Directors attempting to turn around failing companies will be protected from insolvent trading provisions, and given ‘breathing room’, under proposed legislation introduced into federal Parliament last month.
New laws introduced will provide greater personal protections to directors when undertaking a restructure, in a bid to avoid companies being placed into voluntary administration prematurely, and encourage a more entrepreneurial Australia.
The proposed “safe harbour” legislation aims to ‘strike a better balance between the protection of creditors and encouraging honest directors to innovate and take reasonable risks.’ Under the legislation, directors will only be liable for an insolvent company’s debt if it can be shown their actions were not ‘reasonably likely’ to lead to a better outcome than administration or liquidation. What is ‘reasonable’ will be dependent on a ‘case-by-case’ basis, however directors who adopt a passive approach, allowing a company to proceed as usual, or whose plans are fanciful will not be protected by the “safe harbour”.
A liquidator, trying to make a director personally liable for debts incurred whilst the company was insolvent, will bear the onus of establishing that the course of action adopted by the director was not reasonable in the circumstances. Therefore, a director will generally be protected by the “safe harbour”, so long as they can show evidence of the reasonable course of action they took.
Directors will not be able to rely on the safe harbour where the company is not meeting their obligations relating to employee entitlements and its taxation reporting obligations. Directors will also be required to provide a liquidator or administrator access to the company’s books, in order to rely on the safe harbour.
It is anticipated that the legislation will lead to failing companies being given a greater opportunity to recover, and provide directors confidence to not wind up companies prematurely. The legislation is expected to pass in a form similar to the bill introduced last week later in 2017.
If you require advice or further information in relation to any of the matters discussed in this article, please contact our Litigation & Dispute Resolution team on 03 5273 5221.