Attempting to salvage a company on the brink of collapse through restructuring efforts is something that is cautiously approached by directors or those acting as shadow directors due to the risk and threat of an insolvent trading liability. This risk is particularly concerning because the ability to determine a company’s solvency at a specific point in time can be difficult, and the uncertainty can cause directors to be overly cautious and may even lead some of them to either resign or place the company into formal insolvency earlier than necessary, thus foregoing the opportunity to potentially salvage a company that could otherwise be saved through the efforts of restructuring.
Ordinarily, pursuant to the insolvent trading provisions in Section 588G(2) of the Corporations Act 2001 (Cth) (“the Act”), company directors will be personally liable for certain debts which are incurred if:
In an effort to address this issue and potentially mitigate the directors exposure to a personal liability arising from insolvent trading, the Commonwealth Government introduced Section 588GA of the Act in September 2017. The Safe Harbour provisions of Section 588GA of the Act are intended to offer directors a form of “defense” or exception to the insolvent trading provisions of the Act.
To obtain the benefits of the Safe Harbour provisions, directors must be able to demonstrate that the course of action adopted by the company is reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator. Debts incurred ‘directly or indirectly in connection with that course of action’ are excluded from the directors liability for insolvent trading under the Act.
Factors to be considered when relying on Safe Harbour provisions should include the following:
The protections afforded to directors under Safe Harbour provisions apply until:
Directors should be mindful that they may lose the protection of Safe Harbour should they fail to meet their employee entitlement obligations, fail to meet reporting obligations under Sections 429(2), 475(1), 497(4) or 530(1) of the Act, or fail to provide returns or notices required in relation to the Income Tax Assessment Act 1997 where the failure forms part of two or more in the preceding twelve (12) month period when the debt is incurred.
Directors should be mindful that the protections afforded pursuant to Safe Harbour provisions is only for insolvent trading and does not extend to other duties a director may have to the company, such as those captured under Sections 180 – 184 of the Act.
Safe Harbour and COVID-19
Whilst the Commonwealth Government made amendments to existing Safe Harbour provisions within the Act in March 2020 due to COVID-19 those amendments ceased on 31 December 2020. Directors and their Advisors should note that the relief is no longer available and the protection afforded by the Safe Harbour legislation reverts to the provisions in place prior to March 2020.
Should you have any queries regarding the above information or any related matters, please do not hesitate to contact our team via our website Hamilton Murphy or send us an email at [email protected].
The above information is a brief overview and it is not intended that readers rely wholly on the information contained herein. No warranty expressed or implied is given in respect of the information provided and accordingly Hamilton Murphy, or any member of the firm, take no responsibility for any loss resulting from any error or omission contained herein. Last Updated: 21 April 2021
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