On Tuesday 12 September, the House of Representatives passed the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), colloquially known as the ‘Safe Harbour Legislation’. The Act introduces protection for company directors from personal civil liability for insolvent trading under s 588G(2) of the Corporations Act 2001 (Cth). The Act was given Royal Assent on 18 September 2017.
Previously, directors of companies risked personal civil liability for debts incurred if the company was insolvent or became insolvent by incurring the debt and there were reasonable grounds for suspecting that the company was or would become insolvent. This risk of personal civil liability was criticised as overly deterring company directors from devising innovative solutions to rectifying the company’s financial distress as well as making voluntary administration or liquidation too attractive an option.
Under the new provisions, directors of companies in financial distress will be protected from incurring personal civil liability if they develop one or more courses of action that are ‘reasonably likely’ to lead to a better outcome than the immediate appointment of an administrator or liquidator.
In conjunction with the proposed course of action, the relevant director(s) must remain properly informed, seek appropriate advice and maintain recording obligations. The company must still meet employee entitlements and all existing tax reporting as well as all other statutory directors’ obligations.
The ‘safe harbour’ for the relevant director(s) ends where:
- the course of action was not implemented within a reasonable time;
- the course of action ends;
- the course of action is no longer likely to result in a better outcome than the appointment of an administrator or liquidator; or
- an administrator or liquidator is appointed.
This legislative amendment adopts a more practical and flexible approach whereby directors are enabled to seek a solution for the company other than voluntary administration or liquidation, where such a solution or ‘course of action’ satisfies the ‘safe harbour’ provisions.