Mastos, Special Counsel from our Commercial & Disputes division has extensive insolvency experience so for tailored assistance and advice please contact Helen Mastos today on +61 3 9822 8588 or you can email us here.

Insights by Bianka Duzelovski

Contacts

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (Hons) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Elizabeth Ong

Special Counsel

Elizabeth Ong

Special Counsel
LL.B.(Hons) CLP GDLP
Elizabeth is committed to providing world class, comprehensive commercial solutions and corporate advice tailored to the best interests of her clients. She is fluent in written and verbal English, Mandarin, Cantonese, Hokkien and Malaysian languages.

Helen Mastos

Special Counsel

Helen Mastos

Special Counsel
LL.B, BA
Helen is a Special Counsel with over 25 years of experience in Commercial Litigation and Commercial Law.

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